Regulation and compliance, using big data for competitive advantage, mobile and other new models for transaction banking are among the key topics at Sibos this year. While conference regulars said attendance appears down on previous years, with a hole left by many Chinese banks that pulled out in recent weeks, discussions were lively and wide ranging.
Sumitomo Mitsui Banking Corporation chief executive officer (CEO), Takeshi Kunibe, kicked off the crowded opening plenary by welcoming delegates. Osaka has been designated as an innovation zone, he said, which makes it particularly appropriate for this year’s Sibos emphasis on technical innovation. He highlighted three key areas of change in the financial services (FS) industry:
- Regulatory environment, with Basel III and other initiatives set up to control excessive risk taking. As a result, the banking industry is under pressure to change.
- Global economic order. Mature economies are experiencing sluggish growth while emerging countries experience strong growth, a decoupling that is expected to continue. Asia’s ability to continue as a driver of economic growth hinges on whether it can change its source of growth from export to domestic demand.
- Technology. The spread of advances, such as smartphones and social networks, could revolutionise the industry. These kinds of leading-edge technologies must be used to create new financial services.
SWIFT chairman Yawar Shah set the tone of the conference, with a look at how the banking industry continues to face uncertainty. If anything, the situation is even less clear than a year ago. He said that SWIFT continues to focus on serving its members by running a resilient network, delivering economic value and encouraging critical dialogue.
The availability of SWIFT remains excellent, Shah claimed, despite one isolated glitch in April that has since been corrected. SWIFT continues to add value through standards, reference data, secure access and lowering direct costs. Value creation is increasing through initiatives like shared services and assistance with regulatory compliance, and there is a compliance forum at Sibos for the first time.
While it is unlikely that SWIFT will enjoy the double-digit growth seen previously, Shah said the board is focused on delivering outstanding results.
A major change at SWIFT over the past year was the appointment of a new CEO, after Lázaro Campos decided to step down in May. As he introduced Campos’ successor, Gottfried Leibbrandt, Shah outlined the CEO’s key tasks including products, leveraging the SWIFT core further, improving its local presence in Asia and helping banks be even more cost effective.
Leibbrandt said that after speaking with customers, board members and regulators in his first 120 days on the job, he has views rather than a specific vision for SWIFT. A key part of his work is maintaining high reliability for the trillions of dollars of transactions that move across SWIFT every day. Renewing the FIN messaging application and building a brand new state-of-the-art data centre in Switzerland will enhance support for this reliability. He’s also ensuring that anything new is backward compatible, so that new systems work with what banks already have
Shah and Leibbrandt then shared their views on directions for SWIFT. When asked about being relevant both globally and locally, Shah noted that SWIFT has board members from China and India for the first time. Gottfried said that one of SWIFT’s strengths is helping to translate global standards and make them local. The shared service hub in Kuala Lumpur, Malaysia, for example, expands SWIFT’s capabilities and enables it to tap into the local talent pool.
Securities are a growth area. Shah said it had expanded from almost nothing 15 years go to approximately half of the traffic over SWIFT today. Leibbrandt said the dynamism, growth and competition in securities has actually forced SWIFT to move its game up a level.
SWIFT is also working on regulation and compliance, Shah noted that everybody is asking for help to deal with the incoming changes and Leibbrandt said SWIFT has developed the first part of a service, for local banks, and will work on it for larger banks next.
Discussing the technology revolution, Leibbrandt said cloud computing has moved from not being talked about for years go to actually happening. SWIFT has always been a cloud solution, he noted, so privacy and access of regulators are something it has dealt with extensively.
Looking forward, Shah said SWIFT’s job is to continue to be a global, neutral and trusted third party. It is working with the community and the board to innovate, added Leibbrandt.
ICC Briefing on Supply Chain Finance Initiatives: The Bank Payment Obligation
The International Chamber of Commerce (ICC) discussed how bank payment obligations (BPOs) offer an alternative to letters of credit (L/C) and open finance.
JP Morgan managing director and ICC banking commission vice chair, Dan Taylor, started the briefing by explaining how BPOs work and what the ICC is doing. The goal, he said, is to dematerialise paper within a transaction and use the content data, with the BPO as an alternative instrument. The ICC got involved because participants wanted a standard in the industry – in a recent survey, 75% of corporates said they wanted an independent set of rules.
Taylor explained that a BPO is an irrevocable undertaking for payment after successfully matching the data. The process to develop the rules started just over a year ago. Along with setting up a group focused solely on creating the rules, the ICC created an education group and a group to commercialise the standard. The latest draft of the rules has been released by the ICC and, after further reviews, the target date for approval by the ICC banking commission is April 2013.
The accounting treatment for BPOs, he noted, is the same as for a L/C. It’s an off-balance sheet liability, without the paper.
Deutsche Bank’s head of cash management and trade finance, Daniel Schmand, said pressure to increase financing, particularly around the middle and lower market, remains paramount. As one example, he said UK Prime Minister David Cameron called FTSE 100 company chiefs to Downing Street last week to discuss supply chain finance (SCF) and how to make sure the sellers have access to sufficient liquidity.
It is important for banks with balance sheet constraints to have rules and frameworks to use BPOs. The key benefit of BPOs for a seller, Schmand said, is cash flow optimisation. For a buyer, it’s about efficiency. Banks can create services for the seller and the buyer at every step in the process.
David Vermylen, BP Chemicals’ global credit manager, gave a practical example of the benefits his company receives from using BPOs. About half of its business is in Asia and half of that is on L/Cs, Vermylen said. BP has found L/Cs inflexible, slow and more expensive in administrative costs.
Vermylen used the example of ships, which sometimes get stuck offshore in the Middle East while companies wait days or weeks for the paperwork to get from Asia to the Middle East. Another example is when a buyer purchases a shipment on consignment and opens two L/Cs, perhaps because of credit line constraints, and runs into problems with the L/Cs because copies can’t be used. It’s a long, costly and cumbersome documentary credit process.
With the BPO, the seller agrees what they’re going to sell and enters the shipment details into an online portal. The BPO goes beyond what an L/C does by improving risk management, offering immediate liquidity, reducing banking lines, improving working capital and giving visibility over cash.
Barclays’ global head of trade and working capital and chair of ICC banking commission, Kah Chye Tan, wrapped up the session by highlighting that effectively BPOs offer a better solution for corporate clients. BPOs are already live, and he encouraged more banks to sign up and offer them. “We’re inviting every bank,” he said, “since it is a co-operative framework.”
Two speakers at the Innotribe Ignite session, focusing on innovation and new ideas, gave fascinating talks.
In one, JP Morgan’s director of Japan equity research, Jesper Koll, explained why he is bullish on Japan. Despite wealth destruction in recent years, he said, the country’s per capita gross domestic product (GDP) is up as much as in the US. Three factors make Japan especially attractive, according to Koll.
First, demographics actually play to Japan’s advantage. Wages are increasing for ‘echo boomers’ in their 20s and 30s> Nominal wages overall are starting to increase and mortgage loans volumes have grown for the past seven months. “Japan is in a demographic sweet spot,” he said.
Second, Japan is rich in technology. Research and development (R&D) spend is among the highest in the world as a percentage of GDP and has continued to increase, which translates into high-value manufacturing. About 56% of the components of the iPhone 5 are made by – and can only be made by – Japanese companies, due to their fine precision. In addition only Japan can supply top-end shipbuilding designs that reduce vessels’ energy costs by 30%.
And third, Japan is running trade deficits. As early as the end of 2014, Japan is likely to become an importer of capital, so there will be pressure on interest rates, and the yen will no longer be an appreciating currency. The increase in competition for global capital will speed up the restructuring of corporate Japan.
Koll sees key opportunities in healthcare, “cool” products and – surprisingly – agriculture, where mechanisation could boost productivity.
Citi’s global chief technology officer (CTO) for transaction services and enterprise payments, Yobie Benjamin, explained what he had learned about digital payments. “There has been a convergence of digital and banking and Citi is actually transacting about US$15bn per month on one of its platforms,” he said. Through a multitude of projects, he’s learned five key lessons about what to do and not to do.
First, he has initially assumed that digital payments were easy. However, it’s actually very difficult to master things that are not core to banking like near field communication (NFC), secure elements, geo-fencing and big data analytics. There will be a huge demand on infrastructure, and banks need to learn how to use it.
Second, scale is different on the internet. Solutions at banks are bank scale, he said, and enterprise scale is different. Google has a billion accounts on gmail, for example, and banks wouldn’t know what to do with a billion accounts.
Third, business models are complex, not always obvious and not yet fully formulated.
Fourth, banks have collective work to do, as stewards of payments, so it’s incumbent on them to learn how to work with new players, and learn how to protect their franchise.
Fifth, digital start-ups within large existing businesses have particular challenges. They need to figure out who owns the business, avoid rejection, set up a profit and loss (P&L) framework and gain access to resources.
The bottom line, Benjamin said, is that digital is difficult and banks need a long-term view to succeed. They need to play to their strengths as banks by having business model innovation as well as technology innovation.
Brave New Leaders in IT
At a panel discussion to conclude Day 1, HSBC’s global head of ecommerce, Marcus Treacher, led a discussion on the future role of the chief information officer (CIO) with Brown Brothers Harriman & Co’s global head of HR, operations and systems, Taylor Bodman; Wells Fargo’s bank head of wholesale services Steve Ellis; and United Overseas Bank’s (UOB) managing director for group technology and operations, Susan Hwee. With so many changes in IT, Treacher observed, it’s time to examine whether the role of the CIO will remain in the static position it has been in for decades, or whether it will change.
Bodman said that while the role of the CIO has not changed, what it takes to perform at the level that’s expected has changed. Ellis concurred, saying that while there are technological shifts that change how we think about business, the same principles apply. A lot of what CIOs have to do, he said, is dispel the myths, particularly by making arbitrary and arcane concepts understandable so a layperson can comprehend them. Hwee noted that cycles between technologies are faster and younger colleagues’ expectations are higher. The CIO has to bring this technology forward, make sense of it, and build the pipes.
A key role for the CIO, Ellis noted, is in making sense of changes such as the internet, social media and cloud technology, and helping people consider of the value chain. While compliance is important, he said, the role is about the business model, how customers interact with the bank and how to make it easier for customers. Hwee added that the CIO’s role is to decipher, look through the smoke screens and say what the real value is. The CIO needs a bag of tricks and carrots and sticks, she said, to convince the board and management what they need in terms of infrastructure technology, business and strategy.
Treacher asked whether outsourcing is still a viable solution, and Hwee said it depends on the size of the organisation. Outsourcing will remain a sourcing strategy, but there are certain things banks cannot outsource. If the outsourcer knows how to make a profit, she said, what you’ve outsourced is your ability to put those efficiencies into your bottom line. Ellis added that it depends on where the CIO thinks the banks’ strengths are and keeping those internal. For smaller boutique services or for a small company, on the other hand, outsourcing can be effective.
In the end, Hwee said, CIOs must up their game, participate in the business, and influence the agenda without ignoring the fact that there is an engineering role for the infrastructure. They need a broad skill set and a respected engineering background. Bodman added that while the overall job of CIO is so complicated that it has to be addressed broadly, one person still has to pull it together.
The day wrapped up with a multitude of networking sessions organised by financial institutions and service providers. Tomorrow gtnews will focus on the Corporate Forum and cover key issues for corporates.
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