Sibos 2008 in Vienna — 15-19 September 2008

Make SWIFT work harder for you

Yawar Shah, Chairman of the Board, SWIFT

Watch video highlights of Yawar Shah' speech

A year ago, I talked about SWIFT on the offensive. A SWIFT that needed to be more assertive, more competitive, more conscious about new market opportunities. And a SWIFT that needed to support its shareholders and community to ensure continuous cost reduction, improved risk management and better products for them.

This creates a virtuous cycle leading to reduced prices which results in increased volume and continued leverage.

I asked – are you getting enough out of SWIFT? Are you putting enough into SWIFT? What more could you do? 

But I have to admit, I was asking these questions without necessarily providing the means for a response.

This year, I’ve taken a number of steps to encourage your feedback. We have sought to create genuine opportunities for dialogue and engagement, both here at Sibos and on swiftcommunity.net. What I’d like to do today is three things:

• Provide a strategic update from the Board;
• Reflect on the increasing diversity of SWIFT’s stakeholders and what that means for the company and our governance;
• Propose an additional way to think about SWIFT.

First and foremost, I am happy to report that your cooperative is in excellent shape.

As I indicated in the Annual Report 2007 was a good year. The executive, under a new CEO, has made good progress on implementing the SWIFT2010 strategy. Both operational and financial performance is strong.

Let me focus on pricing for a minute. It is something that is very visible to the community. 

Simply put, last year traffic went up 22% and SWIFT gave back 25% in price reductions.
15% structurally and a 10% rebate.

Even in these traumatic times, year to date traffic growth is 11.5% - off of a record year. And SWIFT is still going to provide a reduction of 20% this year – 15% structural and 5% rebate – just approved by the Board on Saturday.

SWIFT’s stated objective is to reduce overall prices from 2006 by 50% on a sustainable basis by.

I have challenged the executive to surpass that objective — in fact, get that accomplished by the end of 2009, two years ahead of the target. Once that is done, we will put a new stake in the ground.

Your Board and your executive are busy executing for today and planning for tomorrow.

An excellent example of this was the Board offsite earlier this year.

Every other year, we use the March Board meeting to step back and reflect on the future strategy for SWIFT. This year the approach was somewhat different, we asked for input from the community ahead of the offsite and 300 of you took the time to provide your comments.

We structured the event to be highly collaborative with the Board and the new leadership team. I’d like to share the main outcomes with you.

SWIFT2010

First, we took stock of the 2010 strategy and reviewed corrective actions.

These included items such as the introduction of a fixed free pricing model, a simpler way to connect to SWIFT, an aggressive securities strategy and a means to improve back office integration.

We identified five additional areas for increased focus.

European harmonisation

As you know better than anybody, the European payments and securities marketplace is changing rapidly. The role of pan-European infrastructures such as ACHs, TARGET2 and T2S is growing and this creates opportunities for SWIFT to connect these infrastructures to our customers. It is also an increasingly competitive space.

Surely it is in the interests of our community to leverage our existing investment in SWIFT rather than duplicate investment and create a multiple set of network access windows.

Easy SWIFT

Your feedback has called for radical improvements. Making SWIFT ‘easier’ was not enough. SWIFT needs to be ‘easy’. Period.

BRIC+

Emerging market economies have developed rapidly since 2005 — probably more than we anticipated when we developed the SWIFT2010 strategy.

While continuing to strengthen SWIFT’s presence in the large economies (Brazil, Russia, India, China) there is now also a greater focus on the middle-tier economies.

This includes working closely with the market infrastructures in those countries.

Corporate access

You have made targeted corporate access a clear priority for SWIFT. The objective is two-fold — broaden reach and increase value. Easy SWIFT is an essential component here.

Workers’ Remittances

And lastly, the Board called for an accelerated rollout of the Workers’ Remittance solution.

Financial principles

A second area we focused on was the financial principles that guide your cooperative’s business operations.

As a Board, we need to ensure that these principles continue to strike the best balance between SWIFT’s competitive needs and its cooperative spirit. Financial resilience is essential – especially in these turbulent times. The discussion led to your Board approving a set of principles in June. In so doing, we have restated our commitment to double-digit unit cost reductions and reaffirmed that profit generation is not an objective in itself.

These principles also confirm that prices must be fair and transparent and structured to encourage wide usage.

Strengthened collaboration

The third area of focus was about how the Board and Executive are working together within the governance process. This should help to facilitate ‘SWIFT on the offensive’ and increase community-wide involvement.

We also discussed the role of Board members, both as practitioners who offer strategic insight and guidance, and as governors, who have a fiduciary responsibility towards the cooperative. 

This dual role ensures the necessary framework for implementation and execution by SWIFT’s management.

SWIFT is very fortunate to have a Board with such experienced and competent executives from major institutions around the globe. And the committee structure allows my fellow Board members to go deep on key matters where they have the expertise we need. Just to remind you the Board committees are Banking & Payments, Securities, Technology & Production, Standards and Audit & Finance.

SWIFT2015

And last, but certainly not least, we stepped out of the present to consider the future and sow the seeds for the SWIFT2015 strategy.

We considered disruptive events and technologies that may have a direct impact on the value of SWIFT.

We reviewed the growing economic shift towards Asia; the increasing complexity of securities markets and products; potential new entrants to SWIFT’s market; the impact of the internet and technology that may disintermediate existing messaging models; and the opportunities associated with increasing collaboration and innovation.

Not surprisingly, all these topics are on the conference agenda this week.

If they were relevant for our Board offsite, they are certainly worthy of much broader industry discussion and debate.

We also asked ourselves a fundamental question. What is SWIFT. And what is it not.

Strategy is as much about what you choose NOT to do, as it is about what you choose to do.

So, what should SWIFT not do? It should not get in between you and your customers from a competitive perspective. Or fundamentally alter the competitive dynamics giving any one party an advantage.

What then is SWIFT's core value? What does it do really well?

We collectively agreed that the value of SWIFT remains the unique combination of its secure financial messaging platform, its ability to shape industry-wide financial standardisation and related market practices, and its worldwide community.

What was at the heart of the SWIFT idea over 35 years ago is still relevant today. So when I talk about SWIFT helping us to reduce costs and mitigate risk, I’m not being boring and repetitive, I’m simply re-stating where SWIFT adds value and what makes it relevant. And, of course, it should help you grow your businesses.

Before I move on, I’d like to refer very briefly to the Distributed Architecture project because that in itself is also a platform for future commercial opportunity.

This is a fundamentally strategic 150 million euro investment. It creates an even stronger and more resilient platform; commercial flexibility and it helps SWIFT overcome issues around data protection. The project is well on track for delivery of the first phase next year. I would like to compliment the executive on the excellent work they have done.

Stakeholder value

However, SWIFT needs to continue to work even harder for you. This is easier said than done. We used to say that SWIFT’s shareholders are its customers and vice versa. Today, the lines are not so clear cut. We have over 8,500 users, of which 3,000 are categorised as participants — i.e. non-shareholding entities. Traffic is still highly concentrated with just 50 financial institutions generating 80% of SWIFT’s traffic.

There are now 351 corporates on SWIFT showing high growth but with relatively small volumes.

Put together, these different dimensions inevitably create some tension and challenges for the governance process.

How do we ensure that the different stakeholders are getting the value they want from SWIFT — in a way that nevertheless preserves and strengthens the value of SWIFT as a cooperative?

As Chairman, my focus is to ensure that our governance enables the cooperative to do the right things with the right focus. As I said last year, the Board’s committees and advisory groups play an essential role in this — and I’m sure will do so even more in the future. Of course, it is the Executive’s responsibility to tee up the strategic choices for the Board and then ensure that the Board's decisions are properly implemented.

And we have seen real progress. Let me give you one example.

Last year in Boston, I suggested that SWIFT should explore opportunities in insurance.

I expected this to be a contentious idea. At our Board meeting on Saturday, we approved a recommendation for SWIFT to take some first steps into this global industry.

SWIFT's executives did some extraordinary work. The focus will be on global re-insurance with a low risk entry. We have moved from an idea, to discussion, to a decision and to action in less than a year. Not bad for a cooperative...

So when we talk about SWIFT as a cooperative and the concept of ‘cooperative space’ — we mean areas where SWIFT can play a role without upsetting the playing field for competition between its members and customers.

At the same time, we recognise more strongly the need for the SWIFT organisation to be more competitive. We need to challenge ourselves and challenge some of the fundamental thinking that has influenced our business models – and I talk here as a practitioner as well as a governor. I spoke last year about competitive threats to SWIFT and how SWIFT would respond. With my ‘SWIFT on the offensive’ hat on, I would like to talk about making the cooperative more competitive.

In June, the SWIFT executive shared the outcomes of work it had been doing on competitive positioning and analysis.

As my fellow Board member, Lynn Mathews from Australia, commented: “We crossed a threshold this week... 10 years ago when I joined the Board no one spoke about competition... Competition must remain firmly on the Board’s agenda. This Board must allocate time to agree appropriate strategies to ensure SWIFT can prosper – as a cooperative in an increasingly competitive world.” I can only confirm that sentiment.

Competition is healthy. It keeps costs down. It keeps us agile. It forces us to anticipate rather than simply respond. The same should apply to SWIFT.

But competition shouldn’t mean unnecessary fragmentation. There are clearly cases where cooperation will bring greater benefits than competition. For instance, the single window access to market infrastructures.

SWIFT as the ultimate shared service

And this leads me to a point I touched on a year ago, but which I believe is even more relevant today. I’d like to suggest an additional way to consider SWIFT.
       
As financial institutions continue to have pressure on the revenue line and on the credit and risk lines, the one area that everyone is focusing on is reducing expenses. This is where the role of shared services within financial institutions and by external providers is seeing greater play. Shared services simply means: creating utilities across businesses, typically in low cost locations, that leverage skills and common competencies in order to lower unit costs.

Many financial institutions have set up captives to do this. Others have chosen to outsource. And the more sophisticated ones have created a hybrid model that combines captive and third parties within a common management framework.

Let’s not forget. SWIFT is the original shared service model. Simply put, that’s how we’ve outsourced our financial messaging all these years.  And this has been dramatically successful. And, we own this entity.  In some ways SWIFT is a “captive third party”.

So, let me ask a question. What are you currently considering outsourcing to a third party that SWIFT could do for you?
 
We, financial institutions, define the cooperative space for SWIFT. In doing so, could we not collectively dramatically reduce our costs rather than using one-off outsourcing opportunities? And we own SWIFT, which has the benefit of control.

If I am one of 180 third party vendors exhibiting at Sibos, I am wondering if this chairman is threatening my business. Absolutely not. SWIFT does not produce everything on its own — it partners with vendors.

Let's come back to the ‘big idea’ question.

It's interesting to reflect back to the 'big idea' for SWIFTNet — namely, the creation of a highly secure and reliable network that would provide access to multiple services — messaging such as FIN; applications such as Accord; and of course links to market infrastructures ranging from global entities such as CLS, to national high and/or low value payments systems and central securities depositories.

Five years on, that vision is a reality. So, you tell me what could be next?

For example: Should SWIFT be managing large volume interfaces for its customers? Beyond messaging, how many risk managers are thinking of SWIFT as a common infrastructure for real-time information? Rather than me laying out more ideas, I want to hear from you this week.

As I said earlier, Sibos is the ultimate meeting place for our industry. It’s where we do business, listen and learn.

Discussions need people to contribute. Sometimes customers say to me that they can’t influence SWIFT because they are not part of the governance process which they consider ‘belongs’ to the members rather than users of SWIFT. That’s true in part because SWIFT is a member-owned cooperative and the shareholding structure influences the governance process. But it does not mean that all users and customers can’t have a say.

There are many ways to do that — and what better way and place than this week... As I stated in my opening, despite the current economic climate, 8,000 people are here at Sibos. We really should be tackling the tough issues, taking the thinking beyond our comfort zones, being prepared to think and act in more radical ways than before.

And this applies to SWIFT as well.

Your Board is taking its responsibility very seriously to ensure that the SWIFT cooperative works as hard as it can to deliver to you — our shareholders and members and also to our users and partners.

Thank you to the city of Vienna for hosting us in this wonderful venue. Let’s enjoy the hospitality AND come up with the tangible outcomes and initiatives that can reduce our costs, improve our risk management and create conditions to survive and thrive!

In conclusion, I expect that Vienna will be remembered as the place where we moved beyond talk to action. Ladies and gentlemen, the financial service industry is living through very difficult times. I can assure you that SWIFT will do its best to continue to serve you.

Thank you.