16 October 2015
Sibos 2015: the banking industry should seek collaboration to innovate
If there is one message that resonates after four days of keynotes and panel discussions on various topics on payments on Sibos 2015 in Singapore, it would be this: the rapid emergence of new technologies forces the payment industry to change very rapidly. The central question is how banks can embrace these changes and regain the trust of consumers by working together with innovative incumbents. How can banks reach a cooperative strategy in these difficult times?
Why are these times difficult? The answer is innovation and changing business models. Much of the discussion on innovation in financial services is around ‘disruptive innovation’. For example, new digital products, services and companies in financial services are often pitched as disruptive. But Tim Howell, chief executive at Euroclear, warned that there is a problem of perception, in that too many people in the industry think disruptive innovation is the only definition of the word. “You really should not be killed by the train you see coming. If you sit and do nothing, the threat is existential. Turn a blind eye and it’s disruptive. But what will actually happen is you’re likely to see a lot of innovation and not much disruption. Total disruption is rare. But if you stand on the track, it will get you.”
Should banks be afraid of innovators?
Are the emerging technologies so disruptive that banks should be afraid of them?
According to a panel discussion during Sibos the blockchain, data analytics and mobile payments are among the technologies having the greatest impact on financial services. These technologies are all known at the moment, so it’s not as if banks should be surprised by them. But banks face another problem when new technologies enter the market: it is very difficult make changes happen due to legacy systems. Financial institutions are burdened by business models and technology stacks that are rapidly becoming outdated as consumer technology rapidly advances. Lessons should be learned from the Chinese market where technology firms such as Alibaba and WeChat are rapidly becoming financial services providers, wrote David Bannister. Panellist Christopher Wasden, executive director of the Sorenson Center for Discovery & Innovation at the University of Utah: “They are digital from the ground up and don’t have the legacy infrastructure of financial services.”
It is not very surprising that banks are heaving a hard time in trying to adapt to modern times where change happens so fast. “Regulatory pressures, changing demands from customers and the impact of digital innovators such as Google and Amazon are making innovation an imperative for banks and financial organizations,” wrote Paul Skeldon on BankingTech. “But banks are not very innovative on their own, being risk averse and focused on their balance sheets.”
Maintaining integrity while incorporating technology
Another reason why banks can’t innovate properly is that financial institutions are to provide safety and soundness to customers,” says Ather Williams, head of global transaction services at Bank of America Merrill Lynch (BAML). “Overall, we have to incorporate technology in a responsible way in order to maintain the integrity of the financial system.”
So innovation is needed, but often banks are not really able do it themselves. Banks should seek cooperation with fintechs when it comes to innovative solutions. Ebru Pakcan, global head of payments and receivables at Citi, explained that the path to technological innovation is built on three stones: partner, integrate, collaborate. “If a start-up or other technology company has come up with an idea that can be replicated elsewhere, why do it yourself? It is a waste of resources,” she says. Partnership with financial technology companies can help banks to better address customer needs, she adds.
Partnerships offers multiple advantages
Instead of competing with these fintechs, the collaboration offers banks the opportunity to provide a more modern, agile service to clients. Partnerships also offer fintechs access to a larger, more competitive B2B space. “Through partnerships, acquisitions and incubators financial services firms can not only look to compete but also to thrive in the changing environment,” said Tapiwa Manjengwa, a senior consultant at financial services business and technology consultants Capco.
One area where this is possible, is the implementation of real-time payments or instant payments. This was a very important topic at Sibos 2015. While definitions of real-time payments differ, there is no doubt that 24×7, 365 days a year payments will become the norm around the world. There is no longer an issue of whether to offer real-time payments, but rather how to offer them, according to the panelists in the “Real time: how fast is too fast?” session at Sibos. And now the demand has stepped up a gear from peer to peer payments to the corporate world, according to BankingTech.
One standard with various dialects
Many of those implementing real-time payments infrastructures are at different stages of development, but are keeping interoperability at the front of their considerations. That is necessary because every country has their own ‘dialect’ of this standard. International compatibility is particularly valuable to multinational banks that have to connect to multiple market infrastructures. The ISO 20022 messaging standard was identified by all as the most appropriate technical standard for real-time payments and it is unlikely that another would supersede it but issues remain with implementation, according to the article ‘Keeping it real‘. Not surprisingly, ISO 20022 was another very important topic during Sibos.
In conclusion, Sibos 2015 was all about new technology and how the industry should cope with innovation. The answer lies in seeking collaboration with fintechs. One of the areas where collaboration should have a great impact is the trend of real-time payments. The underlying structure making real-time or instants payments possible, is the ISO 20022 messaging standard. Unfortunately, every country is using their own interpretation of the ISO 20022 standard, so that the next step will be to connect all the various ‘dialects’ together so cross-border and instant payments will be a reality.
- Business developments