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Economies of scale

John Doyle’s blog about “The SWIFT Future” has had my fingers twitching for a couple of weeks, and as nobody else is joining in….

SWIFT plays a very important role in a changing market.  Its role has changed, as the market has changed.  It was created to put together a solution for cross-border payments in a world where there were no global networks, no standards for messaging, and no application structure for interchanging messages securely and globally.  We all know how the market has changed, but SWIFT may not have changed in line with that.  We didn’t know about Moore’s Law back when SWIFT was created.

There are about 8,000 banks on SWIFT globally, yet there are around 9,000 banks in Europe alone.  There are about 25 million corporates in Europe alone that will need to adapt to SEPA, and yet there are only about 200 corporates on SWIFT globally.  To save on per-message costs, banks bulk-ship transaction messages, and net out as many transactions as possible to reduce the bulk that they have to ship.  There is no economy of scale, because the scale is too small.

The banking industry won’t increase its costs in order to generate economies of scale for SWIFT.  Bulk doesn’t come from the back office, where there is one settlement per trade: it comes from the front office, where there can be 28,000 quotes per trade.  Economies of scale don’t come from 30 gigabytes of traffic globally per day: they come from 30 gigabytes of traffic per customer per day (that’s around the capacity of one home’s 4 Mbps internet connection today).

How do you protect your “core market” when Moore’s Law went sprinting past you ten years ago?  Perhaps SWIFT’s future is not in being a vendor to the community – after all, it’s a not-for-profit organisation.  Perhaps its future is not in achieving its own goals, but in achieving the community’s goals.
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