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Source: Chris Skinner, TowerGroup

If 2006 was all about planning, 2007 is the year for financial services firms to act on their plans and execute their strategies in a new regulatory landscape, says Chris Skinner.

Looking forward to the next twelve months we face a year of execution, and the chance for bankers to kill off all those major compliance projects that have been cluttering up intrays for the past two or three years, including Sepa, MiFID, Basel II and the Capital Requirements Directive.

Let’s take a look at what is actually happening.

Capital Markets

The major movement in the capital markets has been the increasing focus upon speed of access to, and trading on, the world’s major liquidity pools. With hedge funds dealing in trillions of dollars at lightning speeds, market liquidity has become the manna that every market player is seeking. The result was that 2006 was the year of exchange consolidation.

One of the most important exchange mergers was the $8 billion merger of the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME). The merger created the world’s largest derivatives exchange with an average daily trading volume close to 9 million contracts per day, and approximately $4.2 trillion in notional value, and an exchange valued at $25 billion.

In Europe, the London Stock Exchange (LSE) was courted first by the Australians with the Macquarie bid, then by the Americans, with both the New York Stock Exchange (Nyse) and Nasdaq moving in big time. Nasdaq's ongoing play for the LSE has yet to reach end-game, while Nyse has since juumped into bed with Euronext in a $13 billion merger, creating a market with four times the liquidity of the LSE during the summer of 2006.

Meantime, the banks have not been sitting back, with Project Turquoise announced in November 2006. Project Turquoise combines the focused efforts of seven leading investment banks – Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS – to run their own marketplace, in competition with other European exchanges which they claim are too expensive. In particular, the seven banks involved generate half of the volume of trading on the London Stock Exchange (LSE). LSE’s share price dropped 10% on the day of the announcement.

Project Turquoise was enabled and promoted by the regulatory backdrop of MiFID, the Markets in Financial Instruments Directive, which aims to make off-exchange business transparent and public. Another venture prompted by MiFID is the launch of Equiduct, the rebirth of Easdaq, led by MiFID proponent Bob Fuller, a keynote at this year’s Finexpo. He'll be joined at Finexpo by Peter Randall, who is leading Instinet's efforts in this arena with Chi-X, which is promising to significantly undercut the fees charged by established exchanges.

Inevitably, 2007 will see more consolidation and more market electronification as broker dealers desperately search for higher speed, higher lift strategies.

A good example is JPMorgan Chase’s launch of two institutional trading algorithms designed to search stocks on dark books, trading networks that do not publish quotes in the open market, as well as on exchanges.

Algorithmic trading will continue to grow in usage during 2007, side-by-side with efforts to reduce data latency. Both buy- and sell-side will be focusing upon speed and connectivity to gain value and liquidity. That is why exchanges will launch increasingly focused co-location services, whereby traders can place their execution server systems into the heart of the engine rooms of the exchanges, in order to cut milliseconds off the time required to move orders through the systems.

Milliseconds trading using algorithmic strategies are the key to 2007 and, as exchanges consolidate, systematic internalisers emerge and ECN’s such as Chi-x continue to burn up the markets, expect more and more focus upon automated trading strategies with high scalability and low latency.

The final point in the capital markets worth noting is that the Tier 1 players, such as those involved in Project Turquoise, will continue to attract more trading volume whilst the rest will become more specialised. This is a consequence of regulatory changes, such as MiFID and CP176, which point to the emergence of itemised billing statements.

Brokers have traditionally charged their clients a monthly fee for services. However, under the new trading regimes, charges have to be separated out and accounted for. This is not unlike the change from the old telephone billing, where a monthly charge wrapped everything into one amount including calls, line charges and other services, to the itemised billing statements of today, where each individual call is broken out into line-by-line detail, and any other services are itemised in a similar fashion.

Broker-dealers will be doing the same in the future. Therefore, charges for connectivity, research, execution, advice will all be listed, line-by-line. This is the other big driver for the markets, to find value and seek differentiation. And, just as has happened with telephone services where there are more and more specialists for calling – those who provide cheap international calls, broadband calls, mobile calls, landline calls at differential pricing rats and structures – the investment markets will go the same way. Some will offer everything in a high value ‘one stop shop’ – the Turquoise Tier 1 players – whilst many others will specialise in providing the best execution service, the best advisory service, the best connectivity service, the best research service....

In summary, 2007 will be a fascinating year for all areas of technology, regulation, service, liquidity, merger and acquisition, across the world's capital markets.


As in the capital markets, payments market participants are equally challenged, especially in Europe.

European banks have spent all of 2006 planning the implementation of Sepa, the Single Euro Payments Area, with the rulebooks, frameworks, policies and procedures fully detailed by the European Payments Council and ready for implementation. Therefore, 2007 is the year of execution.

The major battle for payments in this space, which continues the themes outlined above, are the movements in securities clearing and settlement.

Although discussions of a European Clearing and Settlement Directive, similar to MiFID but to address this space, have dissipated a little, it relies upon the fifteen barriers identified by the Giovannini Group being overcome if the Directive is to avoid becoming a reality.

The Giovannini Group represents a cross section of the private and public sectors of the EU securities industry including representatives from the European Commission, banks, fund managers, brokers, exchanges, central counterparties (CCP), international and domestic central securities depositories (CSD), central banks, consultants and other industry bodies such as the European Securities Forum.

The fifteen barriers are extensive, but the first is the one that most Finextra readers will focus upon as it’s to do with technologies:

"National differences in the information technology and interfaces used by clearing and settlement providers should be eliminated via an EU wide protocol. Swift should ensure the definition of this protocol through the Securities Market Practice Group. Once defined, the protocol should be immediately adopted by the ESCB in respect of its operations. This barrier should be removed within two years from the initiation of this project."

Financial messaging network Swift has been leading the charge to address the standards required to resolve these issues.

The most enjoyable debate of 2006 had to be the launch of Target2 for securities by the European Central Bank (ECB) though. This announcement plays firmly into the securities settlement space, and caused major concerns for folks such as Clearstream and Euroclear, as the ECB’s Target2 system is a real-time settlement engine.

If the ECB offered intra-day real-time gross settlement for securities, then what do Clearstream and Euroclear do?

Although there has been lengthy dialogue to placate these concerns, with the ECB saying that Target2 for securities will only offer overnight settlement and not intra-day, there are still questions for the future for the securities settlement firms in this space. Therefore, like the exchanges, 2007 is the year they have to clarify their value-add.

Equally, so do the automated clearing houses (ACH’s).

ACH’s are consolidating across Europe with one of the prime movers in this game being the Dutch clearer, Interpay, which merged with Germany’s Transaktionsinstitut to form Equens. Another early mover was the UK’s Voca – the commercial arms of what was Bacs – which has played a determined role in trying to muscle into the euro space.

Although 2006 also saw the creation of the European Automated Clearing House Association (EACHA), the fact that it represents twenty ACH’s and retail payment processors drawn from 17 countries indicates the issues that these markets still need to address, as in: What the hell is the point of twenty ACH’s in Europe? That is exactly what Sepa and the European Commission are trying to get rid of. In fact, the European Commission’s vision is to have the most focused pools of liquidity, which means only one or two exchanges, and as few as possible clearing systems for securities and retail payments, as in a single RTGS and ACH.

Twenty ACH’s?

2007 will see this number come down.

How far is difficult to forecast, although many believe that Europe only has room for three or four clearing houses and, if I were a betting person, my money would be on Voca, Equens, France’s Stet and, of course, the first Pan-European ACH, Step2 from the EBA.

Meantime, there will also be other services coming into the fray, including e-invoicing and mobile and contactless payments. I shall cover these in more depth through the course of 2007, but I would be very surprised if we did not see a European standard for e-invoicing being selected by the European Commission this year. Charlie McCreevy, the European Commissioner for Internal Market and Services and the man who owns the plans for Europe’s financial markets, has stated often enough that he wants to see Sepa include "developing new and profitable business models for banks based on the provision of value-added-services linked to e-invoicing". This is a critical part of Europe’s plan.

Meantime, in retail payments specifically, the move away from cash and cards is still emerging, albeit slowly. I have written about this stuff often enough and do not want to repeat it here, but there will be more and more examples of MasterCard and Visa trials of contactless payments. Examples already include Royal Bank of Scotland’s rollout of MasterCard PayPass across the UK, and there will be more. Meantime, Rabobank’s launch of not just a mobile payments service, but actually a mobile telephone service with mobile payments is something else I think we will see more of. Finally, 2007 will see the first full trials of biometric payments in Europe and America. Already used in Japan and Asia, biometric authentication built into mobile telephones will be emerging as a more mainstream option this year.

Although many of my retail bank friends respond with a yelp of (doctor) no, no, no, whenever I mention biometrics, this year is the year it has to happen even though it scares the living daylights out of many.

This leads us to more retail discussions.

Retail Banking

Retail banks have focused for the last two years primarily upon branch operations, and turning the traditional transaction centre into a sales and service channel. Known as branch transformation, the idea is that the poor, harassed customers who come into bank branches to quickly pay in a cheque want to have a bright-eyed little teller ask: “And would you like a mortgage with that sir?” Not quite, but you get the gist.

Now, do not get me wrong. Many bank branches need refreshment.

Some branches operate within listed buildings with a history going back for decades, and even centuries in some bank branches across Europe. Many of them also look like they have not had a lick of paint in the last few centuries either. For example, my local branch could easily star in a movie set in the 1960’s. It is a pokey, small, fluorescently lit hell-hole. It is no worse than two or three of the other local bank branches though. So yes, branch transformation makes sense for these branches.

Then you go to the USA and see the Retail Delivery Show and realise that many of Europe’s bank branches are actually challenged by their history. Offering bank services in a 17th century building just does not work.

By way of example, have a look at Umpqua Bank’s branch in Portland, Oregon. It is one of the world’s most innovative bank branches because it is not a bank branch. It is a hotel lobby and retail store in one location. It is designed to be fresh and bright with branded retail products, including an own-brand coffee. You even have the ability to hire the branch for business meetings and private functions in the evening.

Radically different and radically wonderful compared to the experience of my branch.

Umpqua is a bit of a one-off, but go anywhere in the USA and you hear discussions of de novo banking. The idea of de novo banking is that you open totally new bank branches. Newly built, newly designed and newly constructed.

Compare this to European bank branches that are trying to fit 21st century banking into 17th century buildings, and you can see the challenge.

Then there is the fact that although the last few years of retail banking has focused virtually exclusively back into branch transformation, it was only a few years ago that banks were closing branches.

Ah, the Internet boom years. Who needs branches? Through the Internet, call centre and ATM, that is all you need. No branch required.

When the Internet proved to be just another channel, all the banks went back to their bricks and mortar, and decided that this was the way to differentiate. Create bright and airy bank branches, turn tellers into sellers, create sales and marketing centres and get rid of transactional banking.


To be honest, I think both camps are right, to a degree. Banks should close branches that are transactional, and focus upon a few sales and servicing centres that are marketing channels. Then reinvest all other assets into electronic channels.

An example is the UK where the largest banks have 2000 to 3000 branches each. Most research estimates that the optimum branch number for a UK bank is about 250 branches. In today’s world, that would be 250 large marketing and sales centres spread across the UK’s major cities. These would be the branches where banks should invest in transformation.

For this reason, 2007 is the end of the branch transformation fad, as branch transformation is purely required for the tired old 17th century European bricks and mortar dilapidated operations in the major city conurbations. For most banks this means that 2007 is the year to implement that transformation.

2006 was planning, 2007 is change.

For most, though, the branch no longer has the same allure when sat next to a new generation of online communities.

The rise of social networks, including MySpace and YouTube has been well reported during 2006, and 2007 is the year that retail bankers will get the Web 2.0 bug.

Looking at the uniquely different business models of Zopa and Prosper who offer an ‘eBay for loans’, banks will begin to experiment more with new services. Already, ABN Aamro has opened a branch in Second Life and Wells Fargo has opened up a whole island, “Stagecoach Island” in the virtual world.

Retail banks will experiment more with these capabilities for online servicing and networking and, in the process, will also rethink a number of services. In particular, they will focus towards ‘customer intuition’ – a step on from customer experiences, customer delight, customer intimacy and customer relationship management.

Retailing bank products and services is all about differentiating with the customer and, through recognising and focusing specifically upon their branch and online needs, retail bankers will start to deliver new, more proactive services. The idea of offering a loan based upon the fact that your last few clicks online was looking at car features, functions and specification. The idea of offering you a mortgage based upon the fact that you were in an estate agent. The idea of offering you insurance services because you were recently burgled.

If the customer provides the permissions for banks to offer these services, as in using your contactless card and online movements to track what you are doing, where you go and what you might need, then retail bankers will leverage such services. That is why this year will see more and more experimentation with customer intuition services: recognising what the customer wants before they ask.

The next level of retail servicing and experience.

So, although bank branches may in some respects be viewed as the banks’ ace in the hole, tomorrow’s services will progressively move more and more towards online intuitive delivery.


As demonstrated throughout this piece, banking is going through a year of execution in 2007. After all the planning of 2006 – whether it be for MiFID or Sepa, branch transformation, new services, products, liquidity pools, clearing, settlement – 2007 is all about delivery and execution.

The banks that are the best at implementation, and those that have completed the best plans for business process re-engineering (BPR) and business process management (BPM), will be the successful operators this year. BPR and BPM are going to be the key areas that will differentiate the winners from the losers in this process.

2007 will also see the delivery of innovations in products, services, channels and technologies. This will not be the end of change or innovation though, just the continuation of the process of cut-throat competition in bank services.

Chris Skinner is a director of TowerGroup and founder of Balatro.
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Author's email: Chris Skinner

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