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Heidi Miller, Bitcoin and fitness for purpose

Building on yesterday’s theme about how a cheque from Canada has taken six weeks to process and had significant processing charges taken from the deposit as a result, reminds me of Heidi Miller’s speech from SIBOS 2004, which is still talked about today.

What did Heidi say that was so compelling?

She basically asked why do banks make everything so darned complicated. 

Her full ten-year old speech is replicated at the end of this blog entry, but the gist of her issue was four questions:

  • Why do we make things so complicated for our clients?
  • How can we help our customers become more efficient and productive, when our own back offices are so expensive, fragmented, outdated and 'non-interoperable?
  • If we truly aspire to be leaders in the payments and securities industries, why is it that so many innovations in this business are pioneered by non-banks?
  • If we can send a secure message to any company over the internet, why should we pay SWIFT to do it for us?

and this specific challenge:

Let me tell you a story about a friend who lives in Europe and bought a boat in the United Kingdom. This gentleman is a very well-known former executive of a large global financial services company. He is eminently creditworthy. He had enough money sitting in his U.S. bank account to buy many boats.  When the boat was ready, he called his bank to arrange payment. And his bank told him it would take about six weeks to transfer the funds.  My friend could have sailed to New York, withdrawn the cash from his bank account, had a leisurely dinner, sailed back to the United Kingdom, paid for the boat, and still had time left over for a Mediterranean cruise before that funds transfer would have been completed.

That situation has not changed in ten years that much, in the banking system.  In fact, with FATCA, AML and KYC, it’s getting even harder.

But here’s the rub: because it’s so darned difficult people are inventing ways around it.

PayPal may be a gnat’s whisker on the banking systems’ backside today, but it’s volume of payments processing is exploding thanks to the ease with which it enables cross-border trade.

And Bitcoin has been invented precisely to overcome the deficiencies in the banking system.

In fact, going back to my theme of regulation and innovation and the divide therein, this world of global trade and travel driven by technology is crying out for a new way of paying and financing.

This is the gap that Bitcoin is trying to fill and if banks don’t get with it, then the world will work out a way around it.

Bitcoin only exists, as does PayPal, because exchanging money through the new net that connects everyone globally is not being supported by the banking system.  If the banking system works in the old world of pre-global travel and technology, then the new world has to create something to fill the gap.

That creation is Bitcoin.

Bitcoin fills the gap of global connectivity and, unlike my Canadian cheque that took six weeks to process and cost me $150 (!), it’s free to exchange globally via the net.

No charges, no waiting and no issue.

That’s the power of the Bitcoin exchange and the reason why we need banks to focus upon change fast.

Get with it or your customers will.

Oh, and going back to Heidi Miller’s speech, there’s a core question that is still unanswered ten years later, namely:

If I’m connected globally with everyone and can easily trade with them electronically or travel to meet them cheaply, then how come the banking system is dragging its heels with six week processes?

Heidi Miller (of JP Morgan) speech in full:

It is an honour to address a group of global leaders in our industry, not to mention some of our most valued clients and most formidable competitors. 5500 of the industry's most experienced experts in cash and securities payments systems. Many of you know that I am relatively new to this business, and new to my current position as head of the Treasury and Securities Services businesses at JPMorgan Chase.

I have spent the last part of my career as a Chief Financial Officer in the financial services industry, so my main experience in the custody, trust, payments and trade finance businesses of late has been from the outside looking in – as an 'owner' and as a buyer of these services. I would like to use this experience as the starting point of my remarks.

I used to wonder – as CFOs tend to do – why these businesses are so expensive to run? Why it takes so many people to run them? Why the operations are so decentralized and so hard to consolidate? Why so many of their IT platforms are 'non-interoperable' and 'non-reusable'? Shouldn't these transactions be handled electronically over one seamless global infrastructure?

Well, the past six months have been an incredible learning experience for me. I have learned how unbelievably complex this business is. At JPMorgan Chase, for example, we have 160,000 employees in 50 countries serving 90 million customers in six key lines of business, and the operating service business, which I oversee, impacts each and every one. The scale is impressive – eye popping. My organization alone has processed more than 10 million securities trades this year. We hold 8.2 trillion U.S. dollars in assets under custody. On any given day, we transfer as much as 2.5 trillion U.S. dollars in wires. And despite our scale, we work hard to ensure that each individual client is treated with great care. No two clients, no two markets, no two products are exactly alike.

The amount of customization in this industry, and the lack of standardization across countries and across market infrastructures, truly amazes me. Despite efforts to digitize transactions and automate processes, these businesses are highly people- and paper-intensive. As an industry, we are a very long way from STP.

I have learned how constrained we are by regulatory and compliance requirements…by our own legacy investments…by the legacy investments of others…by the glacial pace at which we banks tend to move. As an industry, we are a very, VERY long way from SWIFT. Forgive the pun.

During the past six months, I have asked a lot of questions about the inner workings of these businesses. The more I know about them, the more optimistic I become about our opportunities to innovate, to better serve our customers, and to grow. But – to be completely candid – I have to say that I am also troubled by what I have learned over the past 6 months. Troubled not because I worry about our people, our products, or our ability to execute in the marketplace. I am troubled by some fundamental questions – what you might call the 'existential questions'. The types of issues that keep me up at night.

Questions such as 'Are banks as important to customers as we think we are?' Or 'Is our position at the core of the transaction services industry as secure as we think it is?' So I thought I'd spend the next 15 minutes sharing a few of the 'existential questions' that have been on my mind – four, to be exact.

Why do we make things so complicated for our clients?

Let me tell you a story about a friend who lives in Europe and bought a boat in the United Kingdom a few years back. This gentleman is a very well-known former executive of a large global financial services company. He is eminently creditworthy. He had enough money sitting in his U.S. bank account to buy many boats. He had patiently waited months for the boat to be built to his precise specifications. He was ready and eager to take immediate possession.

When the boat was ready, he called his bank to arrange payment. And his bank told him it would take about six weeks to transfer the funds. Six weeks? Think about it: My friend could have sailed to New York, withdrawn the cash from his bank account, had a leisurely dinner, sailed back to the United Kingdom, paid for the boat, and still had time left over for a Mediterranean cruise before that funds transfer would have been completed.

Let me tell you a little more about this friend of mine. He was the Chief Executive Officer of one of the world's most well known banks, a bank that is one of SWIFT's largest customers. A place I used to work. Enough clues. I'll let you guess who it is. I'm sure every payments manager here has a similar story about a payment that got stuck in the system, and clearly this is an extreme example. However, here's my point: Why should it take days or even a week or more to execute a cross-border payment? No one is immune. Not a bank CEO.

Not the treasurer of a multinational enterprise trying to manage the company's global cash position across 20 different countries and multiple time zones. Not a large investor trying to navigate a multitude of differing requirements for cross-border securities settlement. And certainly not the small business or middle market company who urgently needs to restock its inventory, and who might have slightly less than stellar credit. Not AAA.

Over these past few months, I have spent a lot of time listening to customers, large and small. I have heard them express frustration about how expensive and time consuming it is to deal with different proprietary bank interfaces. These customers cannot understand why an overnight delivery service can tell them exactly where a package is from the second it leaves their premises to the moment it arrives at its destination, but banks can't tell them exactly where a cross-border payment is as it moves through the process. Comments like these trouble me.

If we don't figure out how to make these problems go away – to make life easier, faster and more transparent for our clients – we are not properly serving them, and that is not good business. So why CAN'T we execute all transactions electronically over one seamless global infrastructure?

I know that there are barriers and challenges – we live them every day. I know, first hand, how expensive and painful it is to migrate to a new technology platform or to centralize fragmented operating centers. I know these things cannot be changed overnight, and I understand the rationale that the associated costs and risks would be prohibitive. But knowing about these challenges and being able to explain them does not help me sleep any easier.

Because I have a suspicion that someone, somewhere is working very hard to make these processes vastly easier, cheaper and more transparent for our customers. And this someone may not be burdened by the legacy investments, rules and regulations that chain the banks.

Will they get to the solution before we do? This brings me to 'Existential Question # 2'.

How can we help our customers become more efficient and productive, when our own back offices are so expensive, fragmented, outdated and 'non-interoperable?

Customers tell us they need to achieve substantial improvements in their own efficiency and productivity. They want us to help them reengineer their supply chains, speed their order-to-pay cycles, free working capital, and integrate seamlessly with their internal transaction and information systems. They want it real time, across all borders. And of course, they want more value at lower cost.

What example are banks setting for them when our own infrastructures are inefficient, complicated and siloed? When there is little harmonization to facilitate cross-border business and compliance with different regulatory schemes? When we ourselves are so deeply entrenched in such outmoded ways of doing things?

All of us know there are many things that we can do individually to improve the efficiency of our own back offices, and we are tackling them today. But I have learned that one of the biggest drivers of my technology and operations budget is something I have very little control over. And that is the fact that – as an industry – we support far too many redundant infrastructures and networks, too many proprietary standards, too many middle-ware platforms, too many legacy systems and too many products that should probably have been swept into the dustbin years ago.

As far as I can tell, we seem to be much better at creating new infrastructures than we are at getting rid of the old ones. We spend so much time and money trying to keep all these platforms working together that we have little energy left over for innovation. Here's a real-time example: seventeen days from today a new piece of financial legislation will take effect in the United States. It is called 'The Check Clearing for the 21st Century Act.' Non-Americans are probably snickering. Yes, you heard me correctly – 'Check Clearing for the 21st Century'. I know that many of the countries represented in this audience got rid of checks in the late 19th century.

Let me explain a little bit about this Act and what it means. It means U.S. banks are investing hundreds of millions of dollars to create an entirely new payments infrastructure to capture images of paper checks, destroy the paper, and then exchange the digital images. This is actually a big deal, given that eighty percent of the world's checks are processed in the U.S.

There is one problem with Check 21. The vast majority of banks in this country have not invested, and may never invest, in image infrastructure. There is no legal requirement for them to do so. The Act gives us the option; it is not a requirement. That means that those of us who do invest in image will now be forced to create an entirely new paper payments instrument called an 'Image Replacement Document' or IRD.

Basically, an IRD is a substitute paper check. IRDs exist for two reasons. One, so that banks who do not invest in image can continue to process a piece of paper that looks and feels pretty much like a paper check. And, two, so that customers can still look at an image of their original item.

So, instead of getting rid of our paper check clearing infrastructure, we have created two additional infrastructures – one to process images and one to print IRDs. Unfortunately, because it is still much cheaper to clear a paper check than it is to print and clear an IRD, it may take years to drive the paper out of the system. So much for progress.

This sort of thinking is hardly unique to the U.S. Let me cite other examples. What about the discrepancy in market practice between Europe and the United States around when to use an IBAN in a cross-border payment? Lack of agreement is creating additional cost and inefficiency in our payments environment, and will ultimately impact the relationship we have with our customers. While we do not have an immediate solution, it is clear that the industry must resolve the issue.

On another front, the G30 and the Giovannini group have issued important recommendations for securities clearance and settlement reform both globally and in Europe. Several recommendations address areas of inefficiency which will materially benefit us and our customers. Yet progress continues at a snail's pace. Financial institutions spend tens of billions of dollars each year on payments and securities-related technology operations. How many billions could we eliminate if we really set our minds to it? If we really tried to streamline, harmonize and modernize the patchwork quilt of payments and securities clearing and settlement systems that we support?

Imagine that – suddenly – all this infrastructure disappeared. Gone. Nothing left. Would we try to re-build the same infrastructure we have in place today? I think not. Starting from scratch is not a realistic option. But what if just a few of us sat down together in a room, locked the doors, and refused to come out until we figured out a more economical way of doing this? And if a few of us suddenly had a much less costly networking infrastructure, wouldn't the rest of you want the same thing?

If we truly aspire to be leaders in the payments and securities industries, why is it that so many innovations in this business are pioneered by non-banks?

Let me tell you a story about a business acquaintance who runs a successful Silicon Valley e-commerce venture. In the late '90s, this company was experiencing explosive growth, and adding thousands of new customers every week. They desperately needed a secure and easy-to-use online payments solution, and they needed it fast. Quite logically, they approached several banks and asked them to develop a solution. To make a long story short, the banks tried, but simply could not deliver a solution that met this company's needs and customer requirements effectively.

So the company was forced to turn to another e-commerce start-up that had already developed, piloted and rolled out exactly the solution they were looking for. This business acquaintance is Meg Whitman. The company is eBay. eBay paid over $1 billion to acquire that payments solution provider. It wasn't a bank. It was Pay Pal. (A start-up concern where some smart programmers created value based on servicing eBay's existing customers.)

Wouldn't you think that banks should be facilitating payments transactions for e-Bay? We have the customer relationships. We have the accounts. We have the clearing and settlement systems. In fact, Pay Pal transactions ride on the very same systems we banks have spent billions of dollars building. And yet the banks lost the deal, despite our natural advantages. In less than one year, PayPal built a person-to-person payments solution that met the needs of the market better than any built by banks in the past five years. I guess this shouldn't be a surprise. Just look how long it is taking our industry to migrate from x25 to SWIFTNet? Is this good enough in the Internet age?

Kudos to PayPal for their creative innovation. And to Checkfree in electronic bill payment. And to ADP and Paychex in Payroll Processing. And to First Data in merchant processing. And to Radianz in IP network connectivity. Shame on us. We repeatedly allow ourselves to be disintermediated. By the time we have barely gotten ourselves organized, nimble new competitors have staked out their superior claims.

When we as an industry are properly motivated, it's impressive what we can achieve together. Look at what we have done with Equilend, CLS, the Euro, Target, and SEPA. Yet how many times has the impetus for change come from the regulatory community? Or an attempt to reduce clearing or settlement risk? How often do we come together purely to create new value for our customers?

Let's take a current problem from the securities business: corporate action messaging. Today, a good portion of the messaging between investors and custodians is done via SWIFT. But corporate action messaging between issuer agents and custodians and other intermediaries is frequently handled manually or via the prospectus, which is subject to misinterpretation.

If all corporate action messaging, from start to finish, were accomplished via SWIFT format, the process would be far cleaner. I do understand that corporate actions can be very complex, so end-to-end automation via SWIFT is no small challenge. Yet a solution is sorely needed, and SWIFT is well placed to help by being a leader. We all know this. It is intuitive. So why hasn't it happened?

It seems to me that other network and standards-based industries – like telecommunications and computing — are much faster than we are to push new innovations to the market that truly change the customer experience, that dramatically lower cost, and that make new things possible.

What new business solutions can we collectively pioneer if we set our minds to it? Should we create an international gateway access to all payment channels – high value, low value, card, ATM – that is fully interoperable and managed by a single interface provider? Could SWIFTNet act as a single channel that links to multiple bank networks and multiple payment systems? A single securities reference database which is used by the entire industry and which we can all tap into? What if SWIFT stopped charging users to get onto the network? If telecommunications and cable companies can give away cell phones and cable boxes for free, why can't we? This brings me to my fourth and last existential question. Let me make it clear that no one on my staff wanted me to ask this question. I take full responsibility for the consequences.

If we can send a secure message to any company over the internet, why should we pay SWIFT to do it for us?

Don't get me wrong. I believe that SWIFT provides a great deal of value around messaging. SWIFT's reliability, resiliency, non-repudiation, and standards are absolutely essential to what we do every day. And I also like the fact that we – financial institutions – own and govern SWIFT.

I also appreciate the value of the SWIFT community. In fact, SWIFT's greatest asset may be its ability to mobilize banks around the world to take action…perhaps even to move faster toward the seamless global electronic infrastructure we all dream about.

I am told that SWIFT became so successful because it replaced the old telex machines and helped us automate our back offices. The innovative application of computing and networking technology to a manual and time-consuming process made it dramatically easier and cheaper for us to do correspondent banking. We got rid of mountains of paper, redeployed telex clerks and centralized our payments processing operations.

SWIFT has saved our industry billions of dollars. But more importantly, SWIFT made international payments faster, cheaper and more transparent for us and for our customers. Congratulations, SWIFT. Job well done.

So what next? What have you done for me lately? How does SWIFT justify its existence for the next thirty years? People tell me SWIFT message prices have dropped by 57 per cent over the last 10 years. On top of that, we have received several rebates in that same timeframe. Again, that's terrific news and very admirable. But what have you really saved me? My total direct expenditures on SWIFT messages represent a fraction of my total IT budget. But at the end of the day, do I care if a SWIFT message costs 2 cents or 20 cents, if my next best option is essentially free.

So what, then, is the real value that SWIFT will provide my business? Thirty years ago, if SWIFT had approached the banking industry and told us they could make our telex machines more resilient, lower cost, and able to handle a broader message set…would SWIFT be as successful today? That's called 'what if' history – but probably not.

To put it another way – what is today's telex equivalent that SWIFT can help me eliminate? How can SWIFT work with me to grow my business? I have no doubt that our world is in the midst of an information technology revolution. And we banks are, first and foremost, in the information business. SWIFT's recent upgrade to an IP network represents an important first step into the 21st century. But we should be clear that this is only a first step. I look at SWIFTNet a bit like one of those European Autobahns – it's great if everyone is driving 130 kilometres per hour, but not great if you are stuck behind someone going 60. Too many back offices still run on 1970's mainframe technology. Too many are going 60 kilometres per hour.

So the question for SWIFT is this: How will you help us create the new applications and business solutions to run over this wonderful new network? To leverage the awesome power and ingenuity of the incredible community that you represent? How will you help us get rid of all these legacy infrastructures? How can you help our slow-moving industry move faster to take full advantage of all the new possibilities? That's the challenge.

Before I conclude, let me restate the four 'existential questions' I raised in this speech:

  1. Why do we seem to make our products so complex and difficult to use?
  2. How do we expect to help our customers become more efficient, when we are not efficient ourselves?
  3. Why is it that so many of the successful innovations in our industry are pioneered by non-banks?
  4. If the internet is ubiquitous and free, why should we pay SWIFT for messaging?

Existential questions don't have ready answers. But how did we get to this point? Could it possibly be that we harbour some desire to make things more complicated than they need to be? More costly? Less customer-centric?

No one in the room would admit to that. Most of us really do want to do what's best for the customer. In some ways, our problem may be that we are sometimes too customer-centric – not willing to enforce more standardization around business rules, formats and processes. Could it be, perhaps, that we are incompetent? Lazy? Incapable of coming up with new solutions? Once again, I don't think so. The people in my organization are talented and work extremely hard, and I'm sure you feel the same way about the people in your organizations. There are far more ideas for creative new innovations than we have the time or money to implement.

Maybe we are too conservative? Too risk averse? Heads too buried in the sand to see and respond to the major changes in our business? A bit closer to the truth, perhaps, but this still doesn't totally ring true to me. You know what I suspect the real problem may be? I suspect it has to do with the simple fact that changing things is just plain hard. Very hard. It is difficult enough to change our own behavior much less that of another person, a team, an organization, a culture, or an entire industry.

One thing I do have some experience at is driving change across large, complex global institutions. When I start to think about driving change across an industry, the roadblocks seem endless – different languages, cultures, tax regulations, legal restrictions, embedded technologies.

With all the pressing demands we have from our managers, our customers, our shareholders, our employees – who has the time or the energy to commit to make it happen? That is until the situation becomes a real crisis. Then I guess we would move. But maybe this reluctance to change is good news.

Isn't it better to know that we are dealing with a lack of effort instead of a lack of good intentions, a lack of competence, or a fundamental inability to work together as business partners?

If I am correct, then it is up to me, and to all of us – to set our individual differences aside and figure out how we can work together to get things to happen. To deliver more value to our customers. To make our back offices more efficient. To get into the marketplace with the innovations we have bubbling around in our collective heads. To inject more urgency and passion into our discussions here at Sibos.

If we don't do it, someone else will do it for us. I don't know how much time we really have. But I am sure it is probably a lot less time than many of us think we have. I want to conclude today's remarks with one final 'existential question' – one that I will even attempt to answer myself.

What could possibly be so important for 5,500 of us to leave our day jobs and spend a week in Atlanta? Here are a few possibilities.

Imagine if by the time we get together in Copenhagen next year, we have accomplished one thing that makes it dramatically easier and cheaper for our customers to execute a cross border transaction.

Imagine if we agreed, at least in principle, to develop a plan that will reduce the IT and operations costs of securities and payments transactions — not SWIFT messaging costs – by more than 5 percent within 5 years.

Imagine if within the next 18 months, we implement a plan to extend SWIFT's reach to more small users who to date resist the start-up costs of becoming involved with the SWIFT business cooperative.

Imagine if we can accelerate the introduction of at least one new business solution.

Or if SWIFT were to become so efficient and attractive that virtually all international payments and securities-related transactions would be in SWIFT formats by 2007.

Endless opportunity. In my opinion, if we have committed to even one of these by the time we adjourn, our time spent here in Atlanta will have been a terrific investment. I'd like to take this opportunity to thank you for your leadership, and to thank SWIFT for giving me the opportunity to express my views here today.

 

 

  

This is Part Two of a six-part series on being a Digital Bank:

Part One: Major parts of banking are stuck in the last century

During my lifetime, two things have fundamentally changed the world: travel and technology.

Part Two: Heidi Miller, Bitcoin and fitness for purpose

Building on yesterday’s theme about how a cheque from Canada has taken six weeks to process and had significant processing charges taken from the deposit as a result, reminds me of Heidi Miller’s speech from SIBOS 2004, which is still talked about today.  What did Heidi say that was so compelling?

Part Three: We are not Borg, we are Human and dancing to a different tune

Building to the theme of the divide between the old world of finance and the new, and why (some) banks aren't fit for the 21st century, brings a few more points to mind, in particular about control and centralisation.  Banks were built as control freaks.  They need to own the complete end-to-end cycle of everything.  They have to develop their own software, systems and services, which is why they end up with more developers than Microsoft as a result.

Part Four: You may be innovative today, but tomorrow you're just an incumbent

I’m going to give up on the discussions about banks dragging heels when it comes to the global net soon, but only after a few more pieces of debate.  Today, it’s all about innovation.

Part Five: Please refer to the Digital Department

I have this cheesy line in my presentation about digital is a journey, not a destination.  The destination comment is that most senior bank management think it’s a one-off project, like building a pyramid or a cathedral. You make the investment and it’s done.  That’s not the case.

Part Six: Banking-as-a-Service, five years later

In a final note on the Digital Bank Transformation, I return to a theme I’ve explored a few times (from Banking-as-a-Service to APIs and apps). The core of the model of banking is represented in various ways, but I encapsulate it as three companies in one: a retailer that has customer intimacy; a processor that has operational excellence; and a manufacturer of products.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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