Changing the world
Change is a theme at this year’s Sibos. But what type of change? Delegates discuss what they think would be the main disruptive forces in their part of the business
Matthew Leavenworth, director of product innovation and disbursements, Bank of America Merrill Lynch
Globalisation – operate anywhere. The world is dramatically shifting and the global flow of assets, services and commerce is both defining and complicating treasury and payments. By 2025, McKinsey estimates that there will be $85 trillion global flows of goods, services and finance, three times the value in 2012. During this same time the emerging global markets will bring around 1.8 billion people into the consuming class. Consequently, businesses, in an effort to realise growth, will be forced to operate in more countries than ever before. As globalisation broadens operational footprints, the fundamental challenges of treasury remain. The age old problem of “I know I got paid, but what did I get paid for?” will compound – exponentially.
Despite the globalisation of business, treasury and cash management operations will be forced to navigate local payment networks and currency management challenges. Local customers will expect to pay using easy, convenient and locally accepted funding instruments. Emerging market suppliers will likely lag in technical sophistication potentially impacting payments, receipts and data integration for reconciliation. Additionally, the trend of local governments requiring enhanced anti-money laundering and know your customer data while simultaneously regulating payment networks to increase speed in clearing and settlement will continue to complicate treasurers’ operations.
As cross-border payments increase, treasurers will seek simplicity and operational efficiencies to streamline currency and cash management. We expect cloud-based payment solutions to disrupt the traditional correspondent banking networks. For example, according to Mercator there are more users of AliPay (a cloud-based payment network) than internet users in China: at year-end 2013, there were over 629 million internet users in China. Alipay had over 800 million registered account holders in China.
While AliPay has tremendous market penetration in China, cloud-based payment networks are growing globally and the internet has become a ubiquitous global platform capable of both passing a broad set of data and moving funds from payer to payee. Swift and other payment message protocols are effective at passing standardised data, however the movement of funds retains the inefficiencies created through correspondent banks (cross-border) or central banks (domestic). The market disrupting solutions will eventually provide secure cloud-based networks that enable the instant settlement of data rich and cost effective cross-border payments.
Tom Carey, president, global technology and operations solutions Broadridge
The mutualisation of capabilities. This stands out as one of the most prominent trends in our industry. Having emerged from a deep and protracted downturn, during which firms pared back internal costs as far as possible in response to lower earnings, these same firms are now faced with the dichotomy of how to invest in growth initiatives to deliver improved return on equity while having to commit scarce resources to support an increasingly complex and demanding regulatory and market landscape.
The necessity to deliver higher levels of return therefore requires a more fundamental rethink, in fact a structural transformation and this is where mutualisation through a shared services model can deliver the answer. Post-trade processing is an area particularly well-suited to mutualisation, given the fact that every firm is undertaking the same critical but non-differentiating functions, the economies of scale that can be achieved through a shared service model and the clear benefits of single investments for market and regulatory change instead of each firm updating its own discrete processes. Who today can afford to invest on an individual basis to retain such infrastructure within their four walls?
Of course, mutualisation can occur on various levels. Using a solution provider for either an onsite or software as a service-based deployment and leveraging the scale of its user community and ongoing investments, is a relevant example. A recent study by the Tabb Group states absolute growth of 14 per cent in external versus internal IT spend from 2005 to 2014, backing this as an established trend since pre-recession and one we believe will continue to accelerate. However it is the recognition of the challenge that firms face that has more recently led to the introduction of the post-trade processing utility that stands to offer transformational benefits through mutualisation, based on a full service model that incorporates both operational processes and technology.
Michael Leach, managing director, global business development software, UnaVista
Regulation – time for a calculated look. Given the continuous regulation cascade impacting our industry (Emir, AIFMD, Mifid II, Basel III, Dodd Frank Title VII, etc this year alone), it is no wonder that firms do not have the breathing room to look at regulations from a strategic perspective and set up frameworks and procedures that can work with the regulation, rather than struggle against it.
This means fewer, disparate tactical solutions for individual regulations and regions. Instead firms should focus on aggregated teams and reporting/compliance frameworks that look at regulations holistically across the business, taking advantage of the overlaps and creating efficiencies in time, effort and infrastructure.
By utilising centralised control frameworks backed by technologies that are flexible and adaptable, firms can address a variety of regulations and efficiently evolve those going forward. In many cases, the regulators and competent authorities are looking less at the actual content of the reporting and risk mitigation functions and more for evidence that properly functioning regulatory monitoring, reporting, exception and incident management frameworks are in place at a firm level.
Certainly in cases of reporting breaches, proof of proper processes that can identify, address and mitigate the issue goes a long way to appease the regulatory bodies. An aggregated regulatory framework driven approach should in the long term not only reduce cost and control risk, but done right it should provide additional data and insight necessary to turn regulation driven investments into opportunities to better understand and serve both the business and end clients.
Marcus Sehr, head of institutional cash, global transaction banking, Deutsche Bank
Correspondent banking models tested. As the industry has seen much greater regulatory oversight in recent years, particularly from a correspondent banking perspective, now more than ever before is a time for further dialogue, information exchange and collaboration concerning regulators’ expectations between all parties involved. This is why Sibos is important, as it offers the platform to interact with peers and clients to raise concerns that will be on the minds of many providers.
One such issue is the 1 January 2015 deadline on intraday liquidity reporting. On this topic, we still need to have a better understanding of exactly what is required on the part of the regulators. It is important that the industry as a whole is fully engaged. This helps to provide clarity, improve efficiency and ultimately avoid waste of resources in what is an already cost-contained environment.
Because of this current environment, perhaps more than in any year in the past, this year’s Sibos will demonstrate which providers still have the capacity to innovate. Regulation requirements are not receding, costs are increasing and margins continue to be under pressure. Yet, this is exactly the situation in which clients look to providers to develop products that help them to streamline their processes and generate revenues.
The process of innovation itself, however, is also undergoing change. Gone are the days where one provider develops a product and simply sells it to its clients. The real innovators in the financial institutions space nowadays are the ones that successfully collaborate with clients to fully understand demand in the market and provide respective solutions.
Mark Hartley, chief innovation officer, Clear2Pay
A Ripple or a wave? May we live in interesting times! At no time have we seen technology advances, regulation, customer behaviour and a banking appetite for innovation (albeit in niche corners) come together as we do today. We see joint initiatives advance the case for immediate payments, we see technology open up some banks as if they were Apple stores and the Payment Services Directive II in Europe will change more than any of us can predict.
True, the vast majority of transaction banking and in particular international payments still takes place as it always did. Yet in a world of commoditisation where we can ‘ebook’ a trip, ‘uber’ around town without cash in clean cars with friendly drivers who (dis)qualify themselves through our rating rather than rely on stifling and rigid taxi regulation, we start to crave for this type of experience in any aspect of life: simple, clean, transparent, convenient and at a price that fits the service level. To date, banks stayed outside that domain.
Yet lately, now the initial hype of non-bank payment providers is behind us – with compliments to them all – regulators, banks, technology partners have all started to work on this new ‘open access’ world from their own angle. In Europe the European Commission is championing the opening up of bank accounts to third parties so they can initiate payments through the PSD II agenda. The data in those accounts is the true value and the customer is the beholder of that value. So rather than opening up the account to third parties, one could claim that the power is given back to the proper ownership, the corporate or consumer can then allow others to act on their behalf.
This notion is sinking in around the industry and so we see tantalising – for our industry at least – initiatives such as the Open Bank Project, The Open Transaction Alliance and many more. And where the payments world used to be divided into ‘bank-friendly’ and ‘challenger’ parties, these now all converge. Ripple after all is not a consumer payments service, but a bank-friendly neutral open source ledger that connects financial institutions and networks. Banks still stand to benefit most, they can build true value add on this ‘pipe’ as they know their customers still better than any other party. It is ultimately the banks that can turn Ripple into a Wave.
Vinod Madhavan, head of transactional products and services, South Africa, Standard Bank Group
Adapting to rapidly changing customer needs. Africa has made a quantum leap in its rapid adaptation of financial services, much as it did with telecommunications, which essentially saw the continent embrace mobile telephony long before complete fixed-line penetration. Typically, markets progress from cheques and cash; to automated clearing houses (ACH); to real-time settlements and then to specialised value transfer networks (VTN) targeting person to person payments. But Africa is leap-frogging, in some markets aiming to move straight from cheques and cash to person to person VTNs. This is illustrated by the rapid uptake of mobile banking in certain markets on the continent, of which Kenya is perhaps the finest example.
Another interesting trend is the behaviour of clients in Africa, who in many cases, are ahead of their international peers in terms of their willingness to embrace new banking technologies such as access through mobile and smart phones and easier adoption of innovative transactional services.
Some of these changes are being driven by the rapidly changing patterns of international trade, which have resulted in greater exchange of goods and services between emerging markets, a trend that Standard Bank expects to continue growing apace. The increasingly multinational nature of large corporate clients means that they also need multi-jurisdictional banking services to support their efforts to set up payment factories, re-invoicing centres and meet their risk management requirements through centralised foreign exchange and funding requirements.
Some of our corporate clients are also going through a lifecycle change wherein they are looking to augment their growth in their domestic market (say in South Africa), by going in search of better opportunities in other jurisdictions in the rest of Africa. Many South African corporates are aggressively moving into the rest of Africa and we expect this trend to continue. Given that Africa is one of the few regions in the world that can more or less comfortably predict strong growth for the next five years we are also expecting non-African corporate entities to continue investing in the continent.
Swift is ideally placed to help meet the rapidly changing client needs of banks operating on the African continent. Financial institutions and corporates need to find ways to leverage the power of Swift to provide financial solutions that meet changes in client needs and behaviour.
Mike Bodson, president and chief executive, Depository Trust and Clearing Corporation
Rethinking the operating model. The global financial services industry has undergone a dramatic transformation in the six years since the start of the financial crisis. A combination of factors continue to drive significant changes in market structure and have sparked a period of intense innovation as firms cope with a difficult economic and regulatory environment.
Although many markets around the world continue to recover, the macroeconomic picture remains fragile and growth is still lacklustre. Furthermore, new regulations, such as the Volcker and Dodd-Frank rules in the US and heightened capital requirements globally, are forcing financial firms to scale back activities while squeezing liquidity. As a result, return on equity (ROE) remains below average for many financial institutions – as low as 8-10 per cent compared to average ROEs of 25 per cent in the early 2000s. Additionally, compliance costs and the need for greater risk management are placing financial burdens on the industry, further squeezing operating margins.
These dynamics have ushered in a period of extreme cost-cutting and retrenchment, which has prompted the industry to take a fresh look at market infrastructures and the broader role they can play in helping market participants manage through today’s challenging landscape. While infrastructure organisations have stepped up their level of support in recent years, the reality is that the industry must rethink its current operating model and take a fresh look at ways to mutualise certain universal middle- and back-office processes in order to further reduce costs and risks.
For this to occur, firms need to recognise that they no longer need to control all aspects of post-trade processing to have a competitive advantage. This way of thinking is no longer realistic – or sustainable – when capital is scarce and limited dollars are increasingly being dedicated to critical, but non-revenue generating, functions like risk management and regulatory compliance. In today’s environment, there is effectively no value for a firm to perform functions like KYC and Fatca compliance using a ‘closed vertical’ model when an ‘open horizontal’ model based on user choice, fair competition and specialisation can reduce costs as well as operating, compliance and reputational risks at each level of the processing value chain.
The need to evolve the operating model is even more compelling when you consider that the cost of post-trade processing globally has been estimated to reach as high as $100 billion or more annually, according to research performed by DTCC. In too many cases, the industry is spending resources on redundant and duplicate processes that do not differentiate them from other institutions. Despite years of existence, financial utilities still represent only an estimated 5-10 per cent of the total costs of trade processing.
As market infrastructures look to take on a more prominent role helping the industry during this period of transformation, they, too, must change the way they operate by collaborating more frequently to reduce overlap and gaps in common solutions while minimising investments in redundant capabilities. In addition, infrastructure organisations must leverage their unique strengths, capabilities and expertise, in partnership with the industry, to deliver on this objective.
While the challenges facing financial firms will likely not abate anytime soon, market infrastructures can play an integral role in helping them reduce costs, mitigate risk and enhance efficiencies – all of which will promote an environment of growth and stability over the long-term.