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ArchiveOctober 1 2006

Is Swift living in the past?

Technology has been transformed in the three decades since Swift was launched. Can the network drag itself into the modern era, as its users demand, or is it destined to become a relic of a bygone age? Dan Barnes investigates.
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You need to be older than 50 to remember the pre-Swift era in banking. Entire generations of bankers have grown up regarding “a safe and secure messaging system” as a basic infrastructure that they never needed to worry about. Starting out in 1973 with just 239 members in 15 countries, today Swift (the Society for Worldwide Interbank Financial Telecommunications, to give it its full title) connects 7500 organisations that send more than 11 million messages a day.

But as with every piece of infrastructure, the Swift network faces challenges from technological change. The arrival of the internet, as well as the services offered by advanced telecoms companies, means that if bankers were building Swift from scratch today they would do it entirely differently. Can Swift adapt to this new era – or is it in danger of becoming a monument to the past, just like the statues on Easter Island?

Ancient model

Technology isn’t the only issue. Swift’s corporate governance is also based on a 1970s model. While most industry-owned utilities have transformed themselves into public companies with profit-driven managements, Swift has stayed true to its original format.

Andrea Klein, chief marketing officer at identity solutions provider IdenTrust, warns that Swift could end up being “the last consortium-based, member-based company in the industry – and I don’t believe they have a strong enough value proposition to exist like that”.

“[Swift] has to change,” she adds. “The internet is getting more and more secure, thanks to growing numbers of technology developments that allow it to be increasingly robust. By going up against that constantly improving network, the Swift value proposition is lowered.”

Swift has made efforts to change. A key move was in 2004, when it migrated to internet protocol network SWIFTNet, which brought members the advantages of internet communications but without the cost savings. Critics say that in any case, Swift was too slow to embrace the internet and there are concerns that, under the current structure, it will lag behind future technological breakthroughs.

Its other impetus has been in trying to expand into new geographies (emerging markets) and industries (corporates and securities companies). While everyone agrees that to stay relevant Swift must move into new areas, critics argue that the new interest groups this will involve will slow down decision-making even further. Unless it changes its governance structure, Swift really could get stuck in the past.

Much now will depend on who is appointed to take over the CEO role from Leonard Schrank, who has held the position since 1983 and intends to retire in 2007. The CEO runs the day-to-day management of Swift, together with a team of executives, and Mr Schrank is only Swift’s second, having taken over from Carl Reuterskiöld, who sadly died this year. Will the 25-member board pick another Swift career executive like Mr Schrank (the current head of the banking industry division, Lázaro Campos, is rumoured to be one contender) or will it go outside the organisation to bring in some fresh thinking? As the board is elected by the 2299 members, mostly bankers, the outcome may be somewhat conservative. Bankers can be resistant to change and a key proposition for taking Swift forward – by extending the service to corporates – has provoked fears that banks could end up being disintermediated.

Yet some of the sharpest criticisms of Swift come from within the industry. Two years ago at Swift’s annual meeting, Sibos, in Atlanta, Heidi Miller, treasury and securities services executive at JPMorgan, caused a storm when she asked: “If we can send a secure message to any company over the internet, why should we pay Swift to do it for us?” Her concerns were based on her view that much of the technology used in banking these days stems from a former era, “1970s mainframe technology”.

The Swift model is slow to change. For example, corporate customers have been targeted as potential Swift users for almost 20 years and yet this is still talked about as if it is a new initiative.

On the technology front, and over the same time period, one of Swift’s unique selling points – the provision of a global network – has become a commoditised selling point. Some would argue Swift acknowledged this when it outsourced the network to provider Global Crossing in 2001, a year before the latter filed for bankruptcy protection. Swift now has an outsourcing deal with multiple suppliers.

To keep its users satisfied, Swift must keep up with, or outperform, alternative commercial offerings. But if it succeeds in increasing its user/member network by expanding the range of organisations it represents, it will almost inevitably experience a slowdown in decision-making and delivery, as a broader range of opinions will require more time to reach common ground. Unless, that is, it can come up with a radical new structure.

Multiple factors

Guy Eden, solutions director at SunGard Business Integration, says: “Twenty years ago, if you wanted a new file format you would form a working group, get some of the biggest banks involved and decide on a format. The problem now is not that Swift is larger but that it is trying to run processes that involve corporates, processes that involve larger numbers of members – it has to follow standards set down by the EU, for example – and it has to take all these factors into account while carrying out more complicated tasks.”

In addition to full members, there are also sub-member organisations (over 50% owned by a member) and ‘participant’ organisations that account for corporates, money brokers and fund administrators along with others that use Swift but are not eligible for membership. This brings the total number of organisations using Swift to 7941.

For Alec Nacamuli, global payments executive at IBM, this lack of speed is entirely due to the inability of participants to form agreements rather than the enormity of the challenges that face the organisation. “The decision-making process is not rapid, as we know. The issue of corporates has been running for 20 years. The question of whether Swift can respond quickly enough will be determined by the banks’ and the corporates’ abilities to cooperate so that joining brings real benefits to enterprises without the banks feeling the threat of disintermediation.”

Chris Skinner, founder of professional network Balatro and a contributing editor to The Banker, says: “Swift is primarily a bank-to-bank network. There has been increasing inclusion of corporates but that has only really happened in the past 18 months. Prior to that, I think that the banks were very anti corporate inclusion because of the threat they perceived.”

Moving away from roots

In an industry in which there is often a reluctance to criticise, Swift is one organisation that everyone has an opinion about. “Swift is expanding further and further from its core business – that much is true,” says Jerry Norton, director, strategy, global financial services at IT company LogicaCMG. “That is stretching the ability of Swift to make changes and effect the changes that are needed in the marketplace. Its agenda is getting bigger and further away from its core banking roots. For example, the move into securities was successful in parts but less successful in others because banks have less sway over the securities community.”

Nick Viner, senior vice-president at Boston Consulting, Group believes that the community must question what it wants to achieve. “I’m interested in [Swift’s] stakeholders. Who is this really for and how much consensus do you need? The more you want to get everyone on board the longer it takes, of course. The more you want the 10 players who represent 70% of your volume to really drive things – overtly or covertly – the more quickly you can do things.”

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Former Swift employee Tony Kirby of consultancy Accenture notes that because Swift works in its current members’ best interests, it can fail to appeal to potential users. He suggests that a restructuring could occur in the division of industry-specific tasks and control: “If you see Swift as a core messaging network today, there might be a whole series of mantles that you can craft on to Swift: a corporate mantle for corporate payments; appropriate mantles for activities as diverse as alternative investments, supply chain management or insurance. You could envisage a family of Swifts with secure messaging at its core, and lots of information exchanges in the mantle and permissioning decided by the core for control purposes. That way you could have the appropriate governance for each mantle.”

Tony Kirby, Accenture: suggests that a restructuring of Swift could occur in the division of industry-specific tasks and controlHowever, if the combination of industries, coupled with the size of membership, proves too unwieldy a decision-making body, it may be time to rethink the ownership model entirely. Mr Viner says there are comparisons to be made with similar industry bodies. “When I think of Swift, I also look at analogous organisations such as Visa and MasterCard – organisations managing networks and multi-bank functionality,” he says. “It is interesting to contrast Swift with other organisations such as Voca [a payments infrastructure body], and to question whether it couldn’t benefit from a similar change of model.” At Voca, CEO Martin Wilson says that changing an organisation’s governance structure can improve its ability to react to the market. “You can take an organisation with bank membership and turn it around – Voca is an example of that. Voca in its former life [BACS] was a bank-owned, back-office ACH [automated clearing house]. We have the same shareholders but what they are now focused on is the commercial success of Voca.” He continues: “We have actually ended up with a very agile, commercially driven organisation that serves its customers better.” Across the industry, similar bodies are changing their governance structure.

Ms Klein of IdenTrust believes her own organisation is one example. “We see ourselves as similar to Swift in many ways, in that we have worked on policies and guidelines and legal infrastructure that is interoperable globally. We are trying to connect that with the operational and technology aspects of identity management.”

If the trend continues, she thinks it may leave Swift as the last body with a consortium model. “You can look at MasterCard’s initial public offering (IPO), one can assume that Visa is looking at that model, we [Identrust] have moved to an entrepreneurial model and, when we get big enough, theoretically we would IPO. So Swift would be the last consortium-based, member-based company in the industry and I don’t believe they have a strong enough value proposition to exist like that.”

Growth strategy

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Swift executives maintain that they already have a robust growth strategy. Mr Campos, head of the banking industry division, stresses the importance of the push into emerging markets. “We have been investing in the BRIC [Brazil, Russia, India, China] group; for us that is really the developing economy. We have been actively investing in Asia for many years. It is important that we are able to be local in Asia, and not seen as a foreign organisation but as a global organisation.

Lázaro Campos, Swift: stresses the importance of the push into markets such as the BRIC group

“Swift is seen as being part and parcel of the payments market – we are a payments solutions provider par excellence – we are part of the industry fabric,” he adds.

Every five years Swift issues a document outlining its future strategy. The four strategic thrusts outlined in the Swift executive report SWIFT2010: Achieve more together, issued in May 2006, are

  • Expand client reach to corporates and enable end-to-end solutions.

 

  • Support European integration.

 

  • Capture the substantial potential of emerging markets.

 

  • Improve automation and standardisation in securities and alternative investments.

The aims are sound – the issue is how readily they can be achieved. Another major challenge facing Swift is to retain its reputation for total security following the revelations that data had been supplied to the US authorities to assist in terrorist investigations. The New York Times reported in June this year that, following the issuance of subpoenas from the US Treasury Department, Office of Foreign Assets Control after the 11th September 2001, Swift supplied the department with data that was analysed for the purpose of identifying potential participants in terrorist activity. Concerns have been raised as it appears that a number of governments, such as the European Parliament, and some Swift users were unaware of this arrangement. Mr Campos believes that Swift had little choice in the matter and that it was only carrying out its legal duty, but that protection of its users was a prime consideration. “Swift is not above the law,” he says. “When presented with a lawful subpoena, we need to comply just like everybody else. In our contract with our customers, that is our user handbook, we cater for this eventuality. Our compliance policy states that the security and confidentiality of our customers’ data is of the utmost importance, however, in certain circumstances we may be compelled to provide information to authorities in support of a criminal investigation.”

Reassurance needed on data

All the same users, central banks and governments will need to be reassured that such a situation will not reoccur, and work is currently being undertaken to ensure the situation is fully discussed with users.

“We are explaining to our customers what we have done and the type of restrictions we have imposed. We’ve actually negotiated a very strict and elaborate scheme with the authorities – nobody has done that before. We make sure that only information relevant to ongoing terrorism investigations is revealed; it is not for economic espionage, it is not for tax evasion. Many constraints have been put in place and we are sharing these with our customers,” explains Mr Campos.

There are, however, real concerns being voiced internationally that the situation could be repeated, with some discussing establishment of regional controls over the network. Mr Nacamuli of IBM believes that more information will have to come out before it is possible to gauge the industry reaction properly but that some types of regional reaction could be possible. “One of the areas that it might damage is in [Swift’s] quest for domestic traffic – an area where it has been successful in attracting high-value payments. You could have some geographies that say: ‘I don’t want my domestic traffic to fall outside of my control.’ It all depends on the information that has been released and whether it has been shown to people who they don’t believe had a right to look at it.”

Confidence in reputation

For the moment, Mr Campos sees no signs of reputational damage: “Will this take business away? Difficult to say. We see no signs of that at this point. We are in the process of signing a very important domestic deal in Asia Pacific.”

However, Mr Skinner warns that the issue must be resolved to the satisfaction of all concerned if it is to retain the important value proposition of trust. “The governance of Swift is going to become a real, real, real question. If Swift becomes a puppet of governments, then its credibility has disappeared,” he maintains.

The keenest argument for keeping the status quo at Swift is that other models could threaten its role as a standards setter. There are fears that if Swift’s detractors decided to go it alone, the advantages of a single industry standard could be lost and Swift’s growth prospects limited. There is also the issue of creating a common standard for messaging between corporates and banks.

Elizabeth Ghekiere, global relationship manager for Swift at Bank of America, says: “Taking a global approach to standards is Swift’s strength. Corporates want one communication channel to their banks and banks want standard data from their customers, so resolving this could be a win-win situation.” As a core role, setting standards must be centralised, she says. “The biggest volume of messages come from global companies – therefore standards must be global.”

Mr Campos agrees. “When you have the Swift community, the technology platform and the ability to set standards – those three combined give Swift’s value proposition real strength. If we dealt with standards in isolation, doing nothing more than issuing standards, we would not exist any more.”

An alternative view is that competition could provide an impetus to change.

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Mark Garvin, chief administrative officer at JPMorgan treasury and securities services international region, and chairman of CLS, acknowledges the need to look at Swift’s role and at a potential role for commercial organisations.“Inevitably with a co-operative venture, trade-offs have to be made. In any of the mutually owned and user-owned market infrastructures there will be a series of trade-offs, so this is a pertinent point but not just for Swift,” he says. “Swift has its own strengths and weaknesses and certain challenges, which, by its own admission, include accelerating time to market. Competition would provide an impetus to accelerate delivery, but what would these alternatives look like?”

Mark Garvin, JPMorgan: Swift performs its core competencies well

Unique industry forum

Mr Garvin is keen that the issue is discussed in a balanced manner, without putting the very positive roles of Swift into question, noting, for example, that “Swift currently provides an industry forum, a venue that you don’t get elsewhere”. He adds: “The industry does not want to pay three or four times for an initiative, it would rather have a one-stop-shop. If you go back to Swift’s core competencies – such as standards setting – it performs them incredibly well and it should retain those without question.”

With challenges on several fronts, Swift’s new CEO will have some tough decisions to make. If Swift wishes to talk to other industries it must have some ownership by other industries. It would do well to look for a candidate with a fresh business perspective. Ms Ghekiere believes this change will be an opportunity to improve the leverage of Swift’s products and services: “In the midst of this major organisational shift, the new CEO will bring focus to the company and its business model. I don’t anticipate major changes, just a Swift that becomes more focused and efficient.”

Mr Nacamuli says that, ultimately, the appointment will signal the future strategy that Swift has chosen to adopt. “The impact that the new CEO can have will be determined by the individual chosen, and by the brief the board gives him. What do the board want the company to become? That will determine the profile of the person they choose. They may bring in someone new to this area, who can apply lessons from other industries. We shall have to see.”

Not only will the new CEO require the knowledge to take Swift forward, he or she will need to command respect across industries and have the strength to manage change. It may prove to be one of the key appointments in today’s finance industry, if Swift is not to get stuck in the past.

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