Nordics Regional Conference explores the impact of disruption on financial services
Bankers gathered at SWIFT event in Copenhagen are told that the future is bright, but they must open their eyes, never succumb to complacency, and be prepared to fight.
Opening the third SWIFT Nordics Regional Conference, Erica Åhman, Head of SWIFT Nordics, SWIFT and K.B. Larsen, Chief Expert, Clearing, FX/MM & Derivatives Operations, Nordea and SWIFT NMG chairperson for Denmark welcomed the over 200 delegates from across the Nordic region to Copenhagen. Against a backdrop of disruption across the financial industry, Åhman set out the agenda for the two day conference, which focused on how the banks in particular, and the financial industry in general, can tackle the challenges posed by disruptive factors such as regulation, cyber-threats, new entrants and new technologies.
Keynote speaker Glenn Söderholm, Member of the Executive Board and Head of Manners & Institutions, Danske Bank, delivered an open, honest and powerful explanation of the process that Danske Bank has gone through to adapt to the wave of change and refocus its business around customer needs. “Just a couple of years ago, transaction banking was just a back-office area, that people barely knew about and that we didn’t talk to clients about. Yet today, transaction banking is one of the things we talk to clients about the most,” he stated. “The world is changing, investment banking is changing, and the way that banks make money is changing,” he went to on say. Talking about the pace and impact of change, he explained that amongst the changes that have been seen over the past years, since the Lehman crash, are a reduction of bank return on equity (ROI) from 30% to 10% and the fact that new regulation is making it very expensive to on-board new clients and advise them. The cost base of the banking business has risen dramatically and change is coming faster and faster by the day. On the technology front, he said, what matters most is that any new technology adopted interlinks with the value chain of the client.
The world is changing, investment banking is changing, and the way that banks make money is changing.
— Glenn Söderholm, Danske Bank
In this market context, said Söderholm, banks will choose different strategies. Nordic banks have had the same strategy for the last 15 years, but that will change, he offered, because it is too expensive to be in all areas, so you have to choose and focus on your strengths. “At Danske Bank,” he went on to say, “we started from the customer.” Referring to focusing on one’s strengths, he explained that when performing an analysis to see what needed to change, it transpired that his bank had many excellent individuals, much of whose time was tied up by cumbersome internal processes, regulations and piles of administrative tasks.
Clients want a seamless and reliable bank. If that doesn’t work then we might as well close the shop.
— Glenn Söderholm, Danske Bank
Looking at what it was that customers wanted from the bank, Söderholm explained that “clients want a seamless and reliable bank. If that doesn’t work then we might as well close the shop. This is where SWIFT can help… That is how we will be able to resist disruption from Google and the likes.” “Only if all of that works, can you think about value-creating advice and related solutions,” he concluded.
Disruptive forces – harnessing the power of change
Having completed his presentation, Söderholm was joined on stage by Michael Carty, CIO, Euroclear Nordics; Idar Kreutzer, Managing Director, Finance Norway; Alain Raes, Chief Executive, EMEA and Asia Pacific, SWIFT and Chris Skinner, Chair, The Financial Services Club who moderated a panel discussion on how financial institutions can survive and thrive in a market landscape that is undergoing so much change across so many areas. Introducing the topic, Skinner talked about how other industries, such as the film, book and TV industries, have already been through disruptive change and have adapted and changed as a consequence. Turning to the financial industry, he expressed the view that we have a great starting point, with excellent customer relations, good investment budgets and very talented resources. Looking first at the “tsunami” of regulatory change, Kreutzer stated that “the financial services industry is facing the most severe regulatory change we’ve ever faced.” It all goes back to the post-crash Pittsburgh G20 meeting back in 2009, he explained, reminding the audience that President Obama said “never again”. That is the key point, he said, and everything flows from that. His main concerns, he stated, are the balkanisation of the regulatory framework within the Nordics and Europe and the fragmentation of global regulatory processes [e.g. Dodd Frank / EMIR, etc…]. Turning the conversation towards opportunities, rather than threats, from regulation and disruption, Raes highlighted how collaboration can reduce cost and risk. “I still don’t see it though,” he said. “Even in the Nordics, which is a more integrated community, the regulators aren’t talking to each other.”
Moving on to where in the globe we see the most innovation coming from, Skinner mentioned Africa and Eastern Europe, amongst others, including a number of relatively small countries that one might not immediately expect to be hubs of innovation. Raes pointed out that many of the countries mentioned, have had the luxury of starting from scratch, building from the ground up and having no legacy to deal with. In the case of new entrants, they are also free from the heavy regulatory constraints that the banks operate under. Debating where profitability will come from for the incumbents, the panellists agreed that the real threat will be posed by the introduction of new business models. “The competition we are facing is not progressive, it’s big leaps. That is what we are up against. New business models that break customer compromises,” stated Söderholm. An example given of a “game changing” new business model was ApplePay, which the panellists praised for having been able to get all card schemes to work together. The downside though is that it is apparently facing significant problems with fraud and may suffer from being deemed to not be safe enough for use yet.
Coming back to collaboration, Kreutzer said that what is really needed is a strategic discussion on where competition ends and collaboration starts. Using the example of highways, he explained how we all use the same infrastructure and only choose which vehicle we will drive on it. In our industry, with digitisation, the borders are less simple, and we need to define those borders again, he concluded. Carty added that one key factor for any player in the Nordics is trust – building it and then, most importantly, maintaining it. He went on to say that a mind-set change is needed in Europe at this point, because it seems pretty clear that competition on the core is unlikely to be the way ahead for anyone.
Moving on to cyber-security, Söderholm’s position was very clear. “At Danske we’ve concluded you cannot be in the middle of the pack,” he said. “You need to be in the forefront (so you don’t get attacked). I can’t see that investment cost being reduced.” Kreutzer talked about the success that has been had with digital ID in the Nordics and to what an extent what can prove to be a game-changer. The panel highlighted that “the bad guys” have access to the same technology, lots of money and excellent resources, so collaboration is key, since the better the financial industry is at pulling together and pooling budget and resources, the more effective it will be at fighting cyber-crime.
The real threat isn’t Google or Apple. It’s complacency. Our own attitude. We need to redefine our business and our customer relations.
— Idar Kreutzer, Finance Norway
As the panel drew to a close, Skinner asked the panellists where they saw the silver lining in all of this and where they thought the opportunities are to be found. Raes replied that there are many markets where customers have a huge demand for new services – such as in the Trade area. “There are opportunities,” he said, “but they need to be tackled fast and we must be nimble and responsive,” he concluded. Carty agreed with Raes on being nimble and flexible and said that from a Euroclear perspective, they need to keep applying that very same mentality to how they cater for the needs of their customers in Sweden and Finland. Lastly, Kreutzer stated that in his view, “The real threat isn’t Google or Apple. It’s complacency. Our own attitude. We need to redefine our business and our customer relations” and that in order to face the challenge, we must change the way we work and ensure that we use technology in the best interests of the customer.
Cyber-security: writing the rule book
Next on the agenda was a presentation by Richard Benham, Professor of Cyber Security Management and founder of The National MBA in Cyber Security ® at Coventry University in the United Kingdom. "You open the MBA textbook and there's nothing inside it - there are no theories yet established" said Benham, reinforcing how new this field of study is and the element of improvisation required to study cyber-security. The good news though, he said, is that whilst until now it has very much been a matter of trying to share best practice and making it up as we go, there is now an effort underway to formalise cyber-security theory and establish formal rules and standards in this area. Benham went on to explain the trademarked 'Cyber Ripple' theory - which states that “The effect of a cyberattack on an organisation or individual has a destructive cascading effect on both the connecting technology and human aspects that are linked. The extent of the destruction depends on the awareness and protection levels built around the sequential points of the attack.” Benham also Benham extended an invitation to delegates to come forward and present their own theories to be used within the financial services module of the cybersecurity MBA.
Moving on from questions to predictions, the professor shared two personal predictions with the audience. The first was that we will see the collapse of a bank following a cyber-attack within 5 years, as a result of reputation damage using social media prompting a run/share sale on that particular bank. He cited the example of Northern Rock to exemplify how social media chatter could damage reputation and incite a bank run. His second prediction related to the rise of economic cyber terrorism, where organisations having their social media presence breached causing significant financial damage. Concluding his presentation he expressed the feeling that we are always playing catch up in a situation where we do not have the luxury of an evolution and need a revolution, yet his fear is that major decisions will only be made after a bank has gone under as the result of a cyber-attack.
SWIFT update – leveraging the network effect
Drawing the morning to a close was an update on SWIFT’s strategy, products and services, featuring Alain Raes, Chief Executive EMEA and Asia Pacific, SWIFT and Javier Pérez-Tasso, Chief Marketing Officer, SWIFT. In an interactive discussion moderated by Finextra journalist Neil Ainger, the two talked the company’s plans for 2015 and what it will be focusing on as it moves into its next 5 year strategic cycle with the SWIFT 2020 strategy. Pérez-Tasso clarified that in such a rapidly moving financial landscape, SWIFT of course has 2-3 year actions plans and 5 year visions, rather than fixed and unchangeable plans for the 5 years to come. Looking back at the 2015 strategy, for which 2015 is the last year of delivery, he explained that SWIFT has delivered significant achievements in all four of the areas set out in the plan. A key area of development for the future, he then said, is the real-time payments space, where SWIFT hopes to pay a major role, well beyond the delivery of the New Payments Platform (NPP) that it is developing for the Australian market.
We have many challenges – resiliency, regulation, cybercrime, just to name a few – but if we all tackle them together, we will succeed.
— Alain Raes, SWIFT
Pérez-Tasso went on to say that with the prediction of 50 billion handheld devices being connected to the internet by 2020, we are seeing a boom in emerging platform-based businesses, such as Amazon, AirBNB, Uber and EBay. The success of these businesses is based on critical mass and access to structured data that is valuable and meaningful to the end customer. With Silicon Valley looking at the financial industry as the next industry to be disrupted, we have our work cut out, he said, and collaboration is going to be key as we move forward. “Projects such as the Australian NPP have made us take a different look at the technology and come up with something new – a peer-to-peer solution, in this case.” He pointed out that the paradox of continuing to focus on the core whilst having to nimble, flexible and innovative is obvious, but that it is the only way forward, so SWIFT will continue to stay strong and keep investing in the core, all whilst making some bold moves, especially in the market infrastructure and compliance spaces. In the case of the latter, the big investment, he said, is the KYC Registry utility.
Picking up on Pérez-Tasso’s points, Raes stated that SWIFT clearly has a big role to lay in correspondent banking and that we still operate in an industry that is very much made up of transactions and correspondents. He went on to say that our industry is, however, very unaware of its network effect and that as a consequence, it isn’t leveraging it enough at a time when expanding reach and increasing the power of the network is essential. “We have many challenges – resiliency, regulation, cybercrime, just to name a few – but if we all tackle them together, we will succeed,” he said. One thing that SWIFT is already working on, for example, is a value proposition based on ISO 20022and shared services to help banks that work across multiple jurisdictions, he explained. In the case of the KYC Registry, the idea is to put together a minimum common denominator that can allow for the bulk of the job to be done by a utility, thus fulfilling the aim of coming up with something that works for and is useful for the majority of the industry and that operates on an economies of scale model.
The bad guys just have to get it right once, whereas we have to get it right every day.
— Javier Pérez-Tasso, SWIFT
Answering a final question on what they thought were the biggest challenge and biggest opportunity for SWIFT and its customers at this moment in time, Raes answered that it is essential to keep focusing on delivery in the core business, which requires significant investment and zero compromise, all whilst remaining agile and responding to rapidly evolving customer needs. Pérez-Tasso said that in his view the biggest challenge is cybercrime, because “the bad guys just have to get it right once, whereas we have to get it right every day.” As for opportunities, he was optimistic that every cloud has a silver lining and that there are opportunities to be found in many areas - cyber-security, regulation and the move toward real-time – and that it is essential that we keep adopting new technologies, reuse them and keep adapting them to the local realities of other communities.
In the afternoon, after chat rooms during which the exhibitors presented their products and services to the audience, the participants split into two groups, choosing to participate in either the payments stream or the securities stream. Dedicated reports on each of the streams will follow shortly.
What are you selling, to whom, and why?
Kicking off day two of the conference, was a speech by Jonas Kjellberg, one of the creators of SKYPE and a much appreciated lecturer at Stanford and the Stockholm School of Economics. In his highly inspiring presentation, Kjellberg started by explaining he has not just been involved with Skype but was also chairman of iCloud, an online shoe company and many other firms. As a “serial innovator” he came highly qualified to speak about one of the key themes of the conference: technology disruption. “All my life I’ve been obsessed with what creates game-changers,” he said. ”It’s an interesting time in the financial services industry at the moment because you’re going through this now. Lots of people want to challenge banks.”
Innovate don't imitate. Delight your customers, and you'll be successful
— Jonas Kjellberg, Co-founder of Skype
Kjellberg’s presentation was structured around a number of lessons that he has learned in the course of his career. Talking about his time with Lycos, then the second largest search engine in the world, he explained that they were soon overtaken by a little company called Google that just grew and grew. Why? The answer was simple – they had a better product. The lesson here was that frequency only gets you so far. "Innovate don't imitate," he said. “Delight your customers, and you'll be successful.”
Citing Ikea, Ryanair and other disruptors with low-cost operations, he addressed a question that he had raised earlier on in his speech: "Does the fast always beat the slow?" His answer was that yes, as a general rule it does, but it's not the only factor and a number of elements play a part in a company’s success. Summing up the four business lessons that he wanted to convey, he said to succeed, companies in a disrupted environment should seek to be low-cost, have a good business model, delight their customers, be persistent and have frequency. He concluded by saying that it’s always good to go back to the basics and “Ask yourself: What are you selling, to whom, and why?” Answer that and you’ll be successful.
In the first panel session of the morning, Kevin Johnson, Innotribe Startup Challenge Manager, SWIFT, hosted a discussion on the future of Bitcoin and its underlying block chain technology. To start off, Johnson played an informative video explaining what Bitcoin is and the concept of crypto-currencies. As Johnson said after it, there were ledgers, messaging, encryption, and so on, all mentioned in it. “All things banks know about.” The panel then took to the stage and Lui Smyth, UK General Manager of Coinjar, a recent winner at Finovate in London, explained that his firm CoinJar is a wallet and an exchange that is aimed at consumers who want to use Bitcoin. Gabrielle Patrick, co-founder, Epiphyte explained that her firm helps others leverage the technology aspect of Bitcoin, aka crypto-currencies. “We don’t deal in BTC but help companies use the network,” she says. The first mention of the block chain then came from the third member of the panel, Chris Skinner, Chair, The Financial Services Club.
The underlying block chain technology is hugely interesting and at SWIFT we are avidly looking into it. But let’s not get carried away and think that everything is about to change. This is an industry unlike any other industry that has been transformed before.
— Arun Aggarwal, SWIFT
Epiphyte's Patrick explained that the Bank of England (BoE) has expressed an interest this year in creating its own currency. “That shows how crypto-currencies are becoming understood and accepted,” she said. Crypto-currencies are also being regulated more now, which is something that is likely to accelerate. New US licensing rules were introduced this year, for instance, on Bitcoin traders. Skinner then talked about Ripple and other players in this market and how big technology vendors are now putting money into this sector. “Reid Hoffman, the co-founder of LinkedIn and others are putting money in, proving there is something here and forcing the financial services industry (FS) to take a look and recognise this is not a Wild West outsider interest anymore,” he stated.
As the session opened up to questions and statements from the audience on the topic of whether BTC will replace fiat currencies, Arun Aggarwal, Head of UK, Ireland and Nordics, EMEA, SWIFT, launched a stout defence of FS, saying that, “we’re different to the newspaper industry and it won’t be so easy for technologists to disrupt us.” He backed up this statement by saying that all money is digital now anyway, especially after quantitative easing (QE), and FS is interwoven with governments who police fiat currencies. “The underlying technology is hugely interesting and at SWIFT we are avidly looking into it. But let’s not get carried away and think that everything is about to change. This is an industry unlike any other industry that has been transformed before,” he went on to say. The panel responded by saying that yes, there are special factors in FS but it’s not unique. Things can and do change.
I think block chain technology is the future.
— Gabrielle Patrick, Epiphyte
The panel is moved towards its conclusion by discussing the block chain in detail, if banks can leverage this technology and how. “Yes, banks can use the ledger model”, said an audience member. “Why not?” But whether they will or not is another matter. “Wells Fargo is looking at this area, using Ripple, as are lots of other banks,” stated Skinner, arguing for the block chain. “You could use the block chain for mortgages title deeds as well. Once you have an irrevocable agreement on the block chain you have to give up your private key to release it.” “Our technology allows fiat and crypto-currencies to exist in parallel,“ added Epiphyte’s Patrick. “I think this technology is the future,” she concluded, although she agreed that there may be a way to go yet, with regulatory concerns and decisions on how to best use the block chain still to be addressed.
The likelihood, though, concluded the panel, is that transaction fees will fall as the block chain distribution model gains popularity, and that in itself would be disruptive.
After the innovation plenary, the participants once again split into two groups, choosing to participate in either the payments stream or the securities stream, before reconvening at the closing plenary.
Wrapping it all up….
To close the conference, Arun Aggarwal, Managing Director, UK, Ireland and Nordics, SWIFT, was joined on stage by Søren Haugaard, SVP, Global Head of Trade & Supply Chain Finance, Danske Bank and Marianne Sørensen, Head of Estimating Operations, Nordea, for an interactive discussion on the key themes that had emerged in the course of the event. Aggarwal, reminded attendees of the key conference theme of disruption and said that over the course of the two days, it had been debated from a regulatory angle; a technology angle; and from the perspective of new entrants challenging existing FS firms and threatening disintermediation. In response, Haugaard said that banks need to be agile. “We need to be agile enough as an industry to navigate these challenges and indeed turn them into opportunities.” Sørensen, looking at the challenges from a securities market angle, stated that on the regulatory front, the sector is now moving from the development phase of post-crash regulations into the implementation stage, with T2S being a good example and one that was much discussed in the securities stream.
“There is a lot of knowledge in banks. Do not give up the fight, but be prepared to fight.
— Søren Haugaard, Danske Bank
The concluding thought came from Danske Bank’s Haugaard who said that “There is a lot of knowledge in banks,” and encouraged everyone to not “give up the fight, but be prepared to fight.” The market is certainly getting tougher, he added, and it is up to participants to rise to the disruptive forces impacting FS and make sure that they succeed.
Thanking everyone for their participation and engagement, Åhman bid the delegates farewell and announced that the next Nordics Regional Conference is most likely to take place in Spring 2016.