Leonard H Schrank, CEO of Swift, talks to Frances Maguire about the challenges that lie ahead for his company and its member banks in growing business.
Q Can you outline the thinking behind this year’s Sibos theme: “Time for growth?” Has Swift recorded first signs of growth so far this year?
A It’s time for growth but built upon last year’s Sibos theme “New realities”. The new realities haven’t gone away – it’s a dangerous world out there, we have to restore trust in the industry, worry about resilience – it’s a new world. What Swift does in terms of resilience is much more appreciated now, whereas in the dotcom, pre-9/11 years it was something that was very much taken for granted.
But at the same time it’s a much more positive year from a business perspective. Most economies are starting to grow now, interest rates are rising (which is a sign that central banks are trying to make sure growth doesn’t overheat), many of our members are reporting record profits and, although this summer the securities market slowed up a bit, markets are strong. Things are starting to grow again.
It is already a much more robust year than last. There is still a permanent focus on being more efficient, and although there is, naturally, greater caution, it’s back to business. It’s time for growth, but with prudence.
Q What levels of migration to SwiftNet have now been achieved? What will be in place by the year-end?
A In 2003, we got off to a slow start, as we had to delay the start of migration due to some quality problems. We had reliability issues and had to delay for a few months to fix these engineering problems with the network and make sure it was absolutely tip-top. But we have caught up and currently have 85% of end users, and 68% of the traffic has migrated to SwiftNet.
What this says is that the smaller companies are doing better than the big, complicated, global institutions, as we expected. We expect, by the end of this year, the percentage of end-users on SwiftNet to be in the high 90s – but it is too early in the year to claim success. There will probably be some stragglers and they will start paying penalties from the fourth quarter of this year. It will be close and we have to keep our eye on the migration ball but I am very optimistic, based on the figures we have now.
Q Last year you said you were looking at ways to help your banking members cut costs by using Swift less and more efficiently. How has this been achieved in the light of a new daily peak of 10 million transactions?
A When people ask me about Swift, I say the worse news we can give our board is that we are making too much money. What that would mean is that either our prices are too high or we
didn’t invest enough. But it gives us an opportunity for a rebate, and it is most likely that there will be another rebate this year, which is sign that it has been another good year for Swift.
The fundamental business model is the lower our prices, the more traffic across the network; and the more traffic, the lower our unit costs. We know that there is a huge amount of Swiftable business sitting with our current members because they still have legacy systems, proprietary networks and messaging that could be migrated to Swift. Therefore this business model is here for easily another decade.
However, what I said last year – especially when banks need to cut costs – is that we don’t need a sales force out there selling pots and pans to our members. Our members were under a lot of stress to keep their costs flat and here is Swift trying to grow, because that’s our business model. So even if we build that up and their price per message goes down, we still need to help them be more efficient, even if it means Swift stays flat.
Of course, in the long run, they will reward us for that relationship. They’ll put more traffic on to Swift, so we have to help them use the system more efficiently. That said, all four sectors are up. Payment, year to date, is 13% up despite the fact that this is a business that a few years ago, in the press, was declared mature and flat. This is a robust business that keeps surprising us and we have a strategy for growth.
Securities is a little soft, it’s up 12% year to date. It was riding high at 18% but it slowed up this summer. Treasury is 16% up year to date. This is in the year of continuous linked settlement (CLS). It was predicted that CLS would mean treasury traffic would shrink, as CLS would change the dynamic. And then, the most important indicator that it is time for growth, is that trade is up 5%. And this is after several years of being flat and negative. This is a very important indicator that the world’s economy is starting to tick over, as it all starts with trade.
Q One way to increase traffic is to increase end-users. Swift says it wants to grow from 7000 to 20,000. How are you going to do this?
A Organically. We are growing by about 500 firms a year. We estimate that there are well over 100,000 financial institutions out there that aren’t Swift members, so why not reach out to the largest of that group to try and achieve this target? But we realise that Swift’s current product offering is either too complex or too costly for smaller financial institutions to connect directly to Swift.
There are three ways to increase our reach. One is geographically, by which I mean Asia. We have just visited Japan, China and Hong Kong, and they are all growing in the 2% to 30% range.
Then there is institutional reach. By not directly connecting to Swift, but through our members as ‘concentrators’ that would talk to the smaller institutions, we turn the old faxes and proprietary communications into Swiftable messages. This would give the concentrating institutions new opportunities to enhance their relationships with smaller financial institutions by providing back-office services that leverage their SwiftNet expertise and scale.
And we’re coming up with a whole range of services to help the concentrators work more effectively with the smaller institutions to enable greater transparency and better straight though processing. Members sustain the relationship and develop new business, the smaller users derive the benefits of rules, standards and transparency by joining the Swift community indirectly and we get increased message traffic. It’s win, win, win.
And then there is corporate reach – beyond financial institutions, Swift has also been promoting the use of Member Administered Closed User Groups (MACUGs) to enable members to extend the benefits of Swift to corporates. We’ve learned that there are a number of administrative and logistical issues getting in the way of this really taking off and we are dealing with those. This idea is another way to help members grow.
Q Swift made a clear decision last year to exit the B2B area. How does the Trade Services Utility fit into this plan?
A When we created Bolero, we took a large step. We have a philosophy of increasing business by taking small, adjacent steps from the core. With Bolero we went many steps away from our core business – we set up a separate company, they were going to deal with corporates, they were very independent. And, basically, I think they made a fundamental mistake in that they tried to re-engineer the entire supply chain.
To use Bolero you had to rewrite all your back-office systems, so Bolero suffered as many new companies do. So what we’re doing now is working with the Trade Services Advisory Group and the new Bolero management, and we are taking a much smaller step. We’re leaving the old supply systems in place and instead we’re overlaying a very basic approach that will get the banks back in the game.
The banks are there to help to finance trades – they help the buyer and the seller – and to do that they have to know where the trade is. But to do that, there are messages sent between the parties of the trade and they need standards.
The Trade Service Utility is being developed to handle this but you don’t have to change any of the old systems. It is bank-friendly, it is building on the current systems and it lets the financial institution provide more services to the buyers and sellers. There is some matching involved, messaging, standards and Swift messages. Bolero will provide the Trade Services Utility software that will plug-and-play with SwiftNet. It is not Swift trying to get into the B2B space – Bolero will do that. We are simply expanding our role into the banks’ space.
Q Is Swift losing out to other networks in the securities arena? How is it distinguishing itself from competing networks?
A Securities is an important part of Swift’s business – more than one-third of total traffic. All the counterparties can now be members of Swift, including the brokers and the fund managers. There is a lot going on in securities beyond just the clearing and settlement: we now have data providers connecting to Swift; corporate actions can be distributed through Swift much more effectively; we have substantially reduced the cost of reporting; FIX is going to be transaction-priced not message-priced; and we are working closely with Omgeo.
Swift is continuing to invest in securities, and there is a lot that can be done to save this industry tens of millions – perhaps billions – of dollars in inefficiency and cost. This will be discussed extensively at this year’s Sibos.
There is so much that the industry can do to improve the service and cost to the end user and Swift has an important role to play here. It does not have the entire solution, but the more Swift standards are adopted, and the more people use SwiftNet, the less the cost there will be for everybody.
