SWIFT Plenary - Yawar Shah's speech

Yawar Shah, Chairman, SWIFT Ladies & Gentleman, As I was preparing for this speech, I couldn’t help but remember the last time Sibos was in Hong Kong. It was 1991. 18 years ago. I was attending as head of payments for Chemical Bank. We had just merged with Manufacturers Hanover. This was the first ‘in-market' New York bank merger. Both sides were at Sibos. Times were uncertain for us. Today, neither bank exists in its original form. Sound familiar?

It was the first time Sibos had come to Asia (even though it was the 14th Sibos). I wonder how many of you here today were in the audience then?

The event was positioned as, and I quote, “the place where serious bankers take time to meet their technocrat suppliers”. This is reflected by the exhibitors at the time – some 73 companies of which only 7 were banks.

1,800 people attended from 61 countries. Now we are at over 5,300.

In the world of SWIFT, Kuwait and Algeria had recently gone live. Membership numbers stood at 3,151 in 72 countries. Today, we are at 8,800 in 209 countries.

The theme of Sibos in 1991 was ‘Cooperation vs Competition. Revisited.’

And presentations covered topics such as:

• Levels of service and pricing in a cooperative society
• A new look at cooperation in the banking industry
• National solutions and regulatory issues.

It’s interesting how these things are still with us today after 18 years.... Now, let’s fast forward to the present. The financial crisis is global. I don’t think there is any part of the world that is not affected in some way, whether it’s a decline in asset values, rising unemployment or some other manifestation. This is a time when customer centricity and dialogue are absolutely essential. And the fact that so many people from the SWIFT ecosystem are gathered here in Hong Kong seems to be testimony to that. Actually, as we assess what has happened from Sibos Vienna to today, I see a number of different worlds.

Firstly, the world of banks

We have gone through a year of traumatic change. Some banks have gone out of business.
And others are weathering the storm and planning for future growth. 

We have cut hard and deep into our organisations to offset financial losses. Life as a banker has been tough. We are the focus of constant media attention (warranted or not) – on issues of trust, transparency, greed, risk, bonuses – you name it. This is a world of huge turmoil undergoing fundamental change.

Then there is the world of SWIFT

Our ‘little’ cooperative has continued to operate safely, securely and reliably in the eye of the storm.

This is a cooperative that we own and govern, and one we depend on to provide us with shared services that are core to financial transactions and banking operations. And you know what?
Your cooperative is far from being in crisis. I’m pleased to say it’s in good shape managerially, operationally and technologically. The financials are sound.

Cost containment and reduction measures are in place and on target; and the financial resilience principles that the Board agreed to in June 2008 have proved to be a very good decision in these difficult times.

But SWIFT is not without its challenges.

Over the past 15 years or so, SWIFT’s business model has rewarded us with double-digit growth on an annual basis, along with fundamental price reductions and rebates.

Indeed, at the September Board and at Sibos, we have many a time approved a rebate and announced the ‘good news’ at this plenary session. Not today I’m afraid – though I can’t imagine that piece of news comes as a surprise to you.

Rest assured, however, that the commitment made to reduce overall prices by 50% by 2011 still stands.

SWIFT has taken serious steps since the end of last year  to ensure that this promise is delivered.

So “what’s new” you might ask? And I’d answer frankly, ‘not much’. SWIFT’s role is to make sure that the basics work. As I said in Sibos Issues, I don’t expect SWIFT to create sizzle in its members’ boardrooms. “It’s like the payroll department. If it doesn’t work you notice, but otherwise it just gets on with things.”
And in quietly getting on with things, it should bring us peace of mind.

Reassurance that, as a messaging infrastructure, it fulfills its crucial role in helping us manage liquidity, collateral and counterparty risk by enabling timely and accurate information flows. But, in the ‘quietly getting on with things’, perhaps it’s doing itself a disservice.

Perhaps it’s not clear enough to many of us just how relevant the core competencies of this cooperative are – beyond the obvious ones of security, reliability and availability. After the catastrophic events of last year and the credit crisis that followed, all of us are much more worried about risk now. And risk has many dimensions in which SWIFT can play a mitigating role. 

The proposition is compelling. But, how well is it understood? For example, SWIFT helps us with:

• Operational risk – thanks to a resilient messaging platform
• Counterparty risk – thanks to RMA, closed user groups and digital identity so you know who you are dealing with
• Settlement risk – SWIFT is an essential means to connect to a multitude of market infrastructures and gives you certainty through a range of reporting capabilities to and from these infrastructures.
• Liquidity risk – to give peace of mind to the questions of ‘where is my money? What is my cash position?’ at any point in time.

And risk comes in another flavour too. A vast number of financial transactions, especially in the securities arena, are still conducted over fax and other non-digital means – with all the associated risks and costs.

Work done this year in the area of Asset Servicing, and specifically Corporate Actions, is tangible evidence of where SWIFT is playing to its core strengths of standardisation and automation.

At the same time, after years of double digit growth, SWIFT has seen its first ever volume decrease and is now preparing for the possibility of a period of significant volume contraction.

It’s important to acknowledge that SWIFT has structured a mechanism whereby it is most beneficial to customers as volumes grow.

I’ve talked before about the virtuous cycle: the more we do business and give SWIFT the volumes, the more we benefit from reduced prices, and the more SWIFT is able to invest in its scale economics, so the more benefit is and so on.  That has been SWIFT's history.

But while volumes contract, it’s a different scenario. SWIFT also needs to look at its own cost base and it is taking significant steps to do this. Lazaro will talk more about this shortly, but the Board fully endorses and supports a structured cost reduction and efficiency programme that is now taking place throughout the company and will continue through the next 18 months. The Audit and Finance Committee of the Board is providing the relevant oversight for this programme to ensure that the proposed cuts are aggressive but do not adversely affect the customer experience and expected service levels.

The basics must continue to work seamlessly. This is fundamental.

And that leads me to another world which is important for me as Chairman.

By December, the tone was more sombre. We were reassured that the Executive had scaled back business ambitions and introduced cost control mechanisms given the growing uncertainty; yet they were still bullish enough to project 9% traffic growth. We agreed to postpone all approved Standards changes for 2009, except for a limited set of message types. As customers, this decision brought us significant savings. We also endorsed other efforts from the SWIFT executive to minimise forced change within our institutions.

By March this year, the economic situation was dire. Drastic scenarios were playing out in the marketplace. And for the first time ever, SWIFT’s traffic was on a downward trend. As practitioners and governors, there was little appetite for anything new.

Our message to the Executive was “stick to the core, we don’t know what’s ahead.” By June, much of our discussion was about the steps being taken within SWIFT for structural cost reductions. But, we also started discussions about SWIFT2015 and how to develop the strategy in a highly collaborative and consultative manner. 

Which brings me to our Board meeting of 13 September. Our focus continues to be financial and operational resilience, the core pillars of SWIFT. However, no update on SWIFT is complete without a status on compliance. Your Board and Executive have taken this issue very seriously and were proactive in putting in place ground-breaking rules and controls to assure the confidentiality of customer data.

As we have communicated to you, the EU and US authorities are currently negotiating an agreement by which the private sector – banks, service providers and SWIFT – will be asked (again) to cooperate with the public sector in their endeavours to fight the financing of terrorism. We understand the need for this cooperation. However, we have made our position clear – most recently at a hearing in the European Parliament. Whatever the outcome of the discussions, the EU/US agreement:

• Must be the right balance between security and protection of individual rights
• Must maintain the robust protections which exist today for customer data
• Must provide the certainty of a legal framework within which companies, like SWIFT, can operate
• Must maintain the commercial level playing field and competitive position of EU-based companies, including SWIFT.

We are monitoring the situation closely and will ensure that the community is updated as appropriate.

So far I’ve spent a lot of time discussing the present. Now let’s look ahead and talk about the future of your cooperative. To ensure that SWIFT aligns its energies with its customers’ future expectations, the Board and Executive are now working on the new strategic blueprint. SWIFT is engaging in dialogue with its customers in multiple forms to make sure it’s getting their input. Your Board is investing considerable time in this journey as well.

A critical step is to ask the right questions and tee up fundamental choices.

So let me share some of my own thoughts

Why don’t we move traffic from more costly networks on to SWIFT?

That is a fundamental question. And one that I raised last year when I talked about SWIFT as the de facto shared service. Why do we pay for access and use to multiple infrastructures, when a more rationalised, integrated, or even ‘merged’ approach may be a better proposition – both from a cost and an efficiency/connectivity perspective? So how do we move from what seems to me to be inertia to starting to have those conversations? If the current economic climate isn’t ‘right’ now, then when will it be?

Do we simply accept the situation ‘as is’ and put pressure on each MI to reduce prices, or do we take a more strategic and collective view and a more radical, forward-thinking approach?

As I said, SWIFT is, or could be, the ultimate shared service infrastructure. It is bank-owned, bank-governed. It brings together big, small, local, regional and global institutions.

The business streams of the past will not be sufficient for the future.

We need to think broadly and deeply for future opportunities. And decide to either do them well or not to do them at all - no hobbies. Think corporate to bank access – it took years and whilst 500 corporates on SWIFT today is ‘good’, it’s still a drop in the ocean.

Think corporate actions as I mentioned earlier. The standards have existed for years, yet the market has remained relatively inactive in moving manual activity into an automated environment.
At least it’s starting now.

More broadly, we have so much potential in the securities environment.

Think of SWIFT as a provider of services domestically. This is already the reality for many high value payments systems, but why not for low value payments too?

Think insurance. SWIFT is taking some first tentative steps in a market that is huge.

But should it move faster? Dare I mention e-identity? What about emerging markets?

Think ‘beyond the interface’ – let’s face it, SWIFT is a fraction of the cost base of a bank, but its relevance through STP can make a huge impact.

Many choices. The key is to pick some. Get agreement. Get them done.

I am increasingly hearing that customers would like SWIFT “at the table” with them as the environment shifts dramatically. Not everybody knows what the end game is going to be, but they would like SWIFT to help “as a partner”. That is a big challenge, because, while the words ‘at the table’ and ‘partner’ sound good, both sides need to be clear on expectations. 

On the SWIFT side, the Executive needs to be clear on the business outcomes and define the right engagement model. This requires deeper insights into its customers’ business drivers and needs in order to go beyond messaging. And SWIFT might have some resource gaps here.

On the customer side, we need to organise ourselves better so that we can speak with a voice that reflects the collective needs of our organisations – rather than fragments of them.
And we need to figure out what is relevant for us, and what is relevant for the cooperative – of which we are owners and users.

All of these questions – and more – need to be on the table as we shape the strategy for the future.

In March 2010, our Board meeting will be fully dedicated to SWIFT2015 with a view to identifying concrete options for review in June and final sign off in September next year.

The new 5-year plan shouldn’t come as a surprise. We have committed to provide ample opportunity for broad and deep engagement of our shareholders, customers, users and other players in the SWIFT eco-system. Discussions are already underway with a cross-section of our community.

Many more will take place this week.

2015 sounds a long way off. Many of us are trying to figure out what to do in 2010, 2011.....

This is also very relevant for SWIFT. Given that we are experiencing dramatic change at a rapid pace and that the uncertainty factor is huge, it is important that SWIFT sets clear near-term milestones and deliverables along its journey towards SWIFT2015.

Having a blueprint and a plan is great, but remember, they are a means to an end.  The end game, for your Board, is creating value to you.

And on that note, let me be clear on governance.

We need to first defie the What. Then we can talk about the How.

Once we are clear about the business objectives and drivers for a future SWIFT, we will be in a position to consider to what extent the current governance structure is an enabler or a barrier to execution.

And by the way, SWIFT is already referred to by many as a best practice example of market infrastructure governance.

There is alway room for improvement. But we must be clear what business objectives we are trying to address and what we are willing to give up for it.

In closing, let me do what I always do. Issue a call to action. These are important times for your cooperative. Now, more than ever, your voices must be heard. I urge you to think hard about the role you expect SWIFT to play in your institution in the future. Where it can take away inefficiency and pain?

What more do you want it to do? And conversely, what do you want it to stop doing, or do differently?

SWIFT is going out of its way to consult and engage. For those who participate, I believe the potential rewards will be considerable.

But please remember - when we collectively agree on what we want to get done, SWIFT has shown an incredible ability to execute across financial institutions on a global basis.

But when we ourselves are divided and uncertain on our priorities, SWIFT by definition, has difficulty in moving forward with solutions that work. And it drains a lot of energy and time. So, let's pick a few things and create a new set of co-operative initiatives. Let me conclude by emphasizing that your Board takes its role very seriously in representing you in governing this cooperative.

From a very personal perspective, it is my honour and privilege to serve you all.
Thank you.



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