Shannon Manders highlights some of the trends that got everyone talking in Dubai this September.
The world of banking is changing: higher costs, economic shifts and new technologies, among other challenges, continue to test the industry. Banks need to find new ways to adapt to these changing conditions, and in doing so continue to increase growth, development and connectivity in the global economy.
Besides continuing discussions about spread erosion brought about by market forces; the impact of regulatory changes on the liquidity and leverage ratios; KYC, AML and compliance issues and the resultant increased scrutiny from national regulators, the following individuals highlighted new themes at the forefront of participants’ minds at this year’s conference.
David Hennah, head of trade, Misys
In the last year or two, I’ve sensed a sea change in behaviour amongst top tier banks, where they’re beginning to question the business model of deploying thousands of people in in-house IT shops. There was one bank that was reported to be spending about US$1bn a year on IT in transaction banking alone.
The same bank was reported to be putting 6,000 lines of code into production every week just to maintain regulatory compliance worldwide. The cost dynamic as well as the operational risk is significant for these big global banks. And they look upon suppliers like Misys now not just as a service provider of software, but looking also at the value add that we can bring.
We’re having meaningful discussions – even this week – with banks in that very top tier. That’s where I see the opportunity for us going forward.
My main remit is to deliver a coherent value proposition front-to-bank, which by definition is for a single bank. So we look for banks to license both the portal and the back office. But at the same time I think there’s a significant opportunity to market the portal side of things directly to corporates. There’s hardly a corporate in the world that’s single-banked today. All of them have got multiple banking relationships, some of them have hundreds of banking relationships.
We are licensing the portal application directly to corporates – and that’s a proposition I want to build on going forward. We’re in the process of “productising” that. It’s something that we do, but not necessarily on a formal structure today.
André Casterman, global head of corporate and supply chain markets, SWIFT
Bank payment obligation (BPO)
I’m happy to see at this year’s Sibos that the BPO is seen as a corporate-to-corporate tool rather than as a bank-to-bank tool.
We want to help banks innovate across many channels in payments, security services, as a multibank identity solution, and on the trade side, the BPO is definitely the key innovation.
Like any innovation the BPO is not the panacea, it’s there really to get the banks to cover the risks for buyers and sellers when those two value the role of such an intermediary. It’s there for those frequent trade flows where the buyer and seller want to address some efficiency improvements leading to financial gain such as early settlement.
We are advising banks to focus on the commercial value propositions that they want to develop – risk mitigation, pre and post-shipment finance – looking at those commercial aspects, the legal aspects, and they can postpone the technology investment to a later stage as the volumes of BPO transactions will not be high from day one. There will be a gradual take-up because the two corporates need to agree to switch to that payment method. If the banks want to buy the full technology from the start, their business case will be hard to promote internally.
On the payments side it’s a no-brainer – technology must be in place because the volumes will hit you on day one and quickly scale up, whereas on the trade side, we see with the six live banks that are on BPO today, some of them are handling those transactions in a semi-automated way. That’s because we’re talking about two dozen transactions a month – not thousands.
I want to protect the banks against the vendors saying “you have to buy from me now”. So I’m very careful to get this right for banks for them to start on the right track.
Samir Assaf, group managing director, chief executive global banking and markets, HSBC
I think that we need to make a fundamental change, which requires practical change and a mental shift. In areas where there are no differentiating factors in what we do and there is shared space, we should seek to collaborate. In our industry, we all do many of the same things, replicating work and costs for no advantage. We can gain scale through combining utilities. We should look at where we can mutualise and co-operate to share services and reduce costs.
As an example, know your customer (KYC) is perhaps the most obvious candidate. There is no proprietary value for us all in doing KYC, so we should be looking to create a KYC utility with other players in the market, which will save costs and improve practices in the industry.
Another candidate for greater co-operation is the sourcing, cleaning and organising of financial market data and prices. Currently, banks have their own processes for this. We each spend time analysing the same data in the same way before feeding it into our own proprietary systems. With the regulators creating more reference data points, we all have more and more data to process. Again, there is no real value in doing this ourselves, so we need to ask if there is a better way.
An independent, auditable data aggregator could provide this service for multiple banks. It would be cheaper and more transparent for regulators, and there would be enforced standardising in valuation, which ultimately is good for everyone. The other positive effect of creating these kinds of utilities would be to create better data. By performing their processes once and then distributing to many, in a way the utility will act like Wikipedia.
There will be many eyes on the same data, and users will feed back into the system as more or better information is discovered. This wiki-effect will improve information quality, and therefore improve process quality. Through simple innovations such as these, we can deal with some of the challenges we face and we can create an opportunity to collaborate.
Jacqueline Keogh, director of global trade, Lloyds Bank
There’s an increasing focus on customer confidentiality with respect to trade transactions.
Obviously, every financial transaction respects customer confidentiality, but there is now more attention paid to this particularly in secondary markets. There has always been a high level of confidentiality when you originate, but what happens when you sell down? And how do you ensure client confidentiality in club deals or syndications? What is the level of confidentiality around those transactions?
At the moment it’s financial institutions engaging in their own right, and there is no regulatory push. But it is a core subject for all of us to make sure we are preparing ourselves and respecting that customer confidentiality.
It impacts us in the primary and secondary market. It feeds into due diligence, compliance and sanctioning requirements – how do you manage that confidentiality across the different stages of the lifecycle and in co-operation with other industry participants?
Paul Johnson, director, senior product manager, global trade and supply chain products, Bank of America Merrill Lynch
Back to the future
It’s a back to the future theme: core trade is about lending and making payments, and at this Sibos, we’re increasingly hearing that while that’s interesting, it’s not sufficient. There’s a need to link the basics of trade back to process improvement: technology integration with clients and trading partners, manifested specifically on a conversation about electronic presentation vs paper.
The BPO, the dematerialisation of paper to data, multibanking, and all the different aspects around technology integration got lost in the financial crisis as people focussed on the survival of their trading partners and liquidity: you really didn’t worry too much about what it took to get that loan, or how long it took to get that payment through.
Today, corporate clients and banking communities are very much focused on solving these problems – not just making payments sufficiently and providing lending facilities, but also making sure they are done faster than it takes for the goods to travel around the world. Integration of physical supply chain logistics with the financial supply chain – back to the future!
It’s been a few years, but these issues are back firmly on the agenda. I think the reason is because companies – and now banks – are having the conversation around trade services from the perspective of growth and strategic expansion as opposed to just making sure they can survive and that their trading partners have liquidity.
The BPO and streamlining processes have recently emerged higher on the agenda. Five years ago, if you were to talk to a multinational treasurer and they were wondering how to finance a debt that’s about to roll over, this platform conversation would have never been on the agenda. Today, since the basics around stability and liquidity have been taken care of, the conversation has evolved to now support the expansion and growth mode that companies are experiencing.