Movement towards Asia, regulation and fintech are the main drivers behind change in financial services, heard attendees of Sibos 2015 in Singapore
Gottfried Leibbrandt, CEO of SWIFT, identified three forces that are shaping financial services globally during the Sibos 2015 opening plenary: the move from the west to Asia, government politics and regulations, and financial technology and cyber.
Addressing the move towards the east, he argued that the pendulum is still swinging in that direction. According to the SWIFT renminbi (RMB) tracker, RMB is currently the fourth most-used currency, after the US dollar, euro and British pound. Generally, Leibbrandt said, RMB and the Japanese yen jostle for fourth and fifth position, but he predicted that RMB would eventually win out.
While he noted the impressive rise of the currency—RMB was in seventeenth place just two years ago—he does not expect it to become a major, or even reserve, currency just yet. He said: “It will be a while before it gets there, but it will be very interesting to watch it rise.”
With regards to regulations and politics, Leibbrandt argued that global banks have been hit particularly hard, affected by the first wave of regulation aimed at financial stability post-crisis, and then by the second wave, which tackled sanctions and financial crime prevention.
There is now a third wave as regulators demand more access to data. “The pessimists would hold the view that this is the end of global banks,” said Leibbrandt, but he argued that they have invested in common infrastructures and these challenges are not necessarily new.
The final trend addressed was the digitisation of finance, including the emergence of blockchain and distribution ledger technology (DLT). Leibbrandt pointed out the benefits of DLT—it can be used to register ownership of practically any asset, and it is very secure. He also suggested that SWIFT could be well placed to take care of these ledgers.
He pointed out that ledgers do not record transaction information well, and that the premise of delivery-versus-payment would only work if there were significant assets and ledgers with liquidity. Distribution ledgers have the potential to be to transaction banking what trains were to transport, but they could still transpire to be the hovercraft, or even the jetpack.
Leibbrandt concluded by saying that banks will have to transform themselves and “absorb technology”, saying that while change may feel risky, institutions have to accept it, while also providing good service.
Staying on Asia, Piyush Gupta, CEO of DBS Group, who also spoke during the opening plenary session at Sibos 2015, said that, despite the setbacks of recent months, the conference’s location in Asia was “timely and appropriate”.
Many of the biggest changes in the financial services industry have been happening more acutely in Asia, he said, with particular activity seen in China.
He put this success partly down to the population in Asia, saying: “People count for a lot.” With so many people, and a relatively young population, people are becoming wealthier, and Asia is no longer the factory of the world, but the “marketplace of the world”, said Gupta.
He also referenced the “digital natives” of Asia. According to Gupta, 50 percent of the world’s internet usage is in Asia, and China alone has more smartphone users than there are people living in the US. He suggested that the most profound technological changes have been in the payments space, and again, this has been most evident in China.
Gupta stressed that growth in China is not just a “flash in the pan”, pointing out that the country’s economy is still growing, only at a rate of 4 to 5 percent, rather than in double-digit figures. Ultimately, growth and development in China is “good for the region and, frankly, good for the world”.
Also high on the agenda at Sibos 2015 was the ISO 20022 messaging standard, with many concerned about fragmented implementation.
In a panel session in SWIFT’s Standards Forum, Marc Bayle de Jessé, general director at the European Central Bank, said that the flight has already taken off in Europe, with ISO 20022 used for Target2-Securities (T2S).
Bob Masina, head of technology and operations at the Australian Payments Clearing Association, said that in Australia, “the plane took a long time to take off,” while Nell Campbell-Drake, vice president at the Federal Reserve Bank in Atlanta, said: “In the US, our plane is at the gate. But we do have one engine that’s started.”
A common theme in discussion was that each jurisdiction was approaching the standards on a very local level. Campbell-Drake pointed out that local systems in the US are very different to those in other countries, and that stakeholders are particularly important, saying the Federal Reserve “has to make sure everybody has an opportunity to have their voice”.
Campbell-Drake did add that the US is trying to get to grips with the correct strategic direction, observing the actions of other jurisdictions in order to help inform stakeholders. She said: “We are learning and we are continuing to listen to what other jurisdictions have to offer.”
Bayle de Jessé pointed out that, in Europe, many local markets had already been brought together in order to try to best capitalise from ISO 20022, and that the standard is already used for T2S connectivity, and that it could be used for collecting information across jurisdictions globally.
From an Australian point of view, Masina considered that they could approach cross-border standards eventually, but at the moment the priority is to hit the deadline.
While he accepted the benefit of engaging with other countries, he said that the process is only just starting, and “everybody is at a different level”. He then added, however, that a certain scale is required in order to feel the benefits of ISO 20022, and in terms of this, “the tipping point may have been reached already”.
Finally, financial technology, or ‘fintech’, start-ups were widely debated throughout the Sibos 2015 Innotribe sessions.
The Future of Money session pitted representatives of small and youthful financial technology firms against speakers from large banking institutions. Moderator Udayan Goyal, co-founder and a managing partner of Apis Partners, began by pointing out that technology usage among customers has superseded that of the banks for the first time.
New technologies could start to disrupt credit distribution, and innovators and banks can “collaborate and compete at the same time”.
Christoph Rieche, CEO and co-founder of Iwoca, pointed out that even after years of quantitative easing, lending to small businesses is still in decline. He put this down to the high cost structures in legacy systems, and the manual processes involved.
He suggested that data collection should be automated in order to reduce administrative costs, and that significant trade data is already available in electronic format through the online platforms that these businesses use every day.
SWIFT CEO Gottfried Leibbrandt was more matter of fact, saying: “I have learnt from banking that the hard part isn’t making the loan, the hard part is getting the money back.”
While Leibbrandt accepted that efficient use of data was a challenge for banks, he also questioned: “Are we allowed to use that data?” If so, he suggested that start-ups may be in a better position to make use of it than larger banks.
As the discussion moved to big banks, Claire Calmejane, director of innovation at Lloyds Banking Group, argued that while ‘fintech’ is an important area for investment, “it’s not the only one”.
She said banks can invest directly in financial technology, and highlighted that there are other important innovations also deserving of attention. While Calmejane advocated collaboration between banks and start-ups, she said that this collaboration should also involve governments, technology giants, and other areas of financial technology, pointing out that small start-ups will have to scale up their technologies.
Steve Ellis, executive vice president and head of the innovation group at Wells Fargo, also agreed that there is a need for innovation, and controversially suggested that large firms should be looking externally.
He said: “The smartest people in the world do not work for your company. They are somewhere else.”
Finally, Alexander Graubner-Mueller waded in, saying that while he had heard talk about innovation from the legacy banks: “I haven’t heard anything innovative”.
He suggested that there is a “new ecosystem” developing in financial services, and compared the bigger banks to telecoms companies of today. Currently, cell phone users care more about their handset, operating system and apps than about their network provider, he said, and in the future bank clients will not care who their bank is, only about the services they’re receiving, which fintech companies will provide.
‘Disruption’ and ‘innovation’ are buzzwords in financial services but the ethos behind them is often forgtton, said the co-founders of Wharton FinTech, speaking at a Sibos Innotribe session.
Daniel McAuley and Steve Weiner cited disruptive technologies, data collection and security and ‘trust 2.0’ as key to the future of financial services, and to serving ‘millenial’ clients.
McAuley said banks are the “most likely to be disrupted by millennial consumer preferences” and argued that as the technology of financial services is getting closer to the consumer, the interaction becomes more important.
“Banks of the future won’t have customers, they’ll have users,” he said, adding that it won’t be a case of human versus machine, but of working together and interacting with technology.
The pair also said that those of the millennial generation are less likely to pay attention to where their data is, and whether it is at risk, and so are more likely to have their data breached. This means that data management should be a priority, as well as collecting data from the ‘internet of things’, a new frontier for banks, which one delegate described as “heavily regulated and not known for their speed and nibleness”.
Finally, the speakers argued that the nature of trust in banks is changing. While previously consumers might have trusted established banks, forming an emotional connection with them and appreciating one-to-one relationships, younger generations put their trust in technology, and would prefer a low-cost and effective service without interaction, while also relying on recommendations from family and friends.
