This article is based on Mark Garvin’s speech at the plenary session ‘Payments Transformation’ at SIBOS in Sydney, October 2006.
Having talked to regulators, correspondents, market infrastructures and, most importantly, our clients, about how they see the future of payments in 10 years, the consensus is that everyone is expecting a much more streamlined, accessible payments product, and one that is truly global. We all recognize that someone will ultimately offer that simpler product – let’s hope it’s a bank.
Over the next 10 years, governments will continue to push us towards greater interoperability, higher speed and lower charges. Our non-bank competitors, in some ways, are already there. Each time someone chooses PayPal to pay for an online purchase there is a shift of perceived value from banks to non-banks. Our data suggests that this bias for simplicity will continue to drive change in payments, whether you’re a consumer or a General Electric.
Learn from History
As we face today’s challenges, we can still gain insights from examining our own history. Next year, will mark the tenth anniversary of CLS – an industry infrastructure many thought would never see the light of day. The story of CLS’s birth is somewhat singular but I believe it offers us significant lessons.
First of all, industry infrastructures remain a powerful tool for confronting external challenges together. Second, in designing and building infrastructures, we need a clear strategy and a decisive plan for execution. Finally, and most critically, we cannot underestimate the importance of infrastructure governance.
In the early 1990s, a group of banks called the G20 came together to answer a challenge from regulators: fix the problem of Herstatt risk. We needed a clear strategy, and by shedding parochial views, we developed a solution that did not destroy the interbank payments business. It took time, and some frank dialogue, but we understood that industry coherence was crucial or else an outside force, in this instance regulation, would effect change without us.
Having agreed on a strategy, the G20 began to move forward to build CLS. But perhaps we did not listen as closely to our clients and the rest of the industry, as we should have because we lacked a certain transparency. Other banks found a collective voice in the G40, where a more constructive dialogue ensued, and only when truly representative bodies were engaged did CLS finally take shape.
Lessons Learnt from CLS?
First, common infrastructures offer us, as an industry, a critical tool for moving forward together. Simply put, market infrastructures at their best help to create a clearly defined, truly competitive environment.
Second, the example of CLS shows that, even where clear drivers exist, such as the threat of regulation, market infrastructures need a compelling and well-grounded strategy to be successful.
But strategy starts with buying into what I like to call the end game, and this means recognizing the ultimate opportunity. For example, with the rapidly approaching single European payments area (SEPA), the end game is really about lower processing costs and increased business, whatever the short-term impact.
But a well-grounded strategy is not enough. When two banks agree to merge, they have to present shareholders with a clear integration plan. The market then rates their execution daily in the stock price. When a collective industry initiative takes shape, the strategy may be clear, but we don’t automatically manage execution in the same way. It’s just not a part of our day job.
CLS started with a clear vision of the future even if it did not address all concerns but even then we strayed along the way. That is why governance is so crucial, even if we often overlook it.
Importance of Good Governance
Executing a collective strategy calls for thoughtful governance. In fact, governance is an essential element at the earliest stages. Market infrastructures can have a mind of their own and the story of CLS shows that without a strong hand on the wheel, these entities can drift away, either moving too slowly, too fast, or in the wrong direction altogether. Who remembers Multinet and ECHO?
And without a strong hand on the wheel, market infrastructures, even ones that appear to be crucial, can fail to get off the ground at all. CLS also taught us that governance needs to be well constructed to succeed. Our history suggests two key prerequisites for this.
First, in formulating strategy, the industry needs to hear from the right voices and, more importantly, we need to listen. Industry bodies must be sufficiently representative, well governed and adequately funded and staffed in order to decide the priorities and the new common ground. Whether they address rules, interoperability, or the dimensions of the co-operative space, the right players need to have a voice in the discussion. And national infrastructures must find ways of combining resources rather than competing for the industry’s limited capacity for new investment.
Second, the larger banks must find a way to come together to drive the overall industry vision. Like it or not, the larger institutions bear both the greater cost of implementing change, as well as the greater regulatory pressure to achieve it. Frankly, our experience with CLS demonstrated that the larger banks cannot be complacent if we want to avoid having an even more onerous solution imposed on us. Had we not taken a self-regulated, self-imposed stance towards FX settlement risk, we would have incurred the heavier hand of government regulation.
A Global Collective
As we turn to the challenges facing the industry in the next 10 years, we need to raise our game. If we truly want to thrive, we must transform our thinking about how the global payments industry is guided. Today, we focus on issues primarily on the national, parochial level of payment issues. If we want to balance what is required in the co-operative space against the competitive dimension – at a global level – we must start to take a global view of governance.
Public policy authorities recognized the importance of defined and well-coordinated global collective action long ago when they created the Bank for International Settlements (BIS) in the inter-war years. What is there for the private sector? Perhaps, SWIFT, which is a true private sector community but even SWIFT does not have the depth to cover all the facets we need to address in the future. Do we truly have an industry structure that addresses global issues and initiatives today?
We still have a way to go in defining the right environment for this global dialogue. We first need to define those aspects of the coming challenges that should be addressed collectively. Following that, the larger banks should find common ground as industry leaders to provide a strategic framework – and resources – to guide existing and potential infrastructures. Only together, can we harness these entities and direct them to those projects that best leverage our common investments.
It is time to make some tough trade-offs between national agendas, decide on a vision and execute it. Without that self-discipline, the industry will expose itself to greater risks of imposed solutions and new entrants that we’re not even aware of today. And as our clients want to trade on a simple and global platform, why would we not come together on a global scale? If we are truly confronting an increasingly complex payments environment, then we need to agree on a collective strategy for meeting those challenges.
When we do come together we should ensure a successful process is in place: strategy first, then execution with thoughtful and transparent oversight. The larger players should provide the resources to bring us together, and the industry should rally together to make something happen.
Successful transformation of the payments industry will require us to remember the lessons of history, focus on our clients’ needs and commit to effective, active and user-driven governance.