The future of money, how we use data and the dizzying advances in digital technologies dominated the opening discussions at the annual Swift Operations Forum Europe (SOFE) convention in Amsterdam.
Leo Punt, head of support and services Emea at Swift delivered the personal welcome to the 385+ delegates that have gathered here in Amsterdam from 42 countries. Punt described the event as a chance to hear about how Swift is responding to the Fourth Industrial Revolution. A World Economic Forum video highlighted the speed, scale and force of change in today’s world. Developments in areas such as nanotechnology, brain research and 3D printing mean that anyone can create new products quickly and cheaply.
Cisco estimates that there will be 50 billion connected devices by the end of the decade, while IDC estimates that spending on the Internet of Things will rise above $1.3 trillion in the next few years. This spending will include the banking and insurance industries. Punt made the point that this will impact not only our personal lives, but our working lives considerably as well. Linked to all of this technology is the fact that mobile wallet transactions and other types of non-cash transactions are booming, and there are thousands of fintech companies trying to get a part of the financial services pie.
What does this mean for financial institutions? Customers are demanding new experiences and there is a raft of new technologies and processes. Investments in new technology and R&D is rising, while there is also increasing regulation. Punt says that security is critical, and that the three pillars of SOFE - operations, collaboration and excellence - are fundamental for the future of the financial industry.
Craig Young, CIO at Swft, picked up the theme of digitisation and the evolving customer experience by touching on how issues such as distributed ledger technology (DLT) and bitcoin have accelerated into the mainstream during his three years at the organisation. What was impossible just a few years ago is now business as usual, meaning that agile development is a must. Young said that financial professionals can no longer give a problem to IT and wait six months for a solution to come back to them, they need to be actively collaborating throughout the development. This requires teams to have a clear grasp of the both the advances in technology and the development of their own business.
A huge amount of data flows through the SWIFT network and it is growing, as Arnaud Boulnois, Swift’s head of messaging, interface and integration product management explained during the morning plenary. There were over 6.5 billion FIN messages sent in 2016, which increased by 8.9% in 2017. 2016 also saw over 1 billion InterAct messages, which increased by 101% in 2017, while Swift’s 10,800+ users are in over 200 countries and territories. With the business doing well and growing fast, Boulnois explained the importance of Swift both keeping the existing platform and services up and running flawlessly whilst also preparing for future growth and new initiatives.
As part of the interaction with delegates, Boulnois asked the audience what, aside from cyber, was the area in which their institution will invest the most time, budget and resources over the coming year. For over half of attendees (52%) this is European payments - drivers of change in the market such as instant payments, PSD2, and open banking, for example. Financial crime compliance was clearly the second highest priority, with 23% of the audience voting for that option.
Financial crime compliance
In terms of financial crime compliance, Boulnois explained how three interconnected utilities - sanctions, KYC, and analytics/fraud/AML - are being heavily invested in by Swift. He cited the introduction of name screening and daily validation reports in 2017, payment controls in 2018 and over 3,700 institutions signed up to the KYC Registry as examples of how Swift is executing its Utilities strategy and demonstrating innovation in financial crime compliance.
Swift’s global payments innovation (gpi) initiative is another key priority for the organisation. It is a solution for the cross-border payments industry at a time when goods are moving faster than money, banks are rationalising their correspondent banking networks and digital innovators are offering new and disruptive solutions. Swift gpi builds on top of the existing FIN messaging rails, a platform that Boulnois described as working extremely well, providing reliability and guaranteed delivery. A core part of the gpi project is about improving the way that FIN is used. Boulnois explained how a new service level agreement (SLA) rulebook, together with a value added product suite, helps gpi deliver enhanced services to the banks that use it. He cited an example of how the payments tracker can now show what happens when a payment moves beyond the first counterparty, whereas previously this was “like a black hole.” The tracker can also stop a payment across all counterparties. Boulnois explained how this functionality can be integrated into a bank’s back office using an API or done manually. These efforts are part of phase 2 of the gpi project, happening from Q4 2017 into the new year.
“Gpi adoption is a fantastic story. We have never seen volumes evolve so quickly on new functionality. Also, more and more banks are starting to use APIs and are integrating the technology to support this new way of doing business,” said Boulnois.
Beyond designing the digital transformation, the third step of the gpi rollout is to explore technological innovation. Boulnois used the example of a DLT Proof of Concept for real-time reconciliation of nostro accounts to demonstrate how Swift is also moving beyond the existing rails and looking at how new technologies can increase the quality of the services that it delivers. It demonstrates how Swift can work together with the industry to develop solutions.
Boulnois then turned his attention to instant payments, saying that this topic offers a chance to innovate through new solutions and by enhancing existing services to cater for a new type of business. Swift has already done this with the delivery of its instant payments solution for the New Payments Platform Australia and is now working on the Eurosystem’s TIPS and EBA’s RT1.
He outlined three design principles for the Swift instant payments solution:
- Enable reuse, so Swift customers can reuse Swift assets as much as possible.
- Multi-CSM connectivity, allowing participants to access multiple services through a single connection.
- Future proof, in order to support future footprint evolution and ensuring that infrastructure changes, industry initiatives and regulations are all taken into account.
Swift has a new instant messaging protocol - SwiftNet Instant - but is reusing the existing SwiftNet connectivity and security infrastructure, as well as reusing SwiftNet FileAct and Browse, in line with the design principles.
ISO20022 Implementation Strategies
The theme of change and growth from the opening plenary was picked up in one of the many afternoon workshops at SOFE 2017, this time with a standards twist. Andrew Muir and Dominique Forceville from Swift Standards set about tackling why financial institutions need an ISO20022 implementation strategy. The use of ISO20022 is on the rise, with over 700 corporates now exchanging ISO20022 messages with their banks. However, as Muir pointed out, there are challenges to working in an ISO20022 environment, the main problem being that legacy versions of the format don’t die. The very first version still exists. At the advent of the single euro payments area (SEPA), version 3 was the one to use, and now users that began with this have pushed back against later releases.
Forceville described the ISO20022 Harmonisation Charter that Swift Standards has developed in a move to try to bring some order to the use of ISO20022 in financial services. Part of this involves market infrastructures sharing information with SWIFT so that it can understand who is using what in the ISO20022 world. Those infrastructures that sign up to the Charter also promise to stick to global market practice, and to only use the latest version of ISO20022. In addition, it includes a promise that the migration date to switch to the latest version of ISO20022 is synchronised with the annual MT migration date. Forceville said that, for banks, this all means a possible reduction of implementation costs and timelines, as well as a reduction of maintenance costs. For market infrastructures, it provides an alignment of international best practices, as well as the ability to share information and understanding. The ISO20022 Harmonisation Charter kicks in on the third weekend of November 2018.
High Value Payments Plus (HVPS+) was cited by Muir as a great example of a group helping to bring harmonisation to the world of ISO20022. The group, made up of major banks, market infrastructures and Swift, has a global governance group as well as four subgroups with specific focus on:
- Liquidity management.
- Interbank direct debits.
These groups are working on the scope and deliverables for how the high value payments industry will transition to ISO20022.
Methods of adoption
One option for market infrastructures adopting ISO20022 is to take a ‘big bang’ approach. This method may or may not use a ‘like for like’ first phase, Forceville explained. Choosing a like for like phase as part of the adoption means that, initially at least, they would only use the ISO20022 functionality that is currently covered by MT messages, with the full richness available from the ISO standard being switched on later. A potentially difficult scenario that could emerge here is convincing the customers to change once the like for like phase of the implementation is over. Both Muir and Forceville agreed that this method of adoption is going out of fashion.
Another method of adoption for market infrastructures is to make the switch over gradually, and to have the coexistence of both ISO20022 and MT in the first phase. In this scenario it was explained that by making an early move, infrastructures can benefit from the learning experience, which may give them a strategic advantage. Forceville said that there could perhaps be a pain for market infrastructures to run two channels at the same time. However, he suggested that this method could be good for customers, as they get to choose the timeline for their switch to the new format.
The decision to move to ISO20022 is not a pure IT decision, rather it is a business-driven change. Muir said that it is important for any adoption project to identify and involve all stakeholders at an early stage, noting that there tend to be more stakeholders than usual because of the richness of data afforded by ISO20022. Institutions also need to come to an understanding of whether they want to achieve a tactical migration - essentially keeping their workflow and processes the same but just on a new format - or whether they want to fully embrace the richness of ISO20022 and the possibilities this brings with it. Clearly there are big decisions to be made by institutions that will shape their adoption strategy.
Toolkit for adoption
Obviously, as it is running the event, there was discussion about how Swift can assist institutions make the move to ISO20022 as painless as possible. MyStandards offers the opportunity to explore message definitions and see which of your business partners can connect with ISO20022. Muir also mentioned the forthcoming Swift Translator, which will map definitions to how institutions do business. Users can define and validate messages from any format to ISO 20022. This new tool, which was only unveiled at this year’s Sibos in Toronto, wont be seen in action until early next year.
Swift is also undertaking a major survey to address “the elephant in the room”, as Muir described it. Some institutions have made the point that they have been using the MT format for 40 years, why should there be wholesale migration to a new standard? The MT to MX Migration Study will have a scope across the financial services industry, including payments, securities, trade and treasury. It will cover a whole range of issues, including timing, implementation strategies and phasing, community readiness, technology, market practices, interoperability with market infrastructures, new messaging capabilities and much more besides. Muir described it as a way to gauge scale of the community that is using or will want to use these messages, and to assess the overall mood about the move to ISO20022 and potential closing of the MT format.
Day 1 of SOFE 2017 has shown that change is afoot across all areas of the financial services landscape. Tomorrow’s highlights include a look at what may be in store for us all down the road as the author of The Day After Tomorrow, Peter Hinssen, delivers the keynote speech, while the Innovation Plenary promises to be a lively panel discussion on how AI, DLT, Open Banking and cloud technologies are changing both customer expectations and what banks actually look like.