Banks stand to lose huge amounts of profit once real-time banking is implemented, but they can soften the blow with global processing, says

John Bertrand.

Banks are facing a raft of challenges – new regulations, lower margins and increasingly sophisticated customers – while, at the same time, relying on an internal sea of legacy computers and business practices. Could this be the end of banking as we know it?

Luckily, help is not far away. For the first time, there is a commercially available technical infrastructure that enables a bank to offer products anywhere it wants without reproducing itself in its entirety. A bank can now move into another geography without dragging along its IT infrastructure, and be productive within 90 days.

Historically, a bank would create a mini head office operational facility to support its customers moving internationally and/or when offering new products such as credit cards. That has all changed. The new technology infrastructure started with the internet, and this year SWIFT has gone live with its own internet, SWIFTNet, to more than 7500 banks. Real-time banking, with new processing efficiencies, has arrived.

Moving money

The European bank payments processing areas are facing massive changes to meet new EU directives, such as the Single European Payment Area. Banks enjoy their use of funds, especially in the UK, where efficiencies are not passed on to the community. In the UK, banks take three working days to move money from one bank account to another. But technology allows money to be moved in seconds and, given an average £11bn-a-day movement, each day not credited to an account represents £522m in float (income) to the UK banks. Even allowing for a one-day standard, the UK banking sector could lose £1bn a year in income forever.

Assuming the float has to end in 2007, banks would need a different approach. Further help is at hand with new message standards being established. The increasing use of service-orientated architectures with their component-based functionality is making it easier for banks to offer one solution globally. This is a complete shift in banking – until now, banks have been organised in a series of silos.

Global processing enables a bank to process transactions from anywhere in the world in a single location within seconds. Bank clients’ access to the information on the account is available electronically. The account information can be posted instantly and, with SWIFTNet, customers’ other bank account activities can be shown as well. This is a substantial change for banks.

Trading compliance

Global compliance is the new challenge for the treasury and capital markets. In Europe, banks are bracing themselves for the Markets in Financial Instruments Directive (MiFID). A 17-point policy framework aims to create transparency from the pre-deal stage through order execution, regulatory reporting and pricing of similar instruments. The goal is to create an orderly and fair market. Every system in a bank involved in trading has to be included to ensure compliance.

Because banks’ processing developed in a series of silos, many banks have multiple systems and processing which do virtually the same thing. The international banks acquired local core banking systems to support their geographic activities. For example, Standard Chartered has many local banking systems worldwide as well as software built in-house.

Similarly, banks that acquired other banks often left the systems to co-exist rather than eliminating the duplication. One exception was Royal Bank of Scotland’s (RBS) acquisition of NatWest. RBS dramatically lowered the cost base of the combined entirety by quickly consolidating processes and computer systems.

Global functions

Each function in banking needs to be turned into a global process. Payments are probably the most emotive of functions that a bank carries out – they have been called the lifeblood of banks and a bank’s DNA. Every bank makes payments. The question is: can banks afford to manage the whole process? The answer is tied to volumes rather than current behaviour.

Politically, banks are being forced to move towards same-day payment. In Europe, the new euro payment world will earn banks less money from float, currency exchanges and transaction fees. Hence the need to hub payments becomes an economic reality. In addition, the global processing payment hub can provide many of the new functions that banks and their clients demand. These include corporate treasury workstations, reference data, reconciliation and regulatory reporting.

Global processing can also be attractive in areas such as trade finance and correspondent banking. The latter was highly profitable for a long time because the volumes were small and there was no time pressure on the transaction. Corresponding banking can now make a return by offering real-time functionality across its centres of excellence. ABN-AMRO, for example, offers its Trade Finance Centre of Excellence to other banks.

The changes needed to create and operate a hub-and-spoke service can come from both banks and technology suppliers. A number of banks are moving into global processing for themselves, including HSBC, which aims to have distinct areas of expertise across its worldwide operations; Bank of India hubbing its 26 international branches out of Singapore; and Deutsche Bank with its central FX reconciliation.

Existing software suppliers are wrestling with global processing with various degrees of success. The older systems and computer languages were not built to handle world-wide functionality efficiently at the current level of volumes nor in the real-time framework that is being demanded. Hence, there is a window of opportunity in the market for new suppliers and banks to manage large sections of banking in the future. Take the core banking systems, with an average age of 8+ years’ working life; once a supplier is providing global processing, the chances of them being replaced are remote.

Global processing is inevitable. It creates one set of standards throughout a bank. A bank can see its customers’ activities across the entire range of bank products and locations. A level of expertise is generated in a hub that cannot be matched in the silo-banking world.

The levels of efficiency and transparency created by global processing could only be dreamed of three years ago. The banking customer will soon be able to enjoy the responsiveness and variety of real-time global banking. Once perfected, there will be no turning back. Global processing, like the internet, will become part of our lives.

John Bertrand is an independent consultant.


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