Almost 250 delegates discuss the impact of new entrants, industry developments and disruptive technologies on the Spanish financial services industry
This article is also available in Spanish
On 8 September 2015, the Spanish SWIFT community gathered at the Palacio Neptuno in Madrid to discuss the changes facing the sector and its future at the Madrid Business Forum. The event brought together more than 230 delegates and 16 speakers, including representatives of the Bank of Spain, Spanish banks and other financial institutions, start-ups, investors and senior representatives of SWIFT.
Topics covered in the wide-ranging agenda included the prospects for the Spanish financial system, the impact of real time payments, the fight against financial crime and compliance strategies, benefits and challenges of managing cash in T2S, as well as technological innovation and the key to building the bank of the future.
The industry is facing a new business model in which financial activity is essential, but not necessarily banking and the financial industry as we know them.
Gema Montoya, Head of SWIFT Iberia and Javier Santamaria, SWIFT Board Member, welcomed delegates and opened the forum. "The financial industry has undergone many changes in recent years, most of which are irreversible. But in reality, this is just the beginning. The sector is undergoing a transformation process with the ultimate goal of competing effectively on a global scale.
Many of the changes are part of the process of European integration, but the financial crisis has accelerated them, added urgency to the need to increase security, transparency and standardisation, and for the entire European financial system to step up its efficiency," explained Montoya. "The industry is facing a new business model in which financial activity is essential, but not necessarily banking and the financial industry as we know them."
The industry has to assume that "this business is not the exclusive domain of the banks," said Javier Santamaría, the Spanish representative on the SWIFT Board. In this context, the Spanish banking sector faces the challenge of operating in a very demanding, much more regulated environment and with an international geopolitical order imposed by globalization.
There will be more changes in the next five years than there have been in the past five.
The SWIFT2020 strategy
The keynote address was given by Gottfried Leibbrandt, CEO, SWIFT who put the emphasis on the global and transversal nature of the changes that are taking place in the financial industry, which are affecting all areas, from customer relations to business models, from cash management to foreign exchange. And "everything is being influenced by new technologies," asserted Leibbrandt, who went on to add that "there will be more changes in the next five years than there have been in the past five."
All of these changes serve as the backbone of the SWIFT2020 strategy, "Grow the core, build the future", the main elements of which were outlined by Leibbrandt in his speech. The banks, he explained, face the challenge of having to strategically rebuilding their businesses, with innovation and technology being rolled out as key instruments to improve operating models, gain efficiencies and recover profitability. But in reality, he explained, "the challenge is to reinvent ourselves to adapt to a change of cycle that has already begun, marked by innovative services, globalisation and the advent of technology and non-banking entities, of the internet and technology that are seeking to gain a foothold in the business."
Learning from our mistakes
Next to present was economist Daniel Lacalle, who talked about the prospects of the Spanish financial system and stressed the need to thoroughly analyse the past to avoid "repeating mistakes" in the future. "You cannot move on without analysing the origins of the crisis," according to Lacalle, the result of an "excessive bankisation".
We are not going to get out of this hole using the tools we used in the past.
In this context of change for the sector, even "the traditional methods of charting a path out of debt saturation are useless. Ultra-low rates simply perpetuate the inefficiencies of the system, the economist warned. "We are not going to get out of this hole using the tools we used in the past," concluded Lacalle.
Banks need to hurry up and implement immediate payments.
The impact of immediate payments
After the opening session, the first panel discussion brought together representatives of the Bank of Spain and banking institutions, with Leibbrandt as moderator, to discuss the role of innovation and technology in the field of immediate payments, the next goal of the payments sector, and one the disruptive innovations that are dominating discussions in the industry and among regulators, customers and consumers. "Banks need to hurry up and implement immediate payments," stated Beatriz Kissler, head of Operative Banking Services with CaixaBank. And not just because of the pressure from the new digital generation of consumers, but also because "it is a demand that comes from the economy itself, and it is being requested by everyone, from big business to new Internet players, the digital stores" added Kissler.
The Spanish banks are ready.
Immediate payments can be a "dynamic factor of growth," according to Jesús López Pedruelo, head of payment systems at the Bank of Spain. They save time and money and allow the recipient to have the funds immediately, "as well as promoting access to payment services using new media, such as payments from mobiles," he added.
Digitisation combined with immediacy can make electronic payments "more efficient and attractive and thus become an alternative to cash," according to the Bank of Spain's representative, but imply "changes to the way risks are managed and payments are processed", and he stressed the need to seek solutions that are interoperable with the rest of the euro zone. The ultimate goal is to "come up with a pan-European response" in tune with the progress made in the field of SEPA. We must prevent the emergence of local solutions that lead to the creation of a fragmented market of instant payments in Europe, similar to what existed in the past with traditional payments.
"The Spanish banks are ready," claimed Javier Celaya, head of Immediate Processing and Payments with Banco Santander. According to Celaya, the Spanish banking sector has an advantage thanks to its degree of internationalisation and its high levels of service and automation. But there is still an open debate within the industry and among the regulators on several outstanding issues relating to interoperability, security and regulatory compliance. In addition, the upcoming deployment of real-time payments requires that banks develop more powerful systems for detecting fraud and tools that make it easier for their customers to manage their cash in real time.
Regulators are increasing pressure on the financial industry and the regulatory changes are being rolled out faster than market players can adapt.
Compliance strategies and the fight against financial crime
The next panel discussion was dedicated to the prevention of and fight against money laundering and financial crimes, which is "one of the most complex and costly challenges for financial institutions, and a top priority for the industry," according to Montoya, who moderated the panel discussion. The changes in the industry, global and transversal, geopolitical, technological, even social, determine the challenges it faces, old and new: threats to cybersecurity, high regulatory costs and pressure from new competitors, for example.
"Regulators are increasing pressure on the financial industry and the regulatory changes are being rolled out faster than market players can adapt, given that they have to deal not only with local legislative requirements but also those of each of the markets in which they operate," pointed out Montoya. "All these factors require agility, innovation and management flexibility to seize the opportunities arising from these changes. But the financial sector must not only react to the reality imposed by the market, but must also anticipate and identify industry trends for the coming years. Those who do so will have a clear competitive advantage. Lagging behind is not an option."
Now that the Fourth Directive on the prevention of money laundering and the Regulation on information accompanying transfers has been approved, the industry is closing ranks with its common commitment to transparency, as confirmed by Juan Antonio García Gálvez, Deputy Head of Banking Services with CaixaBank, and José Luis Calderón, Head of Global Transaction Banking at Banco Santander. As far as Spain is concerned, its transition will not be a radical change from the existing legislation on the prevention of money laundering. "The industry has been working to meet European requirements for years," they stated.
However, the industry will need to prepare itself for the new requirements regarding transparency and traceability of transfers. At the centre of the debate, lies the AML/CFT information on compliance with the requirements relating to anti-money laundering and combating the financing of terrorism and due diligence in terms of the information of the customer by financial entities.
For Thierry Chilosi, Head of EMEA Market Initiatives, SWIFT, "the banking industry needs an efficient and flexible solution that starts from a simple principle: knowing how to handle and leverage information that already exists, and manage it, a task that requires the determined cooperation of the entire sector at a global level." As is the case in all industries, "knowing what to do with a piece of information and knowing how to manage data, means having an opportunity to improve, to grow."
"The only way to adjust the banking structure to the regulation is through advanced data analysis. Financial institutions are required to change their anti-money laundering strategy and build an efficient infrastructure to keep their organisations fully operational. And innovation and technology can help by drastically slashing the workload and the management cost required to achieve this," according to Chilosi.
T2S is the most important reform of the workings of the security market in recent times.
T2S cash management - the benefits and challenges
The last presentation of the morning was devoted to analysing the impacts on liquidity control with the entry into force of the new settlement platform Target 2 Securities (T2S), with a talk by Jonathan Ehrenfeld, Market Manager, Securities Markets, SWIFT and Fernando Castaño, Head of the Division of Payment Services to Credit Institutions, Bank of Spain, who referred to the new pan-European settlement platform, designed to harmonise settlement processes in Europe, as "the most important reform of the workings of the security market in recent times."
Despite the uncertainty that still prevails in this new market ecosystem, the advantages are clear when it comes to cash management. It will make it possible to centralise the settlement of all the transactions and securities of a client in a cash account at the central bank chosen by the customer. As it is a global, harmonised and real-time securities clearing and settlement platform, it will have a very positive impact on the intraday liquidity needs of market participants. Moreover, according to the experts, intraday liquidity requirements may be reduced even more if T2S is accessed through an agent bank, which will be particularly beneficial for financial intermediaries who wish to focus their resources on settlement activities.
In this new environment, the post-trade activity will require a high degree of specialisation and institutions need to take urgent decisions on how to approach their business.
One of the challenges of this new environment is the need for a change of mentality in the sector, but in return, it gives them a unique opportunity to rethink how resources should be used. Ehrenfeld believes that "the current regulatory initiatives of the pan-European securities industry highlight the need to review the specifics of the Spanish post-trade model in order to align it with best practices and with the imminent entry into operation of the new settlement system of the Eurosystem".
"The organisations that are dedicated to providing post-trading services are having to make significant investments in technological development and dedication of resources," explained Ehrenfeld. "In this new environment, the post-trade activity will require a high degree of specialisation and institutions need to take urgent decisions on how to approach their business." Indeed, one of the open debates revolves around the need to define precisely the functions of managers and trustees to ensure the absence of conflicts of interest between the two entities.
"The main elements of the reform, such as the introduction of a central counterparty (CCP) and the move to a system of settlement by netting, require the standardisation of communication flows and messaging for future, already imminent, forms of transaction settlement," explained Ehrenfeld..
The bank of the future relies on an online strategy
Innovation to build the bank of the future
The afternoon was devoted to analysing and discussing the role of innovation and technology, which are crucial to the new context of the financial industry, with the participation of Nicolás Moya García-Luján, Head of Innovation, Bankinter; Guillermo López, CEO, Torusware; Luis Martín Cabiedes, Investor, Professor and a lecturer on Entrepreneurship at the IESE business school and Fabian Vandenreydt, Head of Markets Management at SWIFT, as well as Head of Innotribe and the SWIFT Institute.
Vandenreydt was entrusted with the task of explaining the role of SWIFT, the "think tank of the financial sector," the driver of the innovations that occur within it, and in particular of Innotribe, the fintech innovation initiative that brings together leading experts in financial services, business angels, venture capital companies, start-ups and fintech experts as well as those responsible for decision-making within the financial industry. "The company acts as a catalyst to bring together the entire industry to collaborate on the design of practices, standards and solutions of a mutual interest. And especially in the field of innovation through Innotribe, its platform for innovation in financial services," explained Vandenreydt. But what really defines and differentiates Innotribe is "the training we give entrepreneurs in the technological field to engage with providers of financial services," he continued.
Banks have extensive experience in maintaining relationships with customers
"There is a gulf between the way in which new companies practise innovation and the way banks do, and helping entrepreneurs to get across their proposals to the SWIFT community facilitates rapid evaluation of new technologies and models by the banks, allowing for the identification of suitable partners and investors. I am certain that our partnership will help expand innovation in financial services and bring benefits to new companies," said Vandenreydt.
There is no going back for banks. The internet has changed banking business models and customer expectations. Branches are no longer going to be an administrative centre, but places where "high value operations such as signing a mortgage" are carried out, pointed out Moya García-Lujánr. For him, "the bank of the future relies on an online strategy" and he believes that the industry will not lose the battle against the new "non-banking" competitors given that, unlike what has happened to the telecommunication companies, "banks have extensive experience in maintaining relationships with customers."
Financial start-ups face challenges ranging from convincing banks to adopt the technology, to solving the problems posed by the regulations.
Innovation and technology are not only the tools that will enable institutions to improve their operating models and restore their profitability: without innovation and technology, organisations run the risk of being left out of the new model. All agreed that the opportunities for innovation in the financial sector are vast. "Financial start-ups face challenges ranging from convincing banks to adopt the technology, to solving the problems posed by the regulations," said López Although Spanish banks are being very active in the technological field, there is a lack of visibility and support from the government to create a network of start-ups in Spain. Unanimity also reigned on the fact that "it is very important that legislation and governments help to invest," and that in Spain, the legal obstacles still hinder entrepreneurship.
The financial sector is undergoing a cyclical change and is forced to reinvent itself
A new era for banking
"The financial sector is undergoing a cyclical change and is forced to reinvent itself," stated Montoya, as she brought the event to a close by pointing out the changes taking place in the sector and the challenges it faces. The industry is facing a new business model, new customer relationships and new competitors. In addition, globalisation and the move towards a banking union are setting a more complex, more regulated and more competitive international stage. "These new 'rules of the game' will require greater efficiency" noted Montoya. "The survival of banks and financial institutions depends largely on their ability to innovate. Strategic business renewal is the biggest challenge facing the industry."
The survival of banks and financial institutions depends largely on their ability to innovate. Strategic business renewal is the biggest challenge facing the industry.
In the case of Spain, after passing through a period of unprecedented crises in recent decades, which saw it come to a turning point in its evolution and results, the industry can now finally shake off the pressure and put the focus on growth and a return to profitability. "The Spanish financial institutions should turn to innovation and technology to shore up their business strategies and gain efficiency in the face of the new global era of banking. We must push forward on strategic drivers such as value creation, professionalism and efficiency in governance and consolidation of the relationship banking model," said Montoya.
The speed of technological progress raises questions among financial institutions, which are facing complex selection and investment decisions. But "that is what lies ahead of us and it is unavoidable," stressed Montoya. "Technological innovation is expected to play a major role in the financial system as a whole, especially at a time when the accumulation of changes can have - will have - a disruptive impact on the current configuration of the sector. In this context, without technology there is no innovation and without innovation, there is no future".