The weather was good when we arrived last week at Stockholm for the yearly EBA Days conference. I’ve been attending this event already a handful of times and it makes for a nice touch point with the traditional banking community before the northern summer breaks in and Sibos takes over to close the year.
The conference’s strong point Is traditionally networking but this year I was surprised to find the current gestalt of the banking community laid out clearly in the first two sessions after the welcome word: consolidation, harmonization and industry collaboration on the one side, versus the need to reinvent ourselves and find new revenue pools.
Know Your Classics.
1. The need to reinvent ourselves
This strategic round table on global transaction banking aptly named “the art of the possible” addressed the problem of correspondent banking as a high cost business where service choices are being forced to its participants and where a call was made for banks to innovate fast, to disrupt even.
Change can be recognized as an ongoing trend in everything that the human being does, it is who we are, what we do. The democratization of powerful phones with human-friendly user interfaces made the personal digital revolution possible and has enabled old technologies like voice and video over internet to become mainstream with products like WhatsApp, Messenger or Viber. Humans everywhere in the world are now in permanent contact and the only true barrier left for communications now is time zones.
What happens when you have that? That the new generation of humans start asking obvious questions: how is it possible that sending money across borders takes so long and cost so much? Thus, when there is demand, there is opportunity and the recent years have seen the remittances MTA space evolve with the addition of the likes of TransferWise and Revolut, to name but a few. These services help the human need to know: how much will the beneficiary get, how much will I be debited, where is the money and when it will get there.
But what happens then to traditional banking? Volume goes up but per-transaction revenue gradually erodes and it does not take long for product managers to figure out that the current model will become unsustainable in the medium to long term.
It is simple maths but, like with the stocks market, the million-dollar question is when.
2. Consolidation, harmonization and industry collaboration
This keynote which actually came just before the roundtable was given by SEB’s Paula da Silva who, referring to PSD2 and banking in general made a point of the banking community reinventing the wheel over and over again (a photo of four different mobile payments solutions was provided as an example) and made a plea for the community towards standardization and collaboration for efficiency reasons.
Now this point also makes full sense taken into the perspective of the round table discussion. The DNA of the banking community is based on trust, security, reliability and risk management, something would be wrong otherwise. The resulting predominant behavior is that, when a new 3rd party or industry solution is proposed, the first reaction is “I’m not sure” or “what’s in it for me” and banks prefer instead to develop their own solutions, try their own luck.
The logic not to adopt such “foreign” solution is simple. When you have an existing infrastructure that has been paid for and you are proposed to replace it anew with a new shiny technology, banks bulk at 1/cost and 2/the NPV (a measure of risk and return). The same thing can be said with revenue pools: you know that you’re suffering revenue erosion but as making a leap forward can be a (very) risky endeavor, the question is how much can I afford to lose trying on my own before I have no other option than to move.
So we’re back to basics and it’s about crossing the Rubicon again, looking for the tipping point where the community is under so much pressure that suddenly all options are on the table.
Meet me in the middle
“Virtue lies in the middle” said Aristotle. The same could be said about change management: timing and balance is everything, you have to apply the correct amount of pressure at the best possible timing. The innovation cemetery is full of good ideas which arrived too soon (e.g. Apple Newton). Conversely, arriving too late is not good for business neither (Polaroid anyone?) so, in absence of a crystal ball the winning horse is for me something that we discussed at a course on Strategic R&D Management I followed this month of May at the Insead school: evolve community innovation from project portfolio to process portfolio.
The key idea is that to future-proof any business we need several innovation portfolios sporting different yields and following different innovation processes:
- A first, classical portfolio of projects where results are expected with a 1-3y time span and which are managed in a classical stage-gate approach
- A second portfolio of “incubation” projects where results are expected within 3-5 years
- And a classical R&D portfolio for results beyond a 5y timespan and where only the input is measured as the output is uncertain and dependent on research.
From experience I would also add that the above three categories must be complemented with the most important component of them all: the “special fridge” -as I like to call it- that place where you store those ideas that did not gain traction at the time, since they might become useful and even trendy later on.
The path that I started in 2016 with the gpi roadmap has brought us today many different initiatives that we are pursuing in parallel this year:
- Payments tracking: after extending it last year to cover payments and standardizing the reporting to corporates, this year we will launch an MVP for financial institution transfers, we have also organised additional trials for gpi Instant with domestic real time payment communities such as in Europe with TIPS -to name one of the most concrete- and will later this year provide the first part of our universal confirmations programme and set the wheels in motion for an additional, most awaited functionality for both banks and corporates.
- We have developed a new “friction reduction” services category which includes Stop & Recall initiation (available since Jan this year), Case resolution and Pre-validation (both in pilot). Pre-validation removes friction before the payment is sent and Case and Stop remove friction from key issues that might appear after the payment has been initiated: stopping a payment and requesting additional information.
- Finally on the most strategic scale, we have been exploring the interconnection to blockchain-based “ecosystems” with the gpi Link and we are considering a healthy number of additional exploratory avenues at the moment.
The initiatives’ portfolio has grown significantly since that first service live back in Jan 2017, so we still have to make a better job at explaining clearly the relevant maturity levels and expected benefits in allowing the community to make an informed investment decision for the next year(s) however all key elements are there for SWIFT to continue supporting the banking community in the industry’s transformation journey.
As an example, two of the recently identified key success transformation factors are “fail fast” and “full upfront predictability”.
On the first, we have proven this year that with minor process changes we can bring substantial transformation. The Case resolution pilot we started in Q1 this year included two novelties: we included in the pilot -next to financial institutions- the case management application software vendors and together we built a proof of concept using an internet-based sandbox developed by SWIFT and based on the service specifications. The benefits were multiple: we were able to significantly shorten the specifications validation period from >20 to 8 weeks and the participating banks recognized that including the vendors from the get-go helped both understand the product deployment requirements and project effort estimations in a much precise and faster way.
On the second, the experience accumulated throughout the years puts us in a unique position where we have a deeper knowledge what are the current solution/scheme limitations and also what would be the least friction paths to overcome them. For example, a full upfront predictable solution could be built in a period of 8 weeks, benefiting from the unequaled reach of existing rails and providing the beneficiary with the choice of disbursement method at the last leg.
Mention of honor
Such mention goes to Facebook / Libra / Calibra this last week which, as of the initiative announcement which took place last Tue shortly after the two session slots above (there are no such things as coincidences), it has lit the community ablaze with buzz and comments that have continued for several days now. And here I thought that cross-border payments were becoming boring! Lots of community thoughts and comment to continue on that one, I might add a few on my side later on since one has to at least applaud the move and willingness to push the agenda further.
Happy holidays to all those who take them in the next few weeks!
(c) Pedro Mullor, 2019.
DISCLAIMER: the views expressed here are my personal opinions. Content published here is not read or approved by my employer before it is posted and does not represent the official positions, strategies or opinions of my employer.
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