17 April 2014

Gary Wright

Gary Wright - BISS Research

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A business case for SWIFT

13 November 2012  |  3968 views  |  11

For many years I have been totally focused on message standards as one of the main drivers for financial services efficiencies that benefit investors and society in general. For this reason when SWIFT opened up to the securities markets all those decades ago it was an obvious decision to utilise the incumbent network in the international financial markets,  namely SWIFT.

The attraction was that it was a cooperative and had achieved spectacular success in the payments world by using its connectivity and capability to manage standard electronic messages. It was also essentially a private network owned by banks and run by banking people. Therefore the leap to get securities messages created and used was not expected to be that huge. Forgive the naivety of pre- nineties thinking.

All this was happening in a world and a market that had still to embrace the Internet and PCs were primarily a secretarial tool. A world where central markets existed and communications to counterparties, in part, went via central markets, whilst others were utilising bespoke or commercial networks like BT.  The risks and costs of that set up need no detailing and the operational efficiencies of the domestic markets were not really a focus in those days at least not as much as they are today.  International cross-border investing and settlement was no where near as active as today and it was the complicated and expensive domestic market structures for clearing and settlement that was limiting economic growth via the release of investing funds accross Europe and beyond. Communicating was often via Telex and standards did not exist. This called into question the capability of Custodians to support international settlement and brokers to be able to afford to offer pan international investing. In the world of the eighties there was only one answer and of course SWIFT was the clear and obvious solution provided by Banks. However it also ensured that banks could remain in total control

Today with modern communications and standards would SWIFT be considered a solution?

I doubt that SWIFT would ever have been invented in today’s world, where the Internet has such a massive role, providing opportunities and benefits not envisaged in the eighties. Commercial network suppliers like BT have evolved technology and services at a much faster pace than could be matched by any private network and certainly not by laboured committee laden structures that are such a feature in SWIFT.

Closed private networks have hardly any relevance in today’s world. Despite attempts by SWIFT to recognise the modern world needs of the market and introduce various post trade services, it’s not really in a position to compete with the commercial network suppliers. Is SWIFT also able to satisfy the needs of investors and the markets that they use?

SWIFT did compete with a commercial network and gain some headway in securities within the UK when CREST was developed. However they only actually gained with mainly existing customers they lost out heavily to BT in the retail market and in volume of transactions quite heavily.

 More recently SWIFT has announced that they have signed up a thousand corporate customers. Impressive, until you measure against the tens of thousands that have been on BT for decades and the hundreds of thousands that are on commercial networks globally. It’s impossible for SWIFT to compete with these figures and one wonders if they should?

Today’s markets need to be able to take advantage of modern, light and flexible technology, where FIs in both investing and trading can pick their network of choice. All the electronic standards messaging can be carried over commercial networks or via the Internet. Why then do we need SWIFT today? It would make far more sense for the commercial networks to replace SWIFT or for SWIFT to evolve it into some kind of inter-communication bridge between commercial networks.

One could argue about security and it is the highest card in the SWIFT hand, but is SWIFT still the same in security terms as it was when originally set up? We know that SWIFT has supplied data and information to third party crime prevention agencies, is this now a precedent? Does this bring into question SWIFT’s value as a closed network supplier that once went unquestioned?

The cost of SWIFT connections (despite a brave attempt to lower joining costs) is still massive in comparison to commercial network suppliers, who are able to keep taking advantage of new technologies from their R & D laboratories and of course broadband. Then quickly bring them to market. This first became obvious to me in the mid-nineties at a City IT cruise when I saw for the first time the splendid development capability in BT labs.

SWIFT is now beggining to offer post trade systems and services that compete with many of its partners in an attempt to extend their revenue potential and value. It is an odd thing when software suppliers pay huge sums to be accredited by SWIFT and then find they are in competition 

Can I make a business case for SWIFT today? I have to say I am struggling. SWIFT is a fact of life but so was the steam engine once and the world moves on. Is it time to move SWIFT into the museum of what once was, but is today no longer needed? You decide and please let me know of your business case for SWIFT          

Comments: (14)

Bob Lyddon - Lyddon Consulting Services - Thames Ditton | 14 November, 2012, 10:13

Hi Gary - how would you view ISO20022 in that case? SWIFT are the registrar and proposer, all the ISO messages are SWIFT MX messages, SWIFT does the annual release, but you can use ISO messages without sending them over SWIFT, the reciprocal of using FileAct without the contents having to be MT or MX. The ISO messages are getting a lock over European payments thanks to their being afforded a de facto monopoly under the SEPA Migration End Date Regulation... ???

Cristian Vlad - Consult Services Ltd - London | 14 November, 2012, 10:21

In my opinion, a financial services world without SWIFT would be like the internet without ICANN, or a country without a Central Bank.

SWIFT is essential to the financial services world, albeit it could try harder to innovate.

A Finextra member | 14 November, 2012, 10:33

First i think that SWIFT is the ISO authority is wrong the clearly have a confliction of interests. ISO20022 can be carried over any network but the Banks have little motivation to change as they also own SWIFT. They can control the pace of change and focus to their own interests

The point about the value of SWIFT and its glue potential holding the industry together is one of the reasons why after twenty plys years the FS industry is still laden with legacy technology and legacy thinking

Other industry have welcomed change and innovation and have benefits consumers but in FS we still have this rather odd and old idea that private networks and centralisation will solve our problems. After so long down this road its about time we all woke up to the fact that the existing system does not work. Certainly not for the world we live in today and the future

So why be defensive lets have an open mind and challenge convention and look for a better way of servicing investors,consumers and society

Fiona Hamilton - Volante Technologies Inc. - London | 14 November, 2012, 11:10

As Bob and Gary know I am somewhat pedantic so I should point out that not all ISO 20022 messages are SWIFT MX or indeed vice versa. Other organizations other than SWIFT have submitted messages which are not represented in the MX message set. Also the version and variant numbers often differ between messages present in both. Just to confuse things SWIFT also have Solutions such as Clearing, Funds, etc that also sometimes have ISO 20022 compliant messages which are neither published as an ISO 20022 standard nor are the present in the SWIFT UHB MX specifications. 

So as at Q1 this year there were two hundred and something messages published on ISO 20022 website but over 500 different messages and or schema versions/variants published between ISO 20022, SWIFT MX and SWIFT Solutions. For those of you with insomnia I can provide you with the detailed comparison spreadsheet if you contact me!

As a message standard it is becoming anything but; a victim of its own built in extensibility. But then we often forget that ISO 20022 is a methodology and data dictionary; for an actual message to be compliant they don't even have to be XML structures. So perhaps the issue of over which network messages get transmitted and in SWIFT's case validated in certain services, is less of an issue than it would seem if there isn't agreement on the standards themselves.

Bob Lyddon - Lyddon Consulting Services - Thames Ditton | 14 November, 2012, 13:34

Thanks Gary and Fiona: what would you recommend to organisations that have built their offerings around SWIFT MT and have reached the terminus of the potential of those messages, for whom SWIFT MX does not seem to offer much more, but whose members are, as you say, anchored in technology that can only deal with MT (or MX translated back into MT), but whose thinking may not be legacy?

Fiona Hamilton - Volante Technologies Inc. - London | 14 November, 2012, 14:44

Bob,

I know it sounds very traditional, but good old fashioned Business Analysis, tied to a sound vision of what the organization wants to achieve in the way of improved services/SLAs, differentiation against competitors, cost reduction and increased bottom line, is the basic answer. Once you have decided on those things then the Business Analyst, provided you have one or more with the requisite broad knowledge of the standards and delivery landscape, should be able to provide recommendations on the most appropriate way forward. As I said it is good old fashioned gap analysis driven from business requirements/desires. I really don't think corporate planning should be dictated by the standards that are out there or the networks that can transport or validate them.

In the end as my previous post stated, one of the advantages from a selfish point of view is that if there isn't an ISO 20022 compliant message out there that fits your purpose you can always create your own message or variant of one that exists and still claim to be supporting the standard (which technically you are)!

The key to this approach is having an appropriate environment that enables this choice of appropriate data structure per function and delivery channel. There may be differences in real time vs non time critical, totally secure vs secure as it needs to be; adoption of a global standard vs leveraging extensions to create commercial differentiation. Whatever you do don't let your internal infrastructure limit your choices. You might say "of course she would say that" but just because I work for a vendor that has particular interest in this area doesn't necessarily mean that it isn't so. :-)

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 15 November, 2012, 13:09

@GaryW:

Very thought-provoking article.

There's a lot of scope of improvement with SWIFT but, having worked with both SWIFT and BT, BT is hardly the epitome of a nimble, fleet-footed company. Like AT&T, BT too might excel in lab and patent level innovation, but SWIFT is far more customer-centric than the telecom behemoths on either side of the Atlantic. 

While you've talked about "commercial networks" with naming anyone in specific, SWIFT offers corporates something very specific, namely, C2B connectivity to enable corporates to connect to multiple banks, and not to one another. I'm not sure if any of the commercial networks you'd in mind even offers a similar product / service as SWIFT because, as far as I know, corporates connect to multiple banks via (a) their respective bank's Internet Banking portal, or (b) SWIFT bureau services or (c) SWIFT. The admittedly low penetration of SWIFT in C2B is better explained by the resistance of corporates to change from their incumbent connectivity method, which is (a), than to the widespread use of third-party networks supporting C2B, if any. 

Comparing financial services with other industries, proprietary networks are still prevalent in automotive, defence and healthcare sectors, if not others. A wave of Independent Trading Exchanges targeting these industries came and went during the dot com era of the late '90s, dragging the leading marketplace technology providers into virtual extinction along with them. A second wave of such platforms has cropped in the last 2-3 years. The jury's still out whether they're going to be any more successful in ousting the incumbent proprietary players this time around than the last.

Olaf Ransome - 3C Advisory LLC - Meilen | 19 November, 2012, 13:14

To paraphrase Bill Gates words about banking: "SWIFT the format, i.e. ISO, is essential, SWIFT the carrier is not"

We do not need SWIFT to move messages from A to B. Others can and do offer services for that. To its credit, SWIFT has done a good job of moving away from charging only per message, with its bulk pricing. We do though as a banking community need channels and forums for dealing with one another and SWIFT is moving, albeit slowly and arguably late, to improves its post-trade services. The success of ventures like CLS that provide a forum for banks to settle trades and even of the various LCH services show that banks need these forums or platforms to manage settle their business.

To stay relevant, SWIFT needs to provide more than just a message carrying service. 

A Finextra member | 19 November, 2012, 13:35

Agree that SWIFT are now doing the sort of things it should have done years ago. However is the finance industry best served with the existing structure? I have for so many years that SWIFT needs to be more commercial and that is what they are now doing now to a degree. Would the FS industry be better served if SWIFT was commercial and competed on a level playing field?

Olaf Ransome - 3C Advisory LLC - Meilen | 19 November, 2012, 13:38

Agree with you. They want to avoid mistakes, which is great, but over time have become too hidebound. Experiement, fail faster. 

Sid Sidner - Black Mutt Consulting - Omaha | 19 November, 2012, 15:12

Wow!  SWIFT is way-more than message formats and a network.  It is contracts and standards.

Is every bank in the world going to maintain the metadata and contracts to connect to every other bank in the world?

For that matter, what is a bank?  SWIFT knows and vets them.

Who journals payments and handles disputes, w/o SWIFT?

Then there is SIBOS - who will organize that?

Finally there is the work of SWIFT's Innotribe (@Innotribe), led by Peter Van Auwera (@PeterVan).  They are linking together banking innovators all over the world.  They have proposed the Digital Asset Grid (DAG), a powerful new network concept to deal with the exploding world of APIs.  See the videos of Heather Schlegel (@Heathervescent) to get an idea of their vision of the future world of payments.  You can find them on YouTube by searching for innotribefilms.  I think you will find the four videos there very exciting.

Chris Pickles - Consultant - England | 19 November, 2012, 15:50

Ketharaman Swaminathan of GTM360 Marketing Solutions commented on how nimble or fleet-footed BT may be, and as someone who works for BT I feel that I should respond – partly because I am often amazed by the way that folks try to compare apples with pears and aren’t up-to-date. 

BT supports the largest secure networked financial community in the world, in terms of the number of customer locations, the geographical reach and the volume of data that that community moves over the BT infrastructure.  It has managed that more nimbly and light-footedly than other organisations – otherwise it would not be in the lead!  BT also offers C2B connectivity and secure messaging services to enable corporates to connect to multiple banks – we’ve been doing that for a dozen years now.  We’ve also been in the secure non-repudiable messaging sector of financial services for the last 16 years. 

And we carry ISO messages, FIX messages, proprietary formats – millions of financial messages per second per customer location, not just millions per day.  Standards are initiated by market participants and vendors, not by a standards registration authority (unless it is acting as a vendor). 

Rather than thinking that the world is still the way it was 40 years ago when banks first set up a private cross-border inter-bank payments messaging system, perhaps it’s time for more people in the Payments and Post-Trade sector to catch up a bit with what’s really happening out there - ?  As Gary Wright of BISS Research has said - times have changed!

A Finextra member | 19 November, 2012, 15:54

Needless to say your way off beam on just about everything but it is interesting the perception you have and the degree of indoctrination that me has been achieved.You did make me laugh about the SIBOS comment though. I assume that was a joke. Thanks for the comments and for brightening my day 

Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 20 November, 2012, 14:47

Before someone charges me with providing the trigger for turning this into a BT product and services bulletin, my only comment about BT v. SWIFT pertained to nimbleness / customer-centricity, and that was based on my experience as a customer of both companies. I'm sure there are enough BT and SWIFT customers in Finextra Community and they're free to post their unbiased views about their experiences with them. My questions about the range of overlap of products and services with SWIFT's pertained to the hitherto - and still - unnamed "commercial networks", not BT.

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