Financial Markets News Update
It’s rather a SWIFT and payments-focused update this month but in my view the only place to start is the very significant news released just prior to the SIBOS event in Sydney. It was announced that the MT messaging standard, that has for decades underpinned the SWIFT FIN network and dominated cross border payments, is now mandated to migrate starting in November 2021. Migration will focus on the well established formats such as MT 103, MT 202, MT 950 to name just a few, through to the XML ISO 20022 based formats of their equivalent messages such as the pacs.oo8.
Following a wide consultation with banks, and wary of the expected impact of the change, this news is, however, to be welcomed. It brings SWIFT in-line with many of the regional and national payments infrastructures using ISO 20022, e.g. SEPA and a multitude of real time payments schemes, and will help enable greater interoperability when payment instructions move between domestic CSM’s already using ISO 20022 and the international SWIFT network. The EURO1 high value payments system has announced they will migrate from MTs at the same time and it is expected that the new UK payments infrastructure and RTGS system, as well as the US Fed, will similarly be using ISO 20022 messaging by this time.
However, the format change, albeit happening in 3 years’ time, will no doubt provide a significant challenge to any bank using the SWIFT network, in particular those banks that remain encumbered by legacy technology and applications bound to the now over 40 years old, MT format. Though some larger banks are beginning to adopt the ISO 20022 formats in conjunction with larger corporate clients (appreciating the richer data the format provides particularly in account reporting - see the CGI-MP community for example), it is still not a well adopted format for cross border transactions. This move will of course change this. Banks must decide if they will take this opportunity to overhaul their infrastructure or quite likely create a flexible “insulation” layer in their environments to transform seamlessly between the formats to minimize the impact such as handling not only the mapping between the formats but also supporting the challenges of an inherently asymmetrical process where ISO 20022 can contain much richer and detailed information than the MT standard. This is a challenge that Volante has been successfully assisting our banking and corporate clients with for many years. There is no doubt that there will be upfront costs involved in this migration but it is a testament to the increasing adoption of the ISO 20022 standard in the payments domain, that in the feedback to SWIFT’s consultation document, when asked the question “Does the combination of drivers justify a migration of cross border payments to ISO 20022?” 97% of financial institutions responded in the affirmative.
However, it is not only pure payments applications that will be impacted. Many banks’ in-house and 3rd party vendor applications that initiate/consume/process payments or account information, e.g in the post-trade space, or Corporate ERP/TMS solutions, will need to address this change. Similarly, this could be the opportunity to re-architect products to adopt an ISO 20022 canonical data model, or potentially integrate components from specialist suppliers likes Volante to deliver the compliance needed.
More news in the payments world sees the continued push of the SWIFT gpi solution with the service reportedly now tracking 80% of SWIFT end-to-end payments, across more than 300 participant banks. With mandatory processing and addition of the UETR from November 2018, SWIFT has now launched a universal tracker for all SWIFT banks (gpi members or not) and of particular note G4C – gpi for Corporates – a tracker designed for corporate treasury. With the continued advancement of the service it is now time for banks to start to differentiate their SWIFT gpi service offerings to corporate clients and in turn, the beneficiaries of B2B payments. For example, linking SWIFT gpi payment tracking to supply chain payments/trade financing solutions could create distinct new competitive offerings.
Customizing the client experience: Building an experience that customers cannot bear to leave
Authored by: Chris Fritz, formerly of SunTrust Bank and JP Morgan, now Principal Consultant at Ulfberht Advisors.
According to governmental agencies there are almost 6,000 FDIC insured commercial banks and savings and loans in the United States. These firms service a staggering 30 million corporate, middle market, and small businesses clients. That’s a lot of banks serving a lot of customers. But what are they selling? Some, if not all, of these services:
- Holding money – Deposit Services
- Making money available – Credit Services
- Moving money around – Transaction Services
- Putting money to work – Investor Services
The above categories are broad, taking a narrower view of commercial mobile applications from 5 large US banks as described by their publically available marketing materials, there seems to be a pretty consistent offering of mobile services across all 5 of the largest US banks.
How do banks deliver their services?
If you look at any recent digital banking survey you’ll see similar results:
- Vast majority of business clients are online, adoption ranges from 80-95% depending upon the segment
- Client satisfaction with digital products is high
- Digital sophistication is higher than ever before due to increasingly digital personal lives
We are a long way from 2004 when the internet was still a mystery to commercial clients. Clients are now savvier and a digitally-based relationship should in theory mean it is easier to transfer that relationship. How then might banks differentiate in a crowded market where clients and relationships are mobile? This led me to consider how such banks ultimately claim ‘uniqueness’.
To achieve this, I looked at the offerings at 12 large US banks. The results were similar to what I saw for mobile capabilities: commonality. Indeed, 11 of the 12 banks touted their ability to bring experts from across their institution to bear on a client’s particular needs which would result in a bespoke solution that would elevate their business.
This commonality approach, called to mind a famous quote from legendary NFL Innovator, Bill Walsh: “If we are all thinking alike, no one is thinking.”
So, if banks offer roughly the same services, and have similar marketing messages, how can they distinguish themselves? Can innovation truly help banks to think differently and distinguish themselves?
If you are familiar with Danny Meyer, the Founder of Shake Shack, you might have heard him talk about the role of innovation in long term relationships: “Shelf life of innovation today is 2 minutes. So we need to do the pleasurable thing. How does it make the client feel.” - Danny Meyer, CEO of Union Square Hospitality & Founder of Shake Shack. Most people, in a banking context, don’t refer to a “pleasurable experience”, but we can translate Meyer’s message to mean - if you create a positive experience for your client, they won’t want to leave and will shut the door to the competition.
So what can a bank do to create this positive overall experience? They can start by asking a few basic questions:
- Are products built and delivered in a way that makes them indispensable to the client?
- Does the Treasury staff rely on the bank for key steps in their daily process?
- Do those steps increase or decrease efficiency (happiness)?
With 6,000 banks offering core banking services, how does one particular bank structure the offering to create a pleasurable experience? The good (and obvious) news is that despite their marketing material, no bank is identical. To truly compete each bank should take an honest and in-depth look at itself and its peers to identify relative strengths and weaknesses. Some examples of questions to reflect upon internally, include:
- What is our risk appetite?
- Do we have a truly differentiated industry expertise?
- Are we an international or domestic bank?
- Can we position ourselves as a payment leader?
When a bank develops a set of honest answers to the above questions, they should be able to structure their offerings to accentuate strengths and work around weaknesses leaving them to sell the services they do best, whilst backstopping weaknesses to minimize client pain.
As an example, let’s look at how two different bank types with differing credit appetites might structure their product offering to maximize what they can provide to a client:
High- bank is actively seeking credit exposure and offers many types of credit products.
- Build natural ties from their credit facilities to the rest of their services
- High digital integration as they seek to include lending in all cash management functions
- Market leader role in new digital lending capabilities to compete with FinTechs
- Reduce barriers to entry with self-service and automated servicing and onboarding
Low – bank avoids new credit exposure
- Every effort will be made to de-emphasize credit products
- Emphasize and build out other strengths, i.e. Treasury or Investments
- Stress automation and digital integration into client’s workflow
- Credit product operations need to work to remove all reminders that their credit products are not their strength
Banking is a crowded, fairly commoditized marketplace. Any bank can mimic its competitors’ product suites. However, those that take to time to understand their clients and themselves, have an opportunity now to deliver their strengths directly into a client’s workflow.
That’s the holy grail. If you can please the user in the accounting, finance, treasury department, that user will fight tooth and nail to ensure their boss doesn’t change banks just because a shiny new bell or a slightly lower price is offered. Because they’re getting a customer experience they cannot bear to leave.
Chris can be reached at CFritz@ulfberhtadvisors.com
