By Joseph Neu
SWIFT’s annual Sibos Conference in Singapore argues that banks and their shared networks will remain relevant in the face of FinTech.
SWIFT, the shared financial messaging and payments network for banks globally, has a knack for inserting itself into all the latest trends. Back when the web was first catching fire, SWIFT was the most secure of networks embracing web technology and eventually XML standards. Now it is the most secure cloud offering, providing a “platform-as-a-service” to banks and the financial technology companies, or FinTech, that choose to collaborate with it.
Over the last several years, the InnoTribe stream at Sibos, which promotes FinTech companies and ideas, has become the most interesting and dynamic program. This year saw even more FinTech startups pitching themselves to global transaction banks to invest money, expertise and provide access to their networks. There were also more established FinTech players present hoping to transform financial messaging, if not disrupt banks and their payment systems.
The question is, can banks transform themselves to monetize the FinTech opportunities before these new market entrants figure out how to do it without them? Or, more likely, will regulators step in to prevent disruption to the banking system by regulating FInTech companies in the same way they do banks?
For banks Asia has arrived
In the conference’s opening keynote, Piyush Gupta, CEO of Singapore-based DBS Bank noted how Asia and, in particular, China are central to how the FinTech trend will play out. Urbanization, digitalization and leap-frogging development, especially with the younger demographic segments, will propel financial technology further faster in this part of the world.
“Last year in Jamie Dimon’s annual report, he noted that Silicon Valley is coming” for the banking industry, Mr. Gupta said. “But I say Chinese companies are here, not coming. On the whole architecture of the banking industry, Chinese companies “are making a profound impact.”
To make the point, he cited how Alipay, the payments arm of Alibaba, has grown from an 80mn daily transaction volume in its first year to some 300bn per day now. How hard is it for a payments company capable of such scale to move from low-value to high-value payments, he asked the largely transaction-banker audience? Nor are deposits and money funds safe: Alibaba launched a money market product in China and became the eighth-largest global money-market provider in just one year. Its peer-to-peer lending program, driven by algorithms to judge credit risk, is bigger than the markets of the US and UK combined. KYC is eKYC with voice and facial recognition built into the platform. Banks need to transform their business in similar ways to avoid disruption.
The difference between disruption and transformation, Mr. Gupta, noted is that with the latter the incumbent market participants, in this case banks, can still make changes to compete. And, as it turns out they have a few competitive advantages to draw upon. The first is data; banks know more about customers via their transaction data than anyone, but before they have just not done a great job (especially outside of the cards business) of monetizing the advantage by using the customer data to add value and transform the user experience. That has to change.
The second is the trust factor. Study after study shows that even young millennials still associate bank brands with trusted places to keep their money, more so than tech firms. The third is the SWIFT network, which, if it succeeds in opening itself to collaboration with FinTech companies, with banks as the gatekeepers, can offer them a secure platform on which to do business.
However, the largest factor that everyone points to is regulation: as banks are hamstrung to transform by the need to comply with the growing demands of regulators, it is simply unfair not to ask the same of FinTech companies, especially if they scale as quickly as Alipay. Banks are developing a competitive advantage in the ability to comply with bank regulations, along with being focused on identity and risk management, and they can offer this expertise to FinTech segments when regulators start to demand it.
Redo the business stack
Without the regulatory, risk and identity compliance advantage—which feeds their “trust factor” edge—banks will need to fundamentally transform their cultures in order to be part of the transformation process and avoid disruption. This was the message from all of the speakers in the InnoTribe stream, especially those representing banks.
“Banks that partner with gateways will be successful,” noted Dan Kimerling, Co-Director API Banking at Silicon Valley Bank. He came to the bank via its acquisition of a start-up he co-founded: Standard Treasury.
Standard Treasury was an InnoTribe start-up challenge finalist last year that aimed to help banks harness the power of developers and developer ecosystems by building, maintaining, and supporting white-labeled and co-branded developer platforms, or gateways, via standardized APIs. Part of their pitch was that a wholesale bank stands behind every FinTech application. Banks need the FinTech applications because banks themselves have bad technology that comes about because of a bad culture, and especially a bad technology culture.
“When you think about money gathering, think about payments, think about the legal and lending process, think about the whole architecture of [the banking] industry… Chinese companies are making a profound impact.”
— Piyush Gupta, DBS Bank
Leda Glyptis, Head of EMEA Innovation Centre for BNY Mellon, said that for banks to succeed in working with FinTech gateways via APIs they have to change how they perceive themselves. Banks need to see themselves more as software companies. “Banks need to rethink the stack and change their business model,” she said, “and they need to commit to it fully.” BNY Mellon is one of the few banks that has shown success in doing this and, as a result, is attracting developers. The key to doing this, according to Ms. Glyptis, is to create an open API and an apps store that allows them to create entirely new solutions in a way that makes sense to them.
“Great developers want to solve big problems and financial services has a lot of them,” noted Adizah Tejani, Head of Ecosystems Development at Level 39, an accelerator for FinTech companies based in London. They also work on great code and don’t just put lipstick on a pig, represented by banks’ legacy stack, which is another way in which banks need to transform in order to avoid disruption, i.e., abandon the idea of simply patching outdated technology.
Three to watch
Three more-mature FinTech companies that several at Sibos pointed to as poised to change the global payments landscape are EarthPort, Ripple Labs, and Volante.
Earthport is a cross-border payment network, providing fast, cost-efficient and transparent payment solutions. Earthport’s payments framework is specifically designed for high volumes of low-value, cross-border payments through a single access point. It delivers predictability, transparency and efficiency while providing secure and compliant payments to beneficiaries in 60 countries and territories worldwide. How long before it moves up the value-chain to higher-value payments? Earthport is also partnering with Ripple Labs to enable cross-border payments in real-time.
Ripple Labs has developed a payments protocol, using a distributed ledger akin to the blockchain technology found in bitcoin, which allows for the secure transfer of funds in any currency in real-time with no reserves required. Indeed, its technology can transfer anything of value from currency to frequent flier miles. Ripple is positioning itself as a compelling alternative to interbank transfers by cutting out significant cost, counterparty risk and settlement delay.
Together, these two companies may completely disrupt correspondent banking by offering customers direct, real-time settlement on cross-border payments via local clearing systems.
Volante Technologies is a third company that can help anyone access almost any payment or financial messaging system, be it bank host-to-host, SWIFT, Earthport, or Ripple via its message plugins, integration and on-boarding tools. It even has a product to help corporate on-board more quickly with newly selected banks or on-board their subsidiaries, which may use disparate systems, to a centralized payment and collection hub such as an in-house bank or shared service center.
What Does the future look like?
The fundamental question posed by SIBOS this year, thus, was twofold:
1) Can banks transform themselves enough to take on the FinTech innovations before they are disrupted? And,
2) Will regulators step in to disrupt FinTech innovators, based on banks’ demonstrated advantage in compliance and risk governance, before they can transform transaction banking with well-thought-out solutions based on better technology?
Either way, SWIFT is ready to be the platform connecting banks and innovators, while supporting standards, open APIs and the latest applications to enable value-added services on its network. But as a bank-owned cooperative, it will be very hard for it to serve a financial ecosystem where banks have been disrupted out of existence, so it really wants to ensure that they don’t all become dumb pipes because that would make for a much more boring annual conference.