Understanding SWIFT’s agenda and its impact on corporates.
SWIFT’s annual SIbos conference took place in Boston this week and underscored four big themes that will form a large part of its next five-year plan for 2020 and also determine the extent to corporates expand their connectivity to the SWIFT network. These four big themes are: 1) the ever growing importance of transaction banking; 2) regulatory compliance challenges to global payments; 3) the threat of cyber-attacks and 4) the increasing threat and opportunity of “digitalization,” which SWIFT and its member banks need to address more swiftly.
The growing importance of transaction banking
SWIFT is all about facilitating financial transactions so it loves the transaction banking business. The global financial crisis and the regulatory response to it have made banks appreciate the transaction banking business more than ever—and this ultimately benefits SWIFT.
From a corporate banking perspective, transaction banking deserves the love. It enjoys twice the returns on a risk-weighted-assets basis than corporate banking generally—i.e., 5.3 percent vs. 2.3 percent—according to research by McKinsey & Company. Plus, McKinsey notes that transaction banking creates stickiness of 29 percent to the length of a client business. A client relationship with transaction banking business lasts on average 9 years, versus 7 years for a credit-only relationship. And, finally, transaction banking contributes about 40 percent of overall corporate banking revenues and is expected to grow to closer to 50 percent by 2018, or roughly 10 percent average growth increased per year. This is true across all regions, except for the Americas, where McKinsey expects it to fall from 36 percent to 33 percent. In revenue terms, transaction banking is expected to reach EUR225bn in EMEA by 2018, from EUR152bn, EUR519bn in Asia, from EUR295bn, and EUR202bn in the Americas, from EUR134bn.
The growing importance of corporate transaction banking was also the topic of a panel led by Axel Miller of Oliver Wyman, which included global and regional transaction banking heads of several global banks. The upshot here was similar: “Transaction banking is going to define corporate banking in the future.”
Unfortunately, the path to transaction banking nirvana will not come easily for most banks, given the cost to confront the challenges that face the transaction banking business going forward. These challenges will require new cooperation and partnership models, per McKinsey, which SWIFT can help support.
Regulatory compliance challenges
“Compliance, compliance, compliance,” said Ather Williams III, Bank of America Merrill Lynch’s Head of Global Payments and Global GTS Strategy, when asked to name his key current priorities. At issue are the myriad KYC and KYCC requirements being laid down by anti-money laundering, sanctions and tax regulation: aka “financial crime compliance.” Unfortunately, these departments may become the fastest growing ones at transaction banks and creating documentation nightmares for corporate customers.
To set the compliance tone, SWIFT had Adam Szubin, director at the Office of Foreign Assets Control (OFAC), US Department of the Treasury, open the Sibos Compliance Forum. He didn’t mince words. “Under the regulations, if one is processing a transaction in violation of our sanctions, be it in Iran or with respect to Ukraine, it is a violation,” he said.
The problem for banks is that if someone opens an account in, say, Turkey and accepts money from a sanctioned country and then wires that to an account in the US, it is sometimes very hard to identify. Transaction bankers can take comfort in Mr. Szubin’s comments that OFAC will consider the willfulness of their conduct: “Was this an example of benign or innocent neglect, or much worse, gross negligence or recklessness?” However, they still have to consider the need to attest to the absence of a violation and this will give pause to certain kinds of transactions from certain entities in certain jurisdictions.
SWIFT and its community of partners are hoping to help banks address the compliance burden, including a KYC Registry that SWIFT has created to help correspondent banks share KYC information with a central repository, rather than bilaterally, and maintain updated information accessible to all SWIFT-member banks, giving each the same access to standardized data. The problem for banks is that it is hard to outsource KYC compliance when they must attest to its validity. The situation may get better with time, as it did with SOX (Sarbanes-Oxley) for corporate officers, but the consequences of a false attestation still look pretty severe today.
The threat of cyber attacks
“This is not a war we will win any time in the near future,” noted James Kaplan, principal with McKinsey & Company, in a session on cybersecurity. Thus, banks must shift from seeking to prevent cybercrimes, which is probably impossible, to detection and harm minimization. More banks should also consider going on offence. Microsoft, for example, was on hand with representatives from its Digital Crimes Unit, which advocates not just detection by attempting to work with local law enforcement globally to go after digital criminals and seek to bring them to justice. With a recently announced pilot program, Microsoft will make its Cyber Threat Intelligence Program feed available to participating Financial Services Information Sharing and Analysis Center (FS-ISAC) members. With this feed, the global financial industry’s key resource for cyber and physical threat intelligence will receive near real-time information on known malware infections affecting more than 67 million unique IP addresses.
Cybersecurity concerns also give SWIFT the opportunity to market itself to more corporates, offering them access to the securest network available.
Digitalization upside and downside risks
Just as banks are at risk of being disintermediated from the payments space by disruptive new vendors harnessing digitalization and related technology to offer better payment services, so too is SWIFT as their payment network. Banks have an opportunity to harness these same disruptive forces to revitalize their payments’ businesses, but they must first overcome the sunk costs in legacy systems that they currently rely on.
If banks, SWIFT and other market infrastructure providers don’t move quickly enough, they will die. In the digital age of today, it is simply unacceptable that payments clear as slowly as they do. As Katja Lehr, director of EU core payments management for PayPal highlighted in a session on “Generational Conflicts in the market infrastructure space,” payments need to be faster. “While I can order something and have it delivered within an hour [using eBay now], I can’t move the money in an hour and in most countries I can’t even move it in a day. I have to still wait three, four or even five days.” The flow of money simply has not kept pace with the flow of physical goods, much less digital ones.
Apart from speed, banks need to think of payment mechanisms in terms of ubiquity, security and user experience. People have to want to use them.
Also, from the standpoint of corporate services, banks needs to consider how the next generation of treasury decision makers will be coming from an environment where they are used to accessing everything from their mobile phone. No paper.
If banks and market infrastructure providers do not respond quickly enough they risk being disrupted by non-bank providers.
Challenges with corporates
Many of the challenges facing transaction banking and SWIFT are also being faced directly or indirectly by corporate treasurers. Thus, SWIFT’s efforts to help its member banks can help corporates, too. But corporates also need to see swifter action on key challenges standing in the way of wider SWIFT adoption. According to SWIFT CEO Gottfried Liebbrandt 40 percent of Fortune 500 companies were on its network. However, moderating a Sibos Corporate Forum panel to assess what was standing between corporates and banks, David Blair, managing director with Acarate Consulting, suggested it should be more like 90 percent: “Most large corporates are multi-banked and most Fortune 500 companies are in multiple geographies, and SWIFT is the logical and most secure way to have visibility over and connect with multiple banks.”
What’s standing in the way? For one, the documentation requirements of connecting with all a corporates banks via SWIFT are not standardized. The SCORE agreements (Standardised Corporate Environment), the equivalent of an ISDA master agreement, can take six months to three years to negotiate with each bank. “I am baffled by banks’ different requirements regarding corporate and bank liability for connectivity,” noted Brooke Tilton, director, treasury operations at Viacom. Martin Schlager, head of treasury operations at Roche added that while differing corporate resolutions can explain some of the documentation issues, 80 percent of the issues are common to all and should be standardized. SWIFT is looking to support standardization in many areas with its MyStandards initiative, which also includes developing standard documentation for customer onboarding. However, it needs to move quickly to prevent corporates from exploring other alternatives that might offer a better user experience.
More standardization is also needed with the core XML 20022 standard for payments. Corporates on the panel and in the audience also suggested more work was needed with the Common Global Implementation – Market Practice initiative (CGI V3), which provides a forum for financial institutions and corporates to promote wider use of the ISO 20022 standard for payment messages. Seventy percent of audience members polled said CGI V3 still needed work. As Viacom’s Ms. Tilton noted, varying requirements in different countries still require messages to be populated differently.
One area where SWIFT has been making progress is with the corporate interface to the SWIFT network. While access is not ubiquitous, the Alliance Lite2 product has made it vastly easier for corporates to connect. Still, if the standard of access becomes a mobile app, SWIFT leaves itself open to disruption.
When polled, the Corporate Forum audience indicated that 56 percent would prefer SWIFT be their payments solution, but were open to other alternatives (12 percent they would prefer an alternative). This suggests that SWIFT and its member banks have an opportunity to win the majority of corporate transaction business via the SWIFT platform, but if they do not move swiftly they will let non-bank providers encroach on the transaction business they have identified as being so important.