May 2018

A changing mindset to how transaction banking applies data and new technologies will be a key metric for the future value it brings. Janet Du Chenne reports from the Transaction Bankers' Forum 2018, where the ‘future business meets a future mindset’ theme underpinned a packed two days in Deutsche Bank’s Frankfurt headquarters

“The future ain’t what it used to be”. During his opening remarks at the Transaction Bankers Forum (TBF 2018), John Gibbons, Deutsche Bank’s Head of Global Transaction Banking, borrowed this famous quote to describe the state of play for the industry. He highlighted that declining margins, regulatory and pricing pressure and competition from fintechs are rapidly changing its dynamics.

During 17 conference sessions over two days, more than 180 business leaders representing more than 120 institutions from 52 countries, gathered in Deutsche Bank’s Frankfurt headquarters to hear how data, platforms, regulatory compliance, digitalisation and cybersecurity are all presenting opportunities for the industry to evolve.

Watch highlights from the Transaction Bankers' Forum here:


Foundations for the future

To set the scene, Gibbons reminded the audience early on of transaction banking’s already solid foundations and its ability: strong profit margins, long-lasting relationships with clients, markets and regulators, and the scale and reach. Nonetheless, he stressed that “there is always a pressure to do stuff the old way, but it’s not so easy when interest rates are negative and not rising.” Meanwhile, fintechs, who have the wallets and who are not constrained by the legacy that banks have, can take a narrow slice of what transaction banks do and focus on that. However, they don’t have the legacy of flows and experience that transaction banks do, he said.

Transaction banking has showed how it can evolve and in the last two years it has developed three new tools to be even more relevant for its clients. First, Swift’s Global Payments Innovation (gpi) has made it possible to fully track the time it takes for a cross-border international payment to get from an originator to a beneficiary via a bank in 30 minutes or less. Second, 5000 market participants are registered with the KYC Registry, to share data in the fight against financial crime. Third, new technological innovations such as APIs and artificial intelligence (AI), combined with the rich data held by, and the substantial market knowledge of, transaction banks are empowering these providers, their clients and ultimately investors. For example, Deutsche Bank’s Autobahn app makes 150bn lines of code available to clients to help with them in their decision-making.

“If you think about the data richness and connection of what our starting point is, the traditional metrics won’t measure the future value we bring,” said Gibbons. “In addition to supporting their flows, our clients look to us to provide counsel, data points, knowledge of markets and reach, helping them achieve their objectives.”

Furthermore, 63% of clients said the digital strategy of their service providers is an important criteria of their buying decision, up from 51% in 2017. When considering data and new technologies and how they can apply to cybersecurity, AML and risk management, the industry hasn’t even begun to scratch the surface of what transaction banking could become,” said Gibbons. “Blockchain, big data and APIs are the opportunities for remaining relevant to our clients and our economies.” In concluding his opening remarks, Gibbons reminded TBF-goers of the enviable business of transaction banks, which sit at the heart of their economies and are essential to the business. “We have customers, flows, data, knowledge and capabilities,” he said. “We have proven we can transform so that we can maintain our relevance to all of our stakeholders – clients, economies and countries.”

Come together, with platforms

With banks facing increasing competition from the GAFAs (Google, Amazon and Facebooks) of the world, TBF delegates heard how their business models are about the commercialisation of data to remain relevant. Facebook and Google sell members’ data in return for advertising while Amazon uses data to sell more goods. The full impact of information sharing and the change in dynamics has not yet been fully realised, SWIFT CEO Gottfried Leibbrandt told The Banker Editor Brian Caplen in a fireside chat. While data privacy, anti-trust, AML and GDPR are potential angles for these largely unregulated platforms, they still have the edge in the payments space. For example, two-thirds of payments in Germany are made using cash while one third is with cards. In China, one third of payments is cash and two thirds is via platforms such as Ali Pay and WeChat1. “That’s happened in the last four years and is the fastest change I’ve seen in the last 25 years,” noted Leibbrandt.

TBF delegates heard how the ‘platformification’ of industries is gradually moving into banking, with banks building platforms and ecosystems of their own. By using APIs to provide greater choice to consumers and by leveraging their network, these platforms can alleviate margin pressure and the heavy investment required for sanctions screening, AML and combatting cybercrime. With SWIFT gpi, the industry is “moving correspondent banking on a truly new s-curve in the global payments system”, said Leibbrandt. The aim is to make gpi the industry standard in the next two or two and a-half-years by providing unique identifiers and pre-validation of transactions.

Additionally SWIFT has provided new services to help reduce the investment burden in AML and KYC processes. This includes a Sanctions Screening Service, enabling all banks to leverage a shared resource for what is a non-competitive space. “The cloud screening service sees payments pass through a filter at SWIFT and if there’s a problem bank’s using the service go away and repair it,” explained Leibbrandt. “We now have 800 customers on it. The other big one we have is the KYC repository which is a shared repository for things like charters of corporation and bank license. This repository is the “tipping point” of what can be achieved by sharing of data,” he said.

In further highlighting how new technologies can provide the vital link for AML and KYC and help fight cyber criminals, Leibbrandt described how SWIFT’s Customer Security Programme (CSP) helped respond to infamous attacks such as the one made on the Bangladesh central bank.  The CSP helps to protect and secure local environments, preventing and detecting fraud in commercial relationships, and continuously sharing information and preparing to defend against future cyber threats. “It involves information sharing on global scale so that banks that may be reluctant to share their data can do so via an anonymous SWIFT platform. Through compliance controls, all 12 000 participants have to self-attest,” he said. “The payment controls service is also compulsory.”

Leibbrandt commented that API is the most relevant tool that can be applied to the labour intensive business of AML, KYC and cyber security, followed by AI. “If we can apply these tools in AML and KYC why can’t we also apply them to cyber security,” he asked. “One of the problems is that you need to train the system. Having said that the applications in KYC, fraud and cyber are fascinating. It’s one of the areas I do see an opportunity for banks to get together.”

Banks were urged to consume shared data collected in the SWIFT platforms in their compliance processes with robotic process automation used as an example of how data extraction activities required to validate customer data via third-party sources could be streamlined and accelerated using this new technology.

The macro-economic outlook

Breaking from the themes of technology and data, TBF delegates heard how the US mid-term elections, the Syria crisis and the threat of China’s increasing weapons arsenal, could mean more unpredictability in 2018 than in the previous year. An economic/socio-political affairs panel discussion also noted the rise of populism in France and Germany and Brexit may further compound issues. In ASEAN, different dynamics are in play. With Chinese President Xi set to stay in power beyond 2023, Deutsche Bank analysts predict that the focus on capital market leverage of 2017 will shift to a focus on household leverage and infrastructure-related credit demand, both of which saw growth in 2017. Across the Atlantic, Trump appears to have given bent to the populous feeling with “significant progress” around the North American Free Trade Agreement (NAFTA) following a mid-April 2018 meeting held between US, Canadian and Mexican leaders in Peru and a trade deal with the EU. 

The more-near term issue for transaction banks, delegates heard, is the rapid change in liquidity and foreign currency fluctuations driven by political events. Deutsche Bank’s global co-head of FX Research, George Saravelos gave a snapshot of the amount of liquidity globally in distribution. Currently at $40 trillion, 2018 will be the year of peak liquidity, he said. Saravelos calculated that every single person on the globe has $2000 that can be printed by central banks. Rising debt levels are a further problem. For example, the Bank of Japan’s ownership of 90% of all government bonds means it has huge debt levels even though net debt is low. While liquidity continues to peak, the private sector credit growth is accelerating. “The issue is not deep liquidity but too much growth in the next 2-3 years,” said Saravelos. On a positive note, Saravelos noted a strengthening of the euro on the back of an ECB policy change, which led to a slowing down of foreign asset purchases by European buyers, who were already overweight on these assets.

Compliance as a competitive advantage

The safety and soundness themes of AFC, AML and KYC remain ever present on the transaction banking agenda. During a safety and soundness panel discussion at TBF, it was noted how banks are increasingly using evolving technological innovations as a competitive advantage in meeting their regulatory obligations. SWIFT gpi, for example, could help address a combination of AFC, AML and KYC, making things more efficient, said Metzger. With 5000 participants now signed up to the SWIFT KYC Registry these participants were encouraged to use Wolfsberg Group’s recently revised correspondent banking due diligence questionnaire as if it was their own Facebook account, where information can be shared. Banks can complete the questionnaire directly via data contained in the KYC Registry, allowing users to better automate processes from it.

Philippe Vollot, Global Head of Anti-Financial Crime & Group Anti-Money Laundering Officer, Deutsche Bank explained that AI, robotics and partnerships “would help us to rely on the KYC done on another institution as these technologies provide a central database where I can login and find information on all clients”.

However, AI and utilities do not represent any form of outsourcing or delegation and, as such, do not change bank’s regulatory obligations, delegates heard. Instead they have their place their as a useful part of the correspondent banking toolkit.   

Regtech forms part of that toolkit. Semantic modelling can present a single view of a conflicts of interest space, observed Andre Wentzel, Head of Anti Money Laundering at Standard Bank. But people will still be paramount. “You need to move smart people into your data analytics to look at data more intelligently. Adopting these new technologies with a change in mindset helped Standard Bank of South Africa introduce a level of specialisation in the compliance function as well as introduce new roles such as behavioural psychologists to support its general AML processes.

The harmonisation of data and transaction monitoring will be key. “The more exchange of data we have, the more we can do to act on wrong doing and the better it becomes”.

The industry standard

In doing their bit for harmonisation and standardisation towards regulatory compliance, many market infrastructures have successfully migrated to the common messaging standard ISO 20022.

The impact of this standard on real time payments is clear as Russ Waterhouse, Executive Vice President, Product and Development Strategy, The Clearing House explained during the Modernisation of market infrastructures panel that “with the threat from the fintechs, we need a system that is ISO20022-based. The volume of messages creates an opportunity for future innovation and our goal is to have all banks connected by 2020 – some banks have seen this is a way to completely reinvent their treasury management.” 

Another challenge is bringing the corporates on board with these initiatives, not just FIs. Michael Montoya, Head of Banking Services, UBS and Chairman of the Supervisory Board, SIC Interbank Clearing remarked: “You have to understand the software companies to understand what the corporates want – transparency and speed.”

With real time payments becoming a reality, Michael Spiegel, Deutsche Bank’s Global Head of Cash Management and Head of GTB Germany, asked panellists how liquidity would be validated if there was convergence of SWIFT gpi and instant payments.

Panel moderator Christian Westerhaus, Head of Cash Clearing Products at Deutsche Bank, cautioned that an early merger would risk unwanted data truncation, which could lead to non-financial risks. He suggested that the industry should instead focus on getting critical mass on gpi in 2018 and 2019, ensure a robust planning and execution of ISO2002 migration in market infrastructures and correspondent banking, and better orchestrate migration to ISO20022. “Throughout this process, international gpi and domestic instant payments will come closer together,” he assured the audience. “At some point, there can be a fusion.”

Fiona van Echelpoel, Deputy Director General Market Infrastructure and Payments, European Central Bank responded that the area of convergence is under discussion, including the subject of value dates for transactions occurring over the weekend.

Digitalisation more than just technology

On day two of the TBF, delegates heard how a future business is more than just software, it’s a digital transformation. Since 2007, banks were too preoccupied with the financial crisis and had not made the same strides as other industries in digitalising, noted Markus Pertlwieser, Deutsche Bank’s Chief Digital Officer for Private & Commercial Bank. Today, driven by consumer behaviour and the rise of platform economies such as 10cent, Google and Alibaba, it must catch up. Meanwhile, GAFAs are using third party access granted by banks under the PSD2 to further change client behaviours.
According to Pertlwieser, the margin is with the banks who provide the balance sheet and their digitalisation is not just an upgrade of the IT, but a revolution of their strategy. New technologies such as API, blockchain and AI are driving new business models not only will AI be used in risk management but it will also support the customer relationship. APIs will also open up the value chain and they are a powerful way of insourcing different types of services from third parties such as fintechs.

With the adoption of these new technologies as part of successful ecosystem strategy banks can restore their ROEs to double digits. “The future value of the bank in the digital world is not just its balance sheet but also customer relationship and building a full business platform model with shared economies. This requires a different mindset for a previously risk averse industry,” he said. In addition, where once a retailer of physical goods and a bank would have proffered their services in very different ways, the digital tools of the modern era have prompted businesses of all types to migrate to online platforms, where they can serve a broader customer base in a more convenient way.

Luke Weston, Senior Manager, Global Financial Services, AWS financial services described the company’s own digital transformation. A former banker himself, Weston recalled how complex legacy infrastructures can make transformation difficult to achieve. But the opportunity for banks is at the front-end, with risk and treasury teams plugging into new digital service opportunities to become more efficient.

Weston pointed out that transformation needs a customer obsession to invent new products and agility. “It’s about making a broader change to your architecture,” he said, and advised that “micro cultures of two pizza teams of 12 people can help deliver a constant stream of APIs. 20% of the challenge is getting the technology to work. Digitalisation is the technology change but it’s also the business revolution.” In concluding, Weston encouraged companies undergoing transformation to write a press release emulating what they will look like in five years’ time.  He also encouraged them to do away with powerpoint presentations and instead write up new ideas (six pages maximum) and structure meetings with 20 minutes of reading and 40 minutes of discussion, followed by a decision, and then move on.

Some banks have already achieved such transformation. A panel discussion heard from those who have made that journey. Dutch bank ING has undergone its own digital transformation using platforms and ecosystems. According to Frank Taal, the bank’s global head of transaction services strategy and change, this meant empowering people to use fixed budgets and a road map of achieving priorities. A human resource change was also needed to making the transformation happen and everyone in the bank, including Taal, had to apply for new roles.

An obsession with helping customers do the jobs they needed to do led Swedish bank SEB’s transformation in partnership with larger platforms, with Paula Da Silva, Head of Global Transaction Services explaining that “customers don’t want to have to call us so the focus should be on the GAFAs. “Mindset is the greatest impediment to customer obsession. We have the trust and the platform so it’s about collaboration in a totally different way.”

Empowering customers means empowering employees as they are ultimately the users of these innovations, was a key takeaway of a panel Empowerment in a digital era. According to Deutsche Bank GTB’s digital head Thomas Nielsen, creating an open and fearless environment built on trust is an innovation enabler. “The real IP is people and should be given as many tools as possible as well as the accountability and responsibility and then step aside, while technology is an enabler rather than the differentiator,” he said. “Don’t give employees the solution, give them the problem.”

Cybersecurity and the weakest link

While people can be the differentiator in the digital age, they can also be the weakest link, as demonstrated by recent cyber-attacks. During a cyber security session, ethical hacker Jamie Woodruff explained that it’s the low-level employees who are particularly targeted as they have more fixed daily routines. Phishing, tailgating and easily gaining access to buildings by blending in with employees are some examples of how internal systems can be compromised.

Education is the biggest deterrent against cybercrime and requires a cultural change with Hackathons and other organisational initiatives in order to engage people throughout the organisation on the cyber security topic. Constant education and dialogue about cyber security is important, said Sean Mouton, Chief Technology Officer, ABSA Bank because “unlike electricity, which is a constant, evolving technology means that cyber security too will continue to evolve and be constantly changing.”

In concluding the two day forum, Spiegel noted that the industry has made many strides since 2007 to learn new things and to “join up even more. Yes we will compete as it’s important to have a diverse banking environment, but we will need to move on and understand what digitalisation will mean for us in the future.”


You might be interested in

This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume you agree with this. For more information about the cookies we use or to find out how you can disable cookies, click here.