SWIFT Business Forum Frankfurt 2018
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More than 200 delegates from the German financial community gathered on 26 April at the Maritim Hotel conference centre for the SWIFT Business Forum Frankfurt. The overarching theme of the event was set by Michael Formann, Head of SWIFT Germany and Austria, in his welcome remarks: the rapidly changing payments landscape, the opportunities and challenges of this development for established players and the role and initiatives of SWIFT in this context. In their opening speeches Stephan Müller, Chair NMG SWIFT Germany, SWIFT Board Member, Divisional Board Member and Group CIO, Commerzbank, and Gottfried Leibbrandt, Chief Executive Officer of SWIFT, set out the main trends that are shaping the industry’s future: shifts in consumer behavior, regulatory initiatives that aim to open up banking models eg. PSD2, compliance pressure, and technology disruption.
The speakers gave an overview of SWIFT’s core initiatives: the global payments innovation initiative (SWIFT gpi) as the new standard for cross-border payments; SWIFTNet Instant as the single gateway to connect seamlessly to multiple instant payments systems which in Europe will enable access to both the Eurosystem’s TIPS and EBA Clearing’s RT1 in the first instance and then later to the combined T2/TIPS/T2S platform; the Customer Security Programme (CSP) and SWIFT’s portfolio of Financial Crime compliance services. Both speakers made it clear that customer expectations for payments providers are rising continuously. Leibbrandt pointed out that the flow of innovation has changed and whereas in the past, innovations started in wholesale markets and then found their way into retail markets, today, innovation starts in retail markets and sets the standard for wholesale markets. Müller shared this observation, saying that people that send instant messages via WhatsApp every day don't understand why they cannot send payments just as quickly and easily.
Support for SWIFT’s evolutionary and collaborative innovation approach
Throughout the speeches and the panel discussions, there was a widespread consensus about the importance of SWIFT gpi for meeting the rising expectations on the payments industry – and the challenges currently shaking up the retail, corporate and correspondent banking businesses. Acknowledging the already significant investments made by the SWIFT community, Stefan Müller encouraged the audience to continue to invest in their payments infrastructure, especially in the field of security.
“Data security has no return on investment, yet it is the very basis of our business”
Stefan Müller, Chair NMG SWIFT Germany, SWIFT Board Member, Divisional Board Member and Group CIO, Commerzbank
In his view, the CSP approach to be more prescriptive about the security requirements of SWIFT member institutions is the right way forward. “A chain is as strong as its weakest link,” he stated and commented that a big part of the CSP requirements have already been integrated into the audit criteria of financial supervisors. Müller underlined his overall satisfaction with the strategic path of SWIFT and its evolutionary and collaborative approach to innovation. At the end of the speech, he took the opportunity to thank Stephen Lomas, former Managing Director, Head of Market Policy, Global Transaction Banking, Deutsche Bank, and SWIFT Board Member for his engagement in the SWIFT community. Furthermore, Christian Westerhaus, Global Head of Clearing Products in Cash Management, Deutsche Bank, was welcomed as his designated successor and second German member of the SWIFT Board.
Leibbrandt picked up on the theme of payments innovation, saying that while the SWIFT community can face new entrants into the cross-border payments space with a good dose of self-confidence – “It’s ours to lose” – established players can definitely not be complacent and should prepare for strong competition by challenger institutions. Leibbrandt emphasized that we are just at the outset of a new world of open and API banking and emphasized that further research and development work is needed in the financial industry as a whole, including SWIFT.
One of the projects highlighted by him was the DLT Proof-of-Concept for real-time Nostro reconciliation with 34 banks. While DLT offers a solution for real-time Nostro reconciliation, he explained, the technology is still not ready for large-scale adoption in this field. “We used about 500 chains and this was the biggest Hyperledger implementation outside IBM,” he said. “There are about 1.5m bilateral RMA relationships on SWIFT. To cope with that you’d need 1.5m blockchains. There is no way Hyperledger is developed enough to handle that kind of scale. It is all solvable, but it is not easy and will take time.” Working with new technologies like DLT nevertheless remains a strategic priority for SWIFT and research and development will continue as the technology matures and becomes more apt for large scale implementation.
Solid market growth, Germany still in top 5 for global messaging traffic
SWIFT’s strong position is underpinned by the solid and continuing growth of the market. Global trends in payment volumes provide tailwinds. Thierry Chilosi, Head of Pricing, Revenue and Competition Analysis, SWIFT, reported that 2017 was a strong year for global payments with a 4% growth in FIN cross-border payment instructions (MT 103 and 202), 9% growth in payment instructions (MT 103 and MT 202) overall – both domestic and cross-border - and 12% across all payment MTs on FIN in comparison to 2016. Judging by the first quarter of 2018, this positive trend is set to continue. In comparison to the first quarter of 2017, cross-border payment instructions rose by 3%, total payment instructions by 7% and total payment messages by 13%. The top three corridors for worldwide payments in 2017 were United States/China, United States/Hong Kong and United Kingdom/United States.
The top payment corridor for Germany in 2017 was United Kingdom/Germany and the top five counterparty countries for payments sent were the United Kingdom, the United States, France, Italy and Turkey. As Stefan Müller had reported earlier, Germany holds fourth place in terms of FIN traffic sent, third place in terms of FIN traffic received and – depending on category – ranks one to three in FileAct traffic. Payments traffic is still slightly higher than securities traffic on FIN, with 3,485m vs. 3,232m in 2017.
Cyber-security - an ongoing challenge for the global banking industry
Following the overview on general trends, a panel of cyber-security experts moderated by Leo Punt, Head of Services & Support and Deputy Chief Executive EMEA, SWIFT, discussed the threat landscape in the financial industry. James Hatch, Director of the Cyber Services, BAE Systems Applied Intelligence, Silke Lechtenberg, Managing Director and Chief Information Security Officer, Deutsche Bank, Frank Fischer, Chief Security Officer, Deutsche Börse Group, and Stefano Ciminelli, Deputy Chief Information Security Officer, SWIFT, all agreed that attacks are becoming more and more sophisticated with hackers specializing in certain areas and paying close attention to their return on investment (ROI). The main goal of hackers today is to gain high level access to corporate networks using any entry point they can get in through, including ATMs and POS technology. While insider attacks are a relatively small problem, reckless behavior by employees who are targeted by social engineering does pose a serious challenge and exposes corporations to risk.
This means that cyber security is not a purely technical problem but that investments into a “human firewall” are needed, too. Deutsche Bank and Deutsche Börse run internal communication campaigns to educate employees. Deutsche Bank’s “The target is you” campaign includes presentations to employees, information material and live hacking exercises. Deutsche Börse’s cyber-awareness campaign “Guardian of Trust” provides employees with a mirror on how well they perform. SWIFT even goes one step further and adds a gamification element to individual cyber security achievements: bronze, silver and gold shields for the employees. There was consensus that every organization needs different layers of defense including the total technology stack (e.g. data base, access layers, APIs) and the employees. Collaboration and information sharing has also become more and more important as a new layer of defense, not only within one’s industry but also cross-industry and between corporations and regulators. SWIFT’s information sharing centre, ISAC, which offers an easily searchable and readable knowledge-base for all related and existing intelligence bulletins was welcomed as an important step for the SWIFT community.
The morning sessions were concluded by three speed briefings on SWIFT products and services that were delivered in parallel to the SWIFT Germany AGM. Urs Kern, Senior Commercial Manager, Financial Crime Compliance Services EMEA, SWIFT, summarized the roadmap 2018 for SWIFT’s growing portfolio of Financial Crime Compliance services, with particular attention to Name Screening, The KYC Registry and Payment Controls. Morgane Donck, Expert Business Intelligence & SWIFTRef, EMEA, SWIFT, gave an overview on business intelligence and data, highlighting a host of new and enhanced services in SWIFT’s business intelligence portfolio and showing some use cases. The speed briefings concluded with Tanja Haase, Senior Expert, Standards, SWIFT, who gave an introduction to the SWIFT full-scale community consultation on ISO 20022 that looks at the timing and practicalities of a migration of cross-border MT traffic towards ISO 20022.
Building the payments market of the future
Saskia Devolder, Head of Western and Central Europe, SWIFT, opened the afternoon sessions with a presentation on the new payments landscape. She agreed with previous speakers Stefan Müller and Gottfried Leibbrandt that new customer expectations are creating demand for better and faster payment services. This demand has driven the success of SWIFT gpi: 16 million gpi payments have already been made since go-live, across 350 country corridors – and 50% of them are credited to end beneficiaries in less than 30 minutes.
In excess of 160 financial institutions have signed up to gpi and will now benefit from faster and fully traceable payments, lower related costs and the access to 50 plus market infrastructures.
Devolder shared information on SWIFT’s significant role in building Australia’s new real-time payments platform NPP which went live in February. The key to the successful start in Australia was the development of three general design principles by SWIFT aimed at easing the challenges for banks and prioritizing efficiency. These principles are: enable infrastructure re-use where possible, design multi-CSM connectivity and future-proof the system. SWIFTNet Instant, SWIFT’s global solution for instant payments, has been developed following the same principles.
SWIFT gpi – the customer perspective
The next panel, moderated by Michael Formann, focused on the practitioners’ views on gpi. Panelists included Hans-Joachim Karras, Chairman of the SWIFT for Corporates Working Group, National User Group (NUG) Germany, Director Global Liquidity and Cash Management, HSBC, Paula Roels, Head of Market Infrastructures & Industry Initiatives, Deutsche Bank, Mathias Friedrich, Product Development Payments Department, HypoVereinsbank – Member of Unicredit, and Ingrid Weisskopf, Head of Payments Financial Institutions, Commerzbank. There was a consensus on the panel that there is high interest of corporate customers in gpi. Karras pointed out that the level of interest in gpi and knowledge about it differs significantly between corporates that are SWIFT members and those that are not. In the latter case, a much more pro-active marketing by banks is needed. Transparency was seen as the biggest pain point for corporate customers, followed by speed. Complaints processing and process automation such as automated payment status updates for SAP-systems emerged as further important issues.
The panel then moved on to discuss the challengers and challenges. Google, Apple, Alibaba, Facebook and Amazon, dubbed as the GAAFA, are in the best position and have the biggest resources to compete with banks on payments. Yet it is still unclear whether the relationship between banks and the GAAFA will be defined by competition or cooperation. There is a risk that the new players will focus on high margin services and the banks are left with low margin parts of the payments business. Other challenges for the SWIFT community are regulatory requirements and time-to-market of new services. In general, the view of the panel was that the SWIFT community has a good chance to compete with new market entrants on the basis of gpi.
Open banking, instant payments, DLT – views on the real-time, digital future of banking
The last panel of the day focused on the dramatically changing environment for banking and payments driven by shifting customer expectations, regulatory changes such as PSD2 and emerging technologies. To discuss the topic were Axel Weiss, Head of Payments Strategy, German Saving Banks Association, Christian Kothe, Head of Market Initiatives EMEA, SWIFT, Matthias Schmudde, Head of Payments and Securities Clearing and Settlement Division, Deutsche Bundesbank, Katja Heyder, Head of Marketing and User Relations, EBA Clearing and Thomas Ramadan, Senior Account Director, Payment Market Infrastructures EMEA, SWIFT, who moderated the panel.
There was some skepticism on the ability of banks to create well-functioning business models in the field of person to person payments. Making end consumers pay for new payments services might prove challenging, leaving banks with the need to cross-subsidize the retail payment business with the margins of wholesale business. The business potential for person-to-business and business-to-business payments was seen more positively. Kothe expected that new challengers like Amazon will try to integrate payments as deep as possible into the order process of their platforms and that this integration will become an important success factor – as payments by end consumers are strongly driven by behavioral bias. One way to pro-actively deal with this and other challenges will be a joint and united approach by the banking sector, such as was the case with Australia’s NPP and to roll out instant payments in all sectors. Kothe predicted that in five years’ time, the majority of all payments activity will be instant. At the end of 2017, there already were 40 active real-time payment systems around the globe, and plans already underway for 20 more.
Unified standards important to prevent market fragmentation through API banking
The panel also discussed some of the major industry trends: Schmudde declared that the DLT hype was over for now. Just like SWIFT, Bundesbank has undertaken a number of pilot projects and its main finding has been that DLT performance is not yet good enough to handle massive transaction volumes. He expected that the use of DLT will be limited to smaller pilot projects in niches with a manageable circle of participants for the time being. Heyder highlighted the risk of market fragmentation through the proliferation of API interfaces and called for unified standards for open banking. Weiss and Kothe saw good opportunities to coordinate such standards through the Berlin Group. Last but not least, Kothe pointed out that the question of competition or cooperation between fintechs and banks seems to have been settled, with cooperation coming out on top. This does not come without challenges, however, and the main stumbling blocks for cooperation tend to be issues around who has sovereignty over the customers and whose security framework is applied.
The event concluded with an innovation pitch on Artificial Intelligence and robotics by Theodor Schabicki, partner at Bearing Point and responsible for Digitalization Strategies, AI and Robotics. He introduced the audience to “the four monsters of digitalization”: legacy, data, culture and organization – and sketched out ways to overcome these typical obstacles for the implementation of digitalization projects. He saw a paradigm change:
“Today it’s not the bigger company that eats the smaller, it’s the faster company that eats the slower”
Theodor Schabicki, Partner, Bearing Point and responsible for Digitalization Strategies, AI and Robotics
Formann then closed the forum reviewing the highlights of the event and stressing the high levels of consensus on the threats and opportunities the industry is facing and the significant progress that has been made by SWIFT and its community in the fields of real-time-payments, enhanced security and value-added services.