Cash & Liquidity ManagementPaymentsSWIFTQuestioning the Appetite for Change

Questioning the Appetite for Change

Chief executive officer of SWIFT, Leonard H. Schrank, spoke to gtnews to give his reaction to the Asking Tough Questions of SWIFT. In that speech Miller challenged both SWIFT and her industry to change the way things are done and asked was SWIFT really a necessity. Here Schrank reacts to Miller’s challenge.

Leonard Schrank, chief executive officer of SWIFT, is relaxed. He is calm in his reaction to Heidi Miller’s comments – made during her speech at Sibos. That speech where she challenged the industry to change itself – and asked SWIFT “What have you done for me lately?”

“Basically she was talking about transformation,” he says, “and transformation is a big word.”

Schrank believes he and Miller agree on far more than they disagree on. “We welcome this kind of dialogue with people like Heidi – we welcome the interest and the recognition that she’s giving the SWIFT community that we can do more and we should do more – I completely agree with her,” he says.

But where do you start with such transformation? According to Schrank it is a tall order – but one that SWIFT was already moving towards before Miller’s speech in Atlanta. “How can you really transform the way the back office works in payments, treasury, trade and securities so that the institutions can save billions of dollars in efficiencies and gain improvements in automation?” he asks.

Schrank looks to what SWIFT has already achieved and points out that transformation within the lugubrious industry of secure payments messaging is slow – but does happen. “The implication was that SWIFT hasn’t done that much – but let’s take an inventory of what SWIFT has done. First of all SWIFT transformed the payments business for correspondent banking. That took over ten years, from 1973 well into the 1980s. Then SWIFT transformed the securities industry in terms of clearing and settlement – we had no messages in the early 1990s now we have over 700 million and it’s over a third of our business. And SWIFT had a big role to play in CLS (continuous linked settlement) but that took ten years too. On average we are talking ten years or more to move our industry.”

And he does not shy away from the failures. “We tried to revolutionise global trade with the Bolero initiative in the dot com era. It didn’t work. The securities industry dropped a $100m dollars in GSTPA to transform post-trade pre-settlement – and that collapsed too.” So although they don’t always succeed when they try, SWIFT has a willingness to move forward ambitiously. “The bottom line is that we have done a lot – and we are continuing to do it,” he says.

Changing the business

Addressing Miller’s speech again Schrank says: “If the question from Heidi is what can you do for me in two years or what can you do in five years – well we are going to have to redefine transformation or change the way this industry and SWIFT work together.”

In his opinion not everyone in the industry has the same desire for change that Miller does. “A lot of people don’t want to deploy and spend that money that quickly – because you have to spend money to save money”.

And he knows that there are opportunities for change. “SWIFT is in the zone but we can be better – there’s no doubt about it.” And he has questions for the industry too. “My question for Heidi and her colleagues is ‘what is your appetite for change?’ What’s the industry’s appetite to go faster? There are some people who like it the way it is. So while some of this transformation might sound good, when you think it through you have to be very careful.”

Schrank is pragmatic in his approach to the industry development and points out that it is very easy to come up with a standard – however, it is a very different thing to get everyone to agree to use it. “On the back of an envelope Heidi could figure out that you don’t need to write 80 billion cheques a year in America – but getting everyone to adopt something else is a completely different issue,” he says. “That’s a different problem and that’s where SWIFT excels.” He believes that SWIFT has been successful precisely because it is a community of financial institutions, a community that comes up with the standards and then agrees to use them over SWIFT’s secure messaging network. “So my message here is, it’s very easy to make a standard but it’s very difficult to get everyone to use it. That’s why transformation takes ten years.”

In Miller’s speech she asked why the industry makes things so complicated for its clients. And Schrank agrees that there is a tendency to over complicate systems. He believes that it is usually the simplest solutions that are the most successful. “From a SWIFT point of view my comment is think big, start small, test quickly and scale fast.”

He tells a joke to illustrate the problem of legacy systems. “God made the world in seven days… because there was no installed base.” Whatever the transformation, banks need to remain functioning and secure in the midst of any change, and that is a difficult task, one that Schrank does not underestimate. “Innovation into an installed base is something you have to be careful about – it’s not so easy. I wouldn’t be overly critical of the banks – they have a huge responsibility,” he says.

He accepts that SWIFT can help the industry to progress. “For many years there wasn’t really that much competition between banks. It was very collegial and there was a lot of disguised unemployment, certainly in Europe. There wasn’t much competition.” Competition is increasing now he says as markets open up and banks can no longer afford the luxury of being inefficient. “SWIFT has a role to play in helping to address that global efficiency,” says Schrank.

However, he thinks that action can only come from the highest levels within the community. “If you really want to make dramatic changes it doesn’t come bottom-up because there is a lot of inertia in the middle management. They like it the way it is. They don’t want to design themselves out of a job. So if you want true transformation it has got to come from the top – from people like Heidi – and ten other Heidis. They need to get in a room with SWIFT and say ‘do this!’ and we will.”

Transforming SWIFT

In order to do this he accepts that SWIFT may have to change itself if the desire for change is industry-wide. “If we really want to accelerate transformation SWIFT might have to transform itself and the way the community works with SWIFT. If they really want to do it, they have to tell their people that it is time to change. Our national member group structures are not really change agents. So there is going to have to be change up and down the line if we all want to accelerate transformation.”

But there is a part of Schrank that does not believe that the industry desperately needs change. “In my opinion we have been doing just fine for 30 years,” he says. But he will be guided by the needs of the community. “If Heidi wants to do really radical transformation she’s going to have to get into a room with her counterparts in the top dozen global banks, along with the top SWIFT people, and hammer it out.” Schrank is optimistic that, if there is the impetus there among the community, SWIFT can facilitate it. But he believes it has to be a push and pull effect – neither side can drive the change.

Banks have traditionally been slow to adopt entrepreneurial thinking partly because he says theirs is an industry based on client’s trust. “It is really easy to build a quick prototype, but to have something that is industrial-strength, that can’t be hacked, that a bank can run, that can move billions of dollars around the world – that is a very different animal to an innovative prototype. That’s a lot different from doing something quickly and being an innovator.” Perhaps this is why non-banks have tended to be able to move faster as Miller pointed out in her speech.

SWIFT today uses sophisticated modelling techniques to come up with standards. “Today we get experts in a room, we ask them what the problem is and we use business process modelling to solve it. We have a patented work station to model this – we ask who the counterparties are, about the flows and the questions they want answered, what the market practices are and that’s how we come up with the standard. Out comes an XML schema and you can apply interactive functions and file transfer to make it work.”

His response to Miller’s challenge on why the industry should pay SWIFT for messaging when they could use the internet for free, brings out his most vehement response. “So why do I need SWIFT and not the Internet you ask me, well go and use the Internet today and see what happens.” In his opinion the value of SWIFT is in the service that is provided around the messages themselves, in the security and support.

“We have our own private Internet – it’s called SIPN (Secure IP Network) – and if one day the Internet becomes safe and reliable we could take SIPN away and use the Internet. Above SIPN is SWIFTNet – InterAct, FileAct, Browse, FIN – our operations centres, our round-the-clock call centres in Asia, the US and Europe. If you have a question you pick up the phone and within three or four rings it’s answered. You don’t get that support with the Internet.”

And he underlines the security aspects of the service too. “What about all the security that SWIFT gets you, what about the interfaces, what about the archiving, what about the non-repudiation? What about if you have a dispute? If you do you can call us up we can bring our chief auditor to bear on it and you can take that to court. You don’t get that backup on the Internet. You wont get any support, you wont get any non- repudiation. You’ll have to build your InterAct and your FileAct services. You’ll still have to build your interfaces, you’ll still have to build your archiving. You’ll probably have to have some auditing going on to prove what’s happened. Well all that is called SWIFT – that’s what SWIFT is. And I guarantee that if one bank tried to do all that they couldn’t do if for less than what SWIFT is charging to share it with thousands of customers.”

Schrank believes that there is really no alternative to SWIFT – at least for the next 10 years anyway. “The question about using the Internet instead of SWIFT is no issue, not an issue at all – and I think Heidi knows that. I think she was trying to really push us. I am looking forward to having this dialogue with her. I can’t tell you what the technology situation will be in 15 years time but for the next 10 years there’s no alternative to SWIFT. We can see out 10 years and we know where things are going in our world.”

“SWIFT is going in the direction of much of what Heidi Miller spoke about in her speech – she was challenging more her community than really criticising SWIFT,” says Schrank.

Pricing

On pricing he is clear: SWIFT prices will continue to drop. “Our business model is based on economies of scale – the lower our prices the more messages the community send on our system. The more messages they send – the lower our unit cost per message. The lower our unit cost per message, the lower our prices – it’s a virtuous circle.” Schrank points out that costs in 2004 are 80 per cent cheaper than they were in 1992 and underlines the commitment he made in 2001 to drop prices by 50 per cent by 2006. SWIFT is well on the way to achieving that he says.

“We are going to continue to reduce prices as long as we continue to get the volumes. We know there is a lot of potential new message traffic amongst our members – from their old proprietary systems. Those systems should be running on SWIFTNet. We could save the banks hundreds of millions of dollars by throwing away their old proprietary messaging systems and by encouraging them to move onto SWIFTNet and accessing our economies of scale. Price is an important factor for doing that,” he says.

Schrank thinks that the community needs to change its perception of SWIFT and what it can do for them as part of this transformation process. “We want our members to start thinking about the impact of SWIFT rather than just about the bill they get from SWIFT. That’s where the huge savings come from. We impact much more of our clients’ costs than just the bills that we send them, and that’s the real challenge of Heidi’s speech. We could get together and do some really transformational things,” he says and gives an example of cutting IT spend by 5 per cent over 5 years, which would mean huge savings for such a technology based industry.

Going forward he is confident of SWIFT’s place in the community, “If they didn’t have SWIFT they’d create it today.”

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