Gaining Momentum at Sibos 2007

SIBOS is a major event in the financial services industry calendar. The conference and exhibition have grown to epic proportions – 225 exhibiting companies and 115 conference sessions this year. The five-day event is not just about gathering information and identifying key industry trends but also, and perhaps more importantly, about networking and doing business. The exhibition floor was constantly abuzz with activity and conversation among the 7,260 financial services professionals attending, while many of the conference sessions had audiences spilling out into the corridors when there was no more room left in the auditoriums.

The Message from SWIFT

In his speech at the opening plenary, Yawar Shah, chairman of the Board at SWIFT, vocalised the new concept of ‘SWIFT on the offensive’. He explained that it was time for SWIFT to become “more commercially aggressive and assertive” and this would involve competing proactively, having an engaged community, delivering lower cost solutions and considering a broader co-operative space.

Shah also emphasised the fact that the co-operative’s governance structure would play an important role in supporting ‘SWIFT on the offensive’. “The basic structure of the board has not changed since SWIFT was founded. Board members are elected to represent a country or countries, rather than individual institutions or shareholdings,” he said. “We have also introduced specialised standing committees, task forces and advisory groups, which are formed with appropriate experts when needed. They focus on specific topics, have a time-specific remit and link into a relevant board committee. This new ‘governance on the offensive’ model allows SWIFT to be more aggressive and ensures that it does not take competition lightly.”

Lazaro Campos spoke at SIBOS for the first time as the new CEO of SWIFT (he replaces Lenny Schrank after 15 years’ service on the board). In his speech at the opening plenary, he began by referring to the fact that he took over the position five months ago and in that time the press had focused on his plans and vision for the future. His message at the plenary was to assert the fact that SWIFT was not about him but the customer.

“We all know that SWIFT’s customer base has grown over the years,” he said. “The question now is, how well have we adapted to the increasing diversity of that customer base? Have we understood your requirements and acted accordingly? Have we lifted all the barriers? That is our first priority: lifting the barriers to the use of SWIFT.”

Some of these barriers include industry opinion that SWIFT connectivity is expensive and that the corporate onboarding process is too complex. Campos was keen to point out that “streamlined processes and a new ‘light’ interface” were part of a new proposition under discussion at board level. For example, SWIFT’s customer centric strategy is based on closer relationships at a regional level, a move away from the ‘one size fits all’ approach in terms of market value proposition as well as delivering products that are simpler to use and integrate.

Impact of the Credit Crunch

It is not surprising that the current credit crunch was an underlying theme at SIBOS and it was a subject discussed by both keynote speakers at the plenary sessions. In the opening plenary, Kenneth D. Lewis, chairman and chief executive officer at Bank of America, considered how the industry could work collaboratively to regain confidence following the crisis, while in the closing plenary Michael Cohrs, head of corporate and investment banking at Deutsche Bank, outlined how the crisis had actually opened up new opportunities for the transaction banking business. Both perspectives are discussed in the following section.

In terms of how the market could address current dynamics, Lewis at Bank of America outlined four key priorities for the industry:

  1. Innovate – constantly improve the speed, efficiency and reliability of the systems the industry relies on to conduct business around the world.
  2. Execute – ensure that these systems will continue to function in the event of any foreseeable crises, whether financial, natural or man-made.
  3. Inform – so that the business community, regulators and public understand the value the financial services industry adds to the global economy, and why they should have confidence in it.
  4. Self-regulation – whether the issues have to do with information security, anti-money laundering or anything else, Lewis affirmed, “no one was in a better position to see, understand and act than market participants within the industry themselves.”

Looking ahead, Cohrs, at Deutsche Bank, is certain that the current market dislocation is an opportunity for the transaction banking business. “The fundamentals of transaction banking are intact and interest in doing basic cash management rises in financial crises,” he said. “Trade flows and cross-border investments around the world are unlikely to decrease while clients will increasingly do business with providers with strong balance sheets and reputations.”

And, most importantly for Cohrs, the crisis has shown that the industry needs – and does have – a robust infrastructure to cope with volatility and stress in the system although he did warn the audience about the perils of complacency.

In his article, Riding Out the Risks of the Credit Crunch, Frank Reiss, head of equities and derivatives, product management at Euroclear Bank, affirms the fact that the credit crunch and the vast sums at stake have rocked the market into greater risk awareness. “As the market knows only too well, dynamics that are not managed can entail untold financial risks,” he says. He believes that market participants that “try to battle on with bilateral, non-automated methods to assess exposures and administer corrective actions are operating with distinct competitive disadvantages” and closer attention should be paid to risk management measures in the derivatives space.

Peter Cunningham, cash management product sales consultant, EMEA at Citi, also emphasised the importance of effective working capital strategies in his article, #gtnArticle(6950)#. “After a sustained period of excess liquidity in the market and cheap money, external sources of liquidity have dried up or have become expensive. As stewards of the company’s cash, treasurers understand the importance of working capital to fund the company’s production cycle and in efficiently allocating internal capital to its best uses,” he says. “During times such as those being experienced in the market currently, this focus on working capital is sharpened.”

US Payments

As Boston was the location for SIBOS this year, it was wholly appropriate that there was a conference session titled, US payments: achieving an integrated approach, to discuss the challenges facing this market.

When audience members were asked what the biggest challenge facing the US payments infrastructure was, 51% said that it was integrating with other payment infrastructures in the world. Twenty-one per cent said it was integrating within the US between existing market infrastructures and 19% said it was achieving business benefits from new technology investments.

Rick Leander, chief strategic officer at The Clearing House, one of the panellists at the session, agreed with the 21% arguing that international integration had to follow domestic integration. “We strongly believe that our single biggest challenge in the US is to continue to integrate between existing processes and infrastructures at home,” he explained.

According to another panellist, Gordon Werkema, first vice president at the Federal Reserve Bank of Chicago, the existing US domestic payments infrastructure is a strong base from which to move forward. “It is IP-based and it uses current technology. It’s highly resilient and reliable. This has come about in part due to competition and in part due to innovation and the application of new technology,” he said.

The US payments market is certainly more mature than its European and Asian counterparts. For example, it has already gone through phases of harmonisation and integration between domestic infrastructures and systems that are only now happening in Europe, with the introduction of the single euro payments area (SEPA) next year and Target2, the new European RTGS system, next month.

But can the US still learn from developments in the rest of the world? Thirty-three per cent of the audience agreed that it could, 31% said it was important to be a scale player and 20% said that no change was required and that global developments would not affect them. The panellists agreed with the majority of the audience and offered various reasons as to why the US should look beyond its own borders.

“The US payments industry is heavily reliant on paper so there is a lot to learn from the penetration of electronic payments in Europe,” said Werkema from the Federal Reserve Bank of Chicago.

Michael Gallagher, executive vice president, global transaction banking at HSBC, another panellist, also said that because the emerging markets such as Africa and Latin America did not have to contend with legacy systems, they were able to leapfrog in terms of technology, which was an interesting trend to observe. “SEPA is also a client driven initiative and that is something new in the market,” he added.

It was evident that while the infrastructure providers on the panel stressed domestic integration and added value, the bankers were more preoccupied with competition issues and this was supported by the audience’s response to the question: what is the biggest challenge for global banks operating in the US? Thirty-five per cent said global standardisation of US dollar transactions with other major money centres, 29% said better integration of payments and related information and 25% said achieving a differentiated proposition for the client base.

“One of the biggest issues for us is around achieving a differentiated proposition because our customers are becoming more global by nature,” explained HSBC’s Gallagher.

In fact, the audience was asked whether the US clearing systems should be more aligned with other major clearing systems in order to improve cross-border services as a result of corporate clients becoming more global. The answer was a resounding yes – 82% agreed that US clearing systems integration with international standards would be a huge benefit to corporates.

While everyone agreed on standardisation, the answer was not as clear as to who was responsible for instigating such an initiative – the infrastructure providers or the service providers?

Leander from The Clearing House said that member banks should set the agenda while Edward Glassman, executive vice president, chief information officer, transaction banking at ABN AMRO and moderator of the session, claimed it was a “collective failure that we have not achieved standardisation.”

The US payments industry is currently undergoing massive change with the migration to IP and ongoing efforts to further adopt electronic payments and eliminate paper-based processes. It is clear that a co-operative approach between key infrastructure players and service providers will be essential and that globalisation is playing a major role in how this market develops.

The Global Payments Industry

Payments have become a commoditised business and the real challenge for banks today is how to differentiate and deliver value to customers. This was the subject debated by speakers from prominent banks at the conference session, Changes in the global payments industry: a pragmatic vision of the future.

“Cash management is more than just payments processing – that is the fastest commoditising part. It is also about risk management and the supply chain,” affirmed Ann Cairns, CEO of transaction banking at ABN AMRO. “Information is what banks can deliver and that is a component of our offering compared to plain vanilla service providers.”

For Cairns, a key driver within the global payments business is the fact that corporate clients increasingly demand control and visibility in terms of liquidity. Ed Barrie, group manager, treasury at Microsoft, reiterated this point in an interview with gtnews at the conference. “As a corporate treasury, we want to have daily visibility into all transactions and cash balances across all of our bank accounts and therefore it is important to increase transparency in order to reduce risks and manage cash more efficiently and effectively,” he said. “If we can’t see it, we can’t measure it and then we can’t manage it.”

Regulatory change is another significant factor for banks to contend with. We are all aware of the impact that SEPA will have in reducing bank revenues in payments processing but the consequences of high- and low-value payments converging were also highlighted by Andrew Long, head of global transaction banking at HSBC, at the payments session. “Convergence will kill the business model. In the UK, the Faster Payments initiative means that soon anyone can make RTGS-type payments for a few pence. It’s similar with SEPA; we might be protected for a while as corporates migrate to the new instruments, but those revenues will go out of the window,” he warned.

For Bharat Sarpheskar, managing director, head of global payments at Citi, a further key consideration for banks is competition from non-bank service providers. “Do we stay happy and fat? Do we collaborate? Do we dive in and compete?” he asked. He believes that emerging technology, such as mobile payments, will drive change and competition. “We are living in a world of instant information,” he said. “With Internet and mobile phone technology, you can now deliver information to anyone anywhere in the world. For banks, that presents a huge opportunity for those that are prepared to accept change.”

Significantly, 85% of the one million people who become mobile subscribers everyday live in the emerging markets such as Africa, according to the mobile phone industry body, GSMA. This fact was supported by Colin Klipin, global head of payments at Barclays, who told gtnews that the payments industry in Africa is currently going through an exciting transformation.

“The industry will leapfrog from a cash-based payments system to electronic solutions and the challenge is making the electronic transactions work in an environment with underdeveloped technology infrastructure,” he explained. “As banks, we need to customise our offerings according to local customer needs and market environment. In South Africa, for example, Barclays has a mobile phone payment solution that benefits from the wider availability of mobile phones rather than the Internet.”

Klipin believes that banks need to think about building the opportunity for trade as well as commercially viable payment solutions in this region. “Non-bank service providers have already seen the potential in the African market and are moving in,” he warned. “As an industry, we need to create a robust infrastructure over the next 10 years in order to develop competitive services in the region.”

The message from the global payments session was that there is hope for a collaborative approach to compliance and that the use of more innovative models for technology-led product development, as well as creating value-added product portfolios and leveraging a scalable operating model, will help banks grow revenues while controlling costs.

Read more about one customer strategy in the article, Gaining Momentum Towards Customer Centricity, by K Nanda Kumar, CEO and president of SunTec.

Market Harmonisation in Asia

“Asia must harmonise in order to increase market access, efficiency and risk management,” insisted Karen Fawcett, group head of transaction banking at Standard Chartered Bank, in the conference session, Market harmonisation in Asia Pacific: desirable, do-able? Without region-wide regulatory initiatives, such as SEPA in Europe, the session concentrated on how the challenge of harmonisation could be tackled by market players through collaboration in Asia.

“There is some useful dialogue occurring at industry and intergovernmental levels,” affirmed Ian Johnston, head of Asia Pacific at SWIFT and moderator of the session. “The main driver will be to maintain a level of international competitiveness or relevance for local financial markets in a regional or even global context.”

According to Standard Chartered’s Fawcett, while there has been a lot of activity in Asia, such as developing standards in the trade space, there have been minimal results and even that has been within individual countries rather than across the region.

George Pilakis, chief information officer and head of technology at ANZ, agreed that while there had been evolution in the region due to the absence of legacy systems, developments had been country specific. However, he added: “It is important to note that while there may be local market requirements, these generally connect at a global level. The Asia Pacific region does want to open its door to opportunity.”

For Shigehito Inukai, senior fellow at the National Institute for Research Advancement, the fact that there is no common infrastructure in Asia is a stumbling block, but co-operation and integration between Japan, China and Korea will be an essential component in driving forward harmonisation in the region.

SEPA: The Last Mile?

At the moment, no conference is complete without discussion on SEPA, and SIBOS did not disappoint with high-level coverage of the regulatory initiative in various sessions.

Europe’s public sector came under constructive attack at the conference session, SEPA: the home straight. “Governors of central banks, ministries of finance, if they are in Brussels, they are very pro-SEPA; if they are on their own ground, they don’t always talk about it. Europe’s public sector should communicate further on SEPA,” said Gerard Hartsink, chairman of the European Payments Council (EPC).

A further issue was the engagement of public administrations; public bodies accounted for 20% of the number of payments in Europe and should be brought into SEPA now. “And it’s not only the public sector,” said Hartsink. “The banks are not all clear on their value proposition to customers.”

In an interview with gtnews at the conference, Craig Ramsey, wholesale solutions consultant at ACI Worldwide, discussed banks’ interaction with corporates and suggested that banks need to be able to offer corporates proven systems that have ‘plug and play’ capabilities. “The ability to receive payment instruments from customers is a priority for banks as well as automatic repair tools,” he said. “In addition, the online validation of transactions with regard to the IBAN and BIC is also important.”

Ramsey believes banks have focused so far on their own compliance and insourcing issues rather than corporate readiness when it comes to SEPA. “There hasn’t been enough focus on the SME market, in particular, and it is important to acknowledge the fact that many SMEs are involved in cross-border business so SEPA will affect them,” he says.

He added that it was also the role of regulators and governments to educate corporates about the introduction of SEPA and not just the banks’ responsibility.

At the session on SEPA, Hartsink went onto to discuss the EPC’s treatment of the evolving complexities of SEPA. “What are the clearing and settlement mechanisms to be used by banks? It’s not only the PE-ACH. Bilateral exchange and multi-lateral exchange are both possible,” he said. Banks have to choose their mechanism by next year, but the options will change over time, he added; this in itself introduced a new level of complexity.

The issue of clearing and settlement mechanisms is discussed in the article, Why New SEPA CSMs Add to Confusion by Bob Lyddon, co-ordinator at IBOS Association. He argues that ensuring each bank can nominate a clearing and settlement mechanism (CSM) through which an SCT can be delivered to it, and into which it can deliver an SCT, is one of the immediate challenges the industry faces in its progress on SEPA. He goes on to say that it would be better if the new CSMs held off until the local aggregators and STEP2 have enabled all banks to connect and exchange the Core&Basic SCT via a model at the centre of which sits STEP2.

Another issue that requires further progress is the SEPA direct debit (SDD) instrument that, according to Andrew England, global head of product management at Deutsche Bank, is one big topic that could derail SEPA and what happens to mandates. “Corporates are reluctant to re-issue hundreds of thousands, in some cases millions, of mandates, not least because they face the commercial risk that clients might take the opportunity to renegotiate terms,” he said at the SEPA session.

Brian Hanrahan, business development director at Sentenial, also underlined the importance of corporates being aware of the issues surrounding the SDD scheme in an interview with gtnews. “Banks are now shifting their SEPA focus to direct debits. The SDD introduces a particularly major change in countries where the debtor mandate flow (DMF) is in operation, as the SDD operates the creditor mandate flow (CMF),” he explained. “This is creating concern for consumers as the CMF affords less protection to the debtor which in turn is placing a significant burden on those banks to satisfactorily address debtor concerns through advanced mandate management facilities.”

SEPA will continue to be a talking point for the industry, particularly as we move closer to the first deadline next year on 28 January. There still seems to be a lack of readiness within the market, however, particularly among corporates and this is an area that we are sure to see banks addressing more aggressively in the coming months. It will also be interesting to see how banks move forward in terms of their strategy on SEPA and the fundamental question they need to answer immediately is whether to stay in or out of the payments business.

Read more about outsourcing strategies in the article, Bank Strategies for SEPA by Christine Drummont, regional head of sales, payments and cash management, and Eppo Soper, global head of sales, payments and cash management, at ING.

Corporate Access to SWIFT

At SIBOS 2006 in Sydney, one of the main topics of discussion was SWIFT’s new corporate access model, SCORE. Launched in January 2007, there are now around 30 corporates on SCORE and more than 150 banks on the service for corporates to connect to. The conference session, Improving cash management with SCORE: a global perspective, explored corporate experience so far and how the solution could be improved to make it easier for corporates to manage their cash flows using SWIFT.

Dirk Feisel was one of the corporate panellists at the session and head of cash management at German consumer goods company, Henkel, which has been live on the SCORE model for two months. For him, the main advantages of the SCORE model is the single entry point that allows the company to change banks more easily and also improve funds visibility through direct access to intraday account statements. He did point out, however, that there is still room for improvement.

“We need standard contracts with all banks we want to connect with over the new system and there needs to be tighter adherence to that agreement,” he said. “SWIFT needs to improve the onboarding process and the flexibility of invoicing should also be improved.” He added that there should be tighter integration with ERP vendors, further promotion of the ISO standards and that banks need to ensure they offer broader support for FileAct-based transactions.

The corporate audience at the session supported his opinions. When asked what SWIFT should do to improve adoption, 28% said increase integration with vendor applications, 28% said increase standardisation and 26% said increase market awareness.

In his speech at the session, Pierre Fersztand, head of cash management at BNP Paribas, affirmed the fact that the role of banks was important in a corporate’s implementation phase of a SWIFT project and that banks must communicate more closely with vendors.

Indeed, the support and service that banks offer will be a key differentiator, as Henkel’s Feisel insisted: “Banks should drive the market in terms of SCORE.”

Improving corporate-to-bank connectivity is an ongoing challenge that banks – and vendors – need to make faster progress on. “Numerous bottlenecks still exist in this space,” affirmed Christian Kramer, director solution management, SAP financial supply chain management, at SAP, in an interview with gtnews at the conference. “Corporates have to deal with multiple interfaces and proprietary channels, which result in high maintenance costs as well as process inefficiencies.”

He also pointed to problems such as lack of transparency and a higher cost of working capital with potential errors in payment orders if systems are not streamlined or automated. “Corporate access to SWIFT provides one way to reduce costs and increase the security of bank-to-corporate connectivity and it is essential that banks move away from proprietary channels,” he argued.

The audience at the session was asked what SWIFT should do to increase adoption by mid-market corporates. Thirty-four per cent said promote ‘service bureau’-like approaches, 31% said simplify the offering and 27% said ensure there was tighter integration with local software vendors.

The value of the service bureau was also underlined by Henkel’s Feisel who said that it allowed corporates to reduce costs and maintenance issues so they could focus on their core business. And it seems the industry is listening based on the number of announcements at SIBOS about new service bureau offerings.

Corporate access to SCORE is evolving and while the benefits are clear, factors around cost, standards and integration still need to be addressed before we see greater adoption within the corporate community. David Robertson, partner in the financial institutions practice at Treasury Strategies, explores these issues in his article, SWIFT Corporate Access: The Next Generation, which also provides an overview of the session, Corporate Access: Beyond Cash Management, held at SIBOS.

Fraud Awareness

One topic that was not covered specifically in a session at the conference but highlighted in numerous conversations gtnews had with speakers and exhibitors was the issue of fraud and compliance within the financial services industry.

“The focus on identifying suspicious activities has increased with an emphasis on weak spots within the organisation,” said Jeremy Payne, marketing director, Europe, at Pegasystems. “Corporates need close to real-time identification of suspicious transactions, as well as a best-practice investigations backbone that provides automated information about those transactions.”

This opinion was supported by Craig Ramsey at ACI Worldwide who said: “Within the anti-money laundering (AML) space, there has been a shift in focus to suspicious checks and behaviour-based tracking beyond the requirements of OFAC, and initiatives such as Faster Payments in the UK are driving this.”

Managing and identifying risk data is discussed further in the article, Business Process Management: Tackling Fraud, AML and Compliance by Willy Fox, senior director, financial industry solutions at Pegasystems.

Another type of fraud that the industry should pay attention to is in the area of direct debits. “The ability to verify the data used to set up direct debits is even more important at a time when cases of direct debit fraud are increasing,” says Jonathan Williams, director of communications and product strategy, at Eiger Systems. “Corporate treasurers are ultimately responsible for any money that is lost as a result of fraud so it is essential that they have the tools to be able to verify account details down to names and addresses.”

In his article, Is Fraud Undermining the Direct Debit Scheme?, Williams discusses how the introduction of Chip and PIN, and the increased security it provides, has led to evidence that fraudulent activity has switched from debit and credit cards to direct debit and credit transfer payments. “To prevent this type of fraud, two new initiatives are needed: the ability to check that consumer-supplied bank account data is correct and current and the ability to corroborate that data with the supplied name and address against a reliable reference for the data,” he argues.

Paul Meadowcroft, head of transaction security at Thales, also believes that while many banks are implementing cutting-edge authentication techniques, the same importance has not been accorded to identity management. “This represents a lost opportunity for banks,” he says. “By focusing on one project and one system at a time, they are not reaping the longer term benefits of centralising systems and reusing IT infrastructure for multi-application, multi-token implementations.”

In terms of online transactions, the authentication of individuals has become increasingly important in an era of rising fraud, he told gtnews in an interview at SIBOS. “Identity management of transactions in the online environment and strong KYC policies are essential,” he said. “Every organisation needs to choose a fraud prevention technique that suits its risk profile as well as usability from the employee’s point of view.”

At a time when compliance and stringent controls within organisations are increasingly important, the industry should be focused on how fraudsters are adapting and developing their techniques in order to prevent serious financial and reputational damage.

Conclusion

As another SIBOS has been and gone, attendees will be reviewing and digesting what they have gained from the event in terms of business, knowledge and new insights.

SWIFT is focused on widening its customer base. The success of its new initiatives in breaking down barriers to access will be judged by the range of attendees next year in Vienna. The co-operative certainly followed through on its promise last year to focus more on the corporate community with the launch of the two-day corporate forum this year. While corporate attendance was lower than expected in Boston – 100 representatives from 65 corporates – there was positive feedback from those that did attend and acknowledgement that SWIFT is serious about its commitment to embrace the corporate community (see box at end ‘Gaining Momentum: Industry Opinion’).

Within the global payments industry, banks are focused on taking a collaborative approach to compliance and SEPA is an example of this. Banks are also considering new models for technology-led product development, such as mobile technology, in order to retain a competitive edge. Indeed, as bank revenues fall from traditional sources and corporate clients become more sophisticated in their demands – and as technology makes it easier for corporates to switch partners – banks are working hard to dev

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