This week the Finanser talks with Gottfried Leibbrandt, CEO of SWIFT about cryptocurrencies, bitcoin, Ripple and all things blockchain.
How do you see value exchange on the internet changing the game for banks and for infrastructures like SWIFT?
Let’s take a step back so that I can give you my overall perspective. I always like to make a distinction between cryptocurrencies and blockchain technology. I’ve been involved with cryptocurrencies since quite early on. I found the mathematics behind it fascinating and delved into the blockchain mechanics, which is a very intriguing idea. I’ve used bitcoin, and I have to say, as a user, it is a fantastic user experience. It really is nifty that with a push of a button you can send real value to somebody else. I urge everybody I speak about it to actually download a wallet and do it, because that helps you understand what it’s about.
Now having said that, I am not sure I believe in the notion of currencies that are not backed by governments. Money is very closely related to taxation and governments. I can see bitcoin as a phenomenon for low-end transactions – exchanging low values. But I have a hard time to see something like bitcoin replacing large value transactions, or being used as a store of value on a big scale. The whole outstanding value of bitcoin is just a couple of billion dollars and the daily volume, if I’m not mistaken, is in the order of $50-100 million.
The volumes that are going through the global financial system are about 100,000 times that number. That’s the order of magnitude of what happens today, and I’m not sure I can see that being replaced by Bitcoin on a meaningful scale. That’s not to say that it won’t be there in its niche.
Another important thing to realise is that people claim it’s frictionless, but it’s not. If you have a look at the mining costs being paid out to bitcoin miners right now, it’s about 1% of the total transaction volume. That’s not negligible. It may become less as the transaction volume grows, but it will never be zero. Therefore I have yet to be convinced that bitcoin is completely frictionless.
Having said that, I think the whole notion of distributed ledger of doing things peer-to-peer without something in the centre is fascinating, and that’s absolutely something we are looking at. Now does that mean that I think banks will be completely bypassed? There I’m less convinced. Back in 2000 I remember everybody saying, “Well, banks will become dinosaurs and will be taken over by pure-play internet banks, telephone banks and new startups”.
If you look back at what happened 15 years ago, all of the technology has been absorbed by banks. They have not stood still. They have developed mobile banking. They have developed phone banks. They have developed e-banking solutions and all of that. Actually, the only real pure-play that I can think of that has made it is PayPal, which admittedly is a good success. The banks have survived, and banks have done quite an impressive transformation of going from a branch-based system to an internet-based system.
That’s not to say that it will happen again the same way with mobile and blockchain. I think the challenge is for banks to keep up with this. They have a few things in their favour here.
One of them is infrastructures. Infrastructures benefit from network effects, and that tend to be persistent and difficult to displace. It’s not that easy to build new infrastructures or replace existing ones, unless the existing infrastructures have failings. As such, it can be better to work with them, than to try and build your own. My favourite example is Apple Pay. Apple Pay did the smart thing and leveraged the credit card technology and networks that were out there. Yes, Apple will capture part of the value created, so there’s some transfer of value. But the banks and their infrastructures are still playing a large role in this new set-up. So infrastructures such as SWIFT have a few things in their favour.
The other thing banks have in their favour is that they know how to deal with high value exchange – with credit and market risk, capitalisation, and the frameworks as well as the regulation that go around it. There is much discussion that blockchain/share ledger, and in particular smart contracts could offer real DVP (delivery versus payment) and thus take some of this risk out of the system, but that remains to be proven. Meanwhile, in high-value transaction systems, as in large securities transactions or large foreign exchange transactions, you do need to worry about default risk and about collateral and the capital against it. Regulators certainly do worry about it.
So I’m not so sure that banks are going to be completely cut out of the loop, as long as they play it smartly. We can get into another interesting example: peer-to-peer lending. Peer-to-peer lending is a very interesting phenomenon. The default risk sits squarely with the lenders, not with the intermediary. It’s different from a bank deposit, which the bank protects against defaults. The worry here is that defaults tend to go through cycles. For a while, it goes very well and you get high returns. We will have to see what happens in a downturn when defaults go up and lenders may panic.
Clearly there is an opportunity here for banks. Maybe they can use the peer-to peer technology themselves and combine it with insuring peer-to-peer lenders against all or some of these defaults. So again, I think banks will change the way they operate rather than become extinct. There’s a big potential for banks to absorb the technology and put better value to their consumers.
I want to come back to your opening discussion of bitcoin. The libertarian vision is a world of money without government and regulation. You dismiss that, but the libertarians say you cannot regulate the exchange of value on the internet, because the internet is global. Do you believe that will change?
I think that’s complete baloney. People said you couldn’t tax things on the internet, because the internet is global. I think governments have made pretty good progress in how to tax internet commerce. You can tax it in the country of the receiver or in the country of the sender of the goods – or both. People have found ways to deal with that so to say you can’t regulate things on the internet, I just don’t buy that. I firmly believe that where there is value exchange, it will be regulated and it will be taxed. That’s a whole framework we’ve had in place for thousands of years, and I don’t see that being turned on its head by this technology. I think everybody realizes that regulation and taxation is needed.
And the whole idea of money without governments? It’s interesting to look back in history, where successful examples of money not backed or controlled by governments are very scarce. There’s a very compelling case to be made that money has always been very closely been linked to governments and taxation. So no, I cannot believe in the libertarian view.
Maybe one more point on the libertarian view and the argument financial markets are best left alone with light or no regulation. We went through massive deregulation in the late 1990’s and early 2000’s, and then witnessed the global financial crisis.
What about blockchain technology creating a friction between the old financial networks and the new ones. We have SWIFT, Visa, MasterCard that were built by banks for the pre-internet age and now we have Ripple, Apple Pay, Klarna and other things that are creating this new friction, because they’ve been built for the new age. Do you see the old structures, like SWIFT, being challenged by these new capabilities or will you evolve with them?
Yes, certainly I see all of us being challenged. Absolutely. I think these things have the potential to fundamentally change how we do things with money and banks have to worry about how to absorb and leverage it. That applies to SWIFT as well. I think the right way to look at it is, again, how Apple Pay was conceived, which is a combination of the old and the new. I hope the same is true for SWIFT. What we do for our member banks is allow them to exchange value between themselves and, if there are newer technologies, there are two options: either we leverage that to provide even better value to our banks, or there’s no need for us anymore. And if there is no need for us anymore, then we should stop what we are doing and return the money to our owners. But I firmly believe we can leverage these new technologies to provide even better value. We’re looking at the blockchain technology, keeping a very close eye on it. If there is a way to improve the service we provide to the banks with that new technology, then we will use it. We are absolutely on it.
Does that mean, in five to ten years, most of SWIFT’s activity will be conducted on the blockchain?
I’m not there yet. I haven’t got my head enough around it to see how that move plays out. I think there’s also another interesting angle to this is, as it’s not just the technology layer. What we do is message exchange between banks. If you look at the cost of a cross-border transaction for a consumer, a very small fraction of that is SWIFT. A SWIFT message costs about $0.04. A cross-border transaction can cost anywhere in the order of $5 to $50, depending on which bank you use. So yes, we’re taking a look at these technologies – but I think there’s also room for the banks to look at the whole correspondent banking value chain, and see if there are ways to do that more efficiently. Is there a way to change the business layers of correspondent banking with this technology, and thereby reduce the cost and the friction to the consumer? That is something we are working with the banks to explore.
If we’re looking at where you see priorities of what your constituency are discussing, the banks, how do they see technology changing things? For example, Know Your Client (KYC) processes are getting very interesting.
Yes, they are. Before you can start creating direct relationships or direct exchange between banks that do not have a commercial relationship with each other, they need to build trust; how will they do that? In cross-border banking today, you’re dealing between banks that have a relationship with each other. If you start to bypass that, as Ripple does, then you need to worry about KYC between the banks. Do I know what bank I’m dealing with and what transactions I’m getting in, etc.? I’m not saying it’s unsolvable, but it is a problem that needs to be addressed.
KYC is one of the challenges but there are others. For example, how to provide value on a mobile platform and be visible to consumers. There are some interesting challenges there. I believe that regulations like Europe’s PSD2, which provides third parties with direct access to bank accounts. It allows other people to turn the bank into a utility that’s invisible to the consumer. This is not new though. We had the same discussion fifteen years ago when Tesco Bank launched and used one of the big banks as their back office. That same dynamic is going to be played out again.
How can banks continue to provide value in that new environment?
I would submit that there are many ways for banks to do this. One is leveraging data. There’s a whole discussion about Google now knowing a lot of data about people but, if you think about it, banks have an incredible amount of data about people too. The question is: can they use that to the advantage of both themselves and the consumer? Can they do that in a way that the consumer accepts, from a data privacy perspective?
Everyone keeps talking about Google and Amazon, Facebook, being the big threats to banks but I don’t agree. I think it’s far more that banks are a threat to themselves if they don’t move fast enough to take on board the challenges of data analytics and the demands for change.
To be fair to banks, I think they are actually dealing with those demands for change. Most banks now do data analytics. They have that expertise or are developing it. Most of them ‘get it’.
A big challenge is data privacy regulation. What are you allowed to do with that data? We have seen some high profile experiments by banks backfire. For example in the Netherlands, where the banks proposed to use anonymised debit card transaction data for marketing purposes, allowing consumer goods companies to mine that data for marketing purposes. There was a big media backlash and they ended up cancelling the idea. It would be very interesting to explore the line between when data can be used in a way that consumers accept and see the value of, and when data usage constitutes such an invasion of privacy that consumers will not support it.
We have talked a lot about the consumer side of things but there’s quite a lot happening in the corporate world too, in terms of technology changing, bank to corporate relationships. Is there anything you see there that is noteworthy?
Yes, I think a couple of things. One is you see an increased acceptance of multibanking and of platforms that allow corporate treasurers to access multiple banks in a single way. We’ve been active in that field as SWIFT, with single sign-on and a single messaging standard to provide a single interface to the banks with corporate connectivity. I think you see renewed discussions about trade, where the old documentation based world of trade is stable. Open account has been growing, and people are finding ways to combine the best of these two approaches with, for example, the BPO (bank payment obligation).
You will see continued growth of direct information exchange between corporates, with systems that enable direct information exchange between corporates and increased automation of supply chains. That’s a rapidly changing field. Corporates are changing the way they exchange information with each other, and that creates challenges for banks being disintermediated and opportunities for banks in terms of providing finances to smooth these trade and exchanges.
If you look at the last decade of change you’ve seen with SWIFT [Gottfried joined the company in 2005], maybe you could summarize what those changes have been and what will be the big changes in the next ten years?
Let me see what’s changed. The last ten years have seen three big ones. First, the global financial crisis. It’s very hard to deny the impact of that one. The second big change is regulation. Governments are using the system as a political tool for collecting tax, claiming sovereignty over taxation data, clamping down on tax avoidance and tax evasion and limiting both terrorist financing and money laundering. All of that comes to mind. The third big trend is technology, and I’ll put all the cyber activity in that one as well.
If I look forward, then technology can only be moving to impact banking and SWIFT more in the next ten years than in it has in the past ten. The whole discussion we have just had is a huge challenge and agenda item for banks. Disruptive technologies, cyber activities, how to protect data and how to protect assets in that new world.
A second big challenge is the geopolitical shift, and I think the move to Asia will continue. That is not to be underestimated. The whole discussion about reserve currencies will continue and there will be new financial centres and new financial flows.
About Gottfried Leibbrandt
Gottfried Leibbrandt became CEO of SWIFT in July 2012. He joined SWIFT in 2005 to focus on the development of the SWIFT2010 strategy. Upon completion of the strategy, he was appointed Head of Standards, and then in 2007 he was promoted to Head of Marketing. Gottfried was a key architect behind the SWIFT2015 strategy, which is now nearing its successful completion. Prior to joining SWIFT, Gottfried worked at McKinsey & Company for 18 years.
SWIFT is a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. More than 10,800 financial institutions and corporations in over 200 countries trust SWIFT to exchange millions of standardised financial messages. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity.
SWIFT’s role is two-fold. The company provides the proprietary communications platform, products and services that allow customers to connect and exchange financial information securely and reliably. They also act as the catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual interest.
SWIFT enables its customers to automate and standardise financial transactions, thereby lowering costs, reducing operational risk and eliminating inefficiencies from their operations. SWIFT has its headquarters in Belgium and has offices in the world's major financial centres and developing markets.
SWIFT does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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...