September 2016 www.euromoney.com

Sibos Edition

Sibos 2016 special edition

Survey 2016: regional banks on the rise

Keeping up with the internet giants

New networks change the face of

transaction banking

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Contents

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September 2016Sibos special edition

4 Cover storyGlobal risks rise as banks beat a retreatFor decades the world’s banks followed their multinational corporate customers across borders and built up international networks to fi nance trade and serve surging capital fl ows. Now those cross-border fl ows of traded goods lag even weak global GDP growth and capital. The era of the global banks may have already ended with the fi nancial crisis. Is the entire concept of global banking at risk too? Peter Lee

28 TechnologyBanks take over the blockchainEverything you thought you knew about blockchain is wrong. Rather than wait for the it to re-engineer banking, banks are going to re-engineer the blockchain. They are determined to turn an existential threat into a competitive advantage. Peter Lee

18 Transaction servicesKeeping up with the internet giants The internet has created a new kind of company that needs to be international and multi-currency from the outset. These are businesses that usually understand technology better than their banking partners. How are the world’s leading cash managers meeting the challenges posed by these new clients? Kimberley Long

42 TechnologyBiometric banking and the $600 billion opportunityAn extraordinary revolution is taking place in digital banking in India. Driven by the state, it is anchored on a billion-strong biometric database to fi nally bring fi nancial inclusion to a country that needs it more than any other. Banks may face a binary outcome: be quick or be dead. Chris Wright

14 Correspondent bankingNew networks change the face of transaction bankingAs the number of truly international banks shrinks, new alliances and networks are being formed to meet the needs of clients. Choosing the right partners is important, but complex. And, increasingly, corporate treasury teams are taking a keen interest in the banks’ decisions. Kimberley Long

36 TechnologyArtifi cial intelligence and the spectre of automationForget about what you’ve seen in sci-fi movies. The deployment of narrow artifi cial intelligence is of immediate relevance to the banking industry. A Euromoney Thought Leadership survey looks at how AI will change the structure of fi nancial services. Tom Upchurch

21 Cash management survey 2016Regional banks on the rise While HSBC scores a notable double in Euromoney’s annual global rankings, the record response rate of almost 35,000 validated votes generated a host of changes at the upper end of our cash management survey, with regional banks to the fore and some previous global leaders dropping back. Kimberley LongEUROMONEY CASH MANAGEMENT 2016 SURVEY RESULTS BEGIN ON PAGE 22

Every day, in cities around the world, people are doing amazing things. They’re creating, innovating, adapting, building, imagining. What about a bank? Shouldn’t we be equally ingenious? Strive to match our clients’ vision, passion, innovation? At Citi, we believe that banking should solve problems, grow companies, build communities, change lives.

We’re glad to see you think so, too, and offer our sincere gratitude for helping Citi be named Euromoney’s World’s Best Bank for Financial Institutions 2016. Through our client relationships, promotion of excellence, and commitment to driving growth, Citi remains committed to serving the financial services industry. Your acknowledgment that Citi has distinguished itself as being your top choice for global banking partner is sincerely appreciated.

© 20

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itigroup Inc. Citi, C

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esign and other marks used herein are service m

arks of Citigroup Inc. or its affiliates, used and registered throughout the w

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Our paper is produced by M-real to the following standards: European Eco-management Audit Scheme (EMAS); the Chain of Custody Programme for Endorsement of Forest Certifi cation; and to ISO14001.We are pleased that our printer, Wyndeham Group, is also committed to minimizing its environmental impact by achieving ISO14001 certifi cation and is pursuing FSC Chain of Custody certifi cation across all its sites.

S P O N S O R E D C O N T E N T

The policy response to the Great Financial Crisis of 2008/9 has been characterized by aggressive

and extraordinary central bank measures in a bid to boost growth, curb defl ation risks and stabilize fi nancial systems. As expected, returns on ‘safe’ assets have diminished and investors have been forced along the risk curve to obtain more satisfactory returns.

The Institute of International Finance (IIF) recently noted that around $10 trillion-worth of government bonds (for example, Japanese, eurozone, Swiss, Danish and Swedish debt) now off er negative yields and no end appears to be in sight. With interest rates in many jurisdictions already at, or near, record lows, a recent Bloomberg report noted that “market implied rates in 20 of 33 countries tracked by Bloomberg, representing 40% of world GDP, show traders expect even lower borrowing costs in six months”. The search for yield will only become more desperate as low or negative nominal yields become more entrenched in government, and even corporate, debt.

Stylized investment strategies have become more common among currency traders as portfolio

management techniques spill over from equity investors. Common thematic investment approaches to currency speculation refl ect value investing (buying ‘cheap’ and selling ‘rich’ currencies, according to some metric), momentum strategies (buying winners and selling losers) or, quite commonly in the early/mid 2000s, carry trades (where investors buy a higher yielding currency and fund that position by selling a lower yielding currency). Indices measuring the performance of these strategies allow us to observe changes in FX investor behaviour in response to the changing economic and market landscape.

Carry strategies proved popular and were consistent money makers for investors in the low-volatility period leading up to the fi nancial crisis – until the downside of the higher risk/higher reward trade-off became apparent. The more aggressive the reach for yield, the more exposed investors become to a range of risks – market, credit, liquidity. Sometimes, exposure to these risks occurs simultaneously, as we saw in the Great Financial Crisis.

Last year, the correction in commodities prompted focus on terms of trade-centric strategies – selling commodity producer

currencies whose terms of trade were deteriorating (Canadian and Australian dollar etc) and buying commodity consumer currencies whose terms of trade were conversely improving (US dollar). The commodity trade has been a dud this year, however. Instead, FX investors are making winning bets on carry trades

again aft er this strategy lost money in 2015 and had a patchy start to 2016.

Investors are being forced to cast a wider net to capture att ractive yields, however, with nominal and real yields in many developed markets near zero or worse. Large, relatively liquid, emerging bond markets are att racting more interest from international

investors, due to their positive (but low single-digit) returns.

At least some of the FX market’s fi repower has had to be concentrated on developing markets to generate the positive carry returns seen this year. Bloomberg data show very strong, net (currency appreciation and interest earned) returns for investors going long Brazilian real and South African rand, for example, via a short US dollar position. Since the start of this year, a buy-and-hold approach using this strategy has produced a cumulative excess return of 25%, according to Bloomberg data.

In contrast, a G10-centred carry trade strategy has delivered weaker returns. A long AUD position funded via an equally weighted basket of USD, EUR and JPY is barely positive on the year to date, for example. Selling the SEK to fund a long NZD does bett er, returning around 11% year to date, however.

Carry trades thrive in the kind of low-volatility environment we are seeing now, particularly when yields of the funding and target currencies are diverging. However, experience suggests that this strategy is prone to sudden stops and signifi cant reversals. This may be especially relevant for emerging market-based carry trades with US Federal Reserve

policymakers suggesting that monetary policy may be tightened again in the coming months.

IIF research* highlights the fact that emerging markets are prone to weakness or crisis when the Fed is tightening policy. This is especially the case when the policy tightening is in its early stages or when market participants are concerned that the adjustment in monetary policy may be more signifi cant (in terms of how quickly or signifi cantly monetary

policy will be tightened).Scotiabank expects the Fed to

tighten policy by 25 basis points in December and implement three additional ¼ point increases in 2017. With market pricing barely refl ecting the risk of one 25bp tightening over the next 12 months, a tightening of the scale we anticipate may well have repercussions for markets moving into 2017 – volatility would likely increase, forcing investors to reduce exposure to emerging markets and

carry trades especially. Currencies that benefi ted most from att ractive yields so far this year – the Brazilian real, the Russian rouble, the Turkish lira and the South African rand, for example – may be most at risk of correction.

* Determinants of Emerging Market Crises: The Role of U.S. Monetary Policy, Robin Koepke

EM FX MOST EXPOSED TO CARRY TRADE REVERSALGlobal investors are facing a conundrum; developed market bonds have never been pricier while central bank policy has never been looser. Easy monetary conditions are driving gains in equities and supporting bonds. But with the IIF noting recently that USD $10 tn worth of the world’s (i.e. developed market) government securities are now offering negative rates, the search for yield is becoming more pronounced. In the FX space, this has driven renewed interest in the carry trade. The main beneficiaries have been higher-yielding EM currencies rather than the traditional G-10 high yielders and these currencies may be the most exposed to a Fed-induced correction in the trade

S P O N S O R E D C O N T E N T

The commodity trade has been a dud this year, however. Instead, FX investors are

making winning bets on carry trades again after this strategy lost money in 2015 and

had a patchy start to 2016.

“ “ Source: Macrobond, Scotiabank FX Strategy

EM FX CARRY TRADES HAVE OUTPERFORMED THE G10

By Shaun Osborne, Chief FX Strategist, Global Foreign Exchange, Scotiabank Eric Theoret, Currency Strategist, Global Foreign Exchange, Scotiabank

Sibos 2016 www.euromoney.com4 5www.euromoney.com Sibos 2016

Cover story

For decades the world’s banks followed their corporate customers

across borders and built international networks to finance trade and serve

surging capital flows. Now those flows of traded goods lag even weak global

GDP growth. Capital and lending flows are shrinking too. Nationalism

is on the rise. The era of the global banks may have already ended with

the financial crisis. Is the entire concept of global banking at risk too?

Could the de-risking of global banking, insisted upon so

vigorously both by regulators and shareholders since

the financial crisis, actually be making the world finan-

cial system more dangerous?

The IMF seems to be coming round to this view,

suggesting in a recent report that global banks ending correspondent

relationships with banks in emerging markets may be “potentially

undermining financial stability”.

That’s quite a grave charge in IMF-speak – and one that comes as

a surprise. As recently as 2015, the IMF posited that global banks’

retrenchment, and in particular their reduction in cross-border lending,

was making the global financial system safer. Its April 2015 Global

Financial Stability report argued that “the relative shift on the part of

foreign banks away from cross-border lending and toward more local

lending through affiliates has a positive effect on the financial stability

of host countries”.

Back then, the IMF appeared to cast international lending by global

banks as a source of systemic risk, saying: “Cross-border flows are

likely to contribute to the transmission of foreign shocks and may thus

increase volatility. For example, deleveraging by international banks

can reduce funding sources for banks in host countries. These banks in

turn may be forced to contract lending even in the absence of domestic

credit problems.”

Now, it says that the retreating global banks are draining the life-

blood from vulnerable countries – and not just smaller emerging coun-

tries but even larger economies such as Mexico and the Philippines.

In part, the IMF has shifted its emphasis. An excess of cross-border

lending, especially if poorly underwritten in expectation of ever-higher

commodity prices, may well be a bad thing. Providing links to the

By: Peter Lee

Global risks rise as banks beat a retreat

Sibos 2016 www.euromoney.com6 7 www.euromoney.com Sibos 2016

Cover story

cross-border payments for their local cus-

tomers. As the retreat continues, however,

local lenders are running out of partners.

This risk of national or regional exclu-

sion from the global fi nancial system owing

to the retreat of global banks from corre-

spondent banking is set to be a big topic at

the annual IMF/World Bank meetings.

In June, an IMF staff discussion note

pulled together some data. It found that

fully 75% of surveyed global banks had

been withdrawing from correspondent

banking relationships, most prominently

the US, UK and Swiss banks, but also

Canadian, German and French lenders. The

overwhelming majority of national banking

authorities report reductions in dollar wire

transfers and remittances as a consequence.

The report’s authors judge that: “The

impact of the withdrawal of correspondent

banking relationships (CBRs) on certain

jurisdictions can become systemic in nature

if unaddressed.”

They also say that while the cutting of

correspondent relationships is intended to

de-risk individual banks, at a system-wide

level, the process could “disrupt fi nancial

services and cross-border fl ows, including

trade fi nance and remittances, potentially

undermining fi nancial stability, inclusion,

growth and development goals”.

And no one wants that.

Talk of undermining fi nancial stability

sounds extreme. Yan Liu, assistant legal

counsel at the IMF, concedes: “We have not

observed macroeconomic consequences at

the global level, but we have defi nitely seen

the impact on certain regions, for example

the Caribbean”.

Liu uses the example of a company in

Barbados trying to make a $100,000 pay-

ment for imported materials to a supplier

in Belize. That payment is likely to be

denominated in US dollars, which requires

handling by a bank with access to the Fed-

eral Reserve system. Most domestic banks

in the Caribbean do not have such access.

In the past, they have been able to conduct

such payments for their customers with the

help of US correspondents. But US banks

have been cutting those relationships for

several years now. European banks are fast

catching up with this process.

Liu says that a survey of 16 leading

banks across fi ve countries in the Carib-

bean region shows that they have all lost

some, or even all, of their correspondent

relationships. In Belize, for example, just

two out of nine banks still benefi t from full

banking relationships with global corre-

spondent banks. Even the central bank is

down to its last two such relationships.

It’s not just trade fi nance payments that

may be disrupted. Large companies head-

quartered in one Caribbean country typi-

cally need access to dollars to pay salary

to employees based in another. Remittance

fl ows also are threatened. And these are

not just a nice-to-have. Liu says: “In some

countries, remittances account for a large

share of GDP… 10%, 20%, sometimes

40%. So you can see the impact.”

NO ONE SHOULD BLAME ANY

global bank for re-examining its relation-

ships with respondent banks far from

its home base. The large banks are all

compelled to do this, just as they must re-

evaluate the cost/income dynamics, capital

consumption and returns of every single

activity they engage in.

Capital requirements on systemically im-

portant banks rise partly in lock-step with

their complexity and exposure to opera-

tional risk, including liability for large fi nes.

ing failures. It’s a bit thick if global policy-

makers now blame banks for not leaving in

place just those parts of their international

operations, the payments infrastructure,

that policymakers now realize was actually

quite useful, but with no other banking

business to pay for it.

In its simplest form, correspondent bank-

ing is the process by which a large, global

bank in a developed market undertakes

to handle international payments for the

customers of a smaller bank in an emerging

market. Christine Lagarde, managing direc-

tor of the IMF, pointed out in a speech at

the New York Federal Reserve in July that:

“Correspondent banking is like the blood

that delivers nutrients to different parts of

the body. It is core to the business of over

3,700 banking groups in 200 countries.

A global bank like Société Générale, for

example, manages 1,700 correspondent

accounts and processes 3.3 million cor-

respondent transactions every day.”

In fact, the biggest banks have been turn-

ing away from correspondent banking for

some time. Local banks in smaller countries

managed to fi nd other providers in the fi rst

years of global banking’s great retreat after

the crisis, increasing their dependence on

fewer and fewer international partners,

but still remaining in the game of enabling

global payments infrastructure is a good

thing. But cutting provision of the fi rst

leads almost inevitably to withdrawal of

the second.

And how unstable the fi nancial system

feels depends very much on whereabouts

within it you happen to sit.

Banking supervisors in Europe and the

US, home to those developed market banks

that once had aspirations to cover the

globe, probably think it is much more sta-

ble today. Their chief concern has been for

banks to increase capital, shrink balance

sheets, rein in the complexity of businesses

that had pursued revenues into many more

markets than senior management teams

could ever hope to control or understand

and so reduce the contingent liability of

home-country taxpayers.

Job certainly not complete – the banks

may be more utility-like but they can’t seem

to make much money or attract inves-

tors’ capital, while many in Europe are

still burdened by legacy NPLs – but pretty

much on track from a risk- and complexity-

reduction standpoint.

For those banks bailed out in the crisis,

the quid pro quo was always clear: concen-

trate your resources closer to home.

Developed market banks that once

boasted of their global capabilities and

scale have become keen instead to highlight

both to regulators and shareholders that

they are shedding customers and businesses

in emerging markets to reduce both regular

annual operating expenses and the chance

of extraordinary legal costs.

Citigroup was the preeminent bank of

the era of globalization led by US multi-

nationals. Its old leaders were overjoyed

when its list of country presences passed

100. But more recently its new leaders

have drawn attention to its retrenchment.

Chief executive Michael Corbat highlighted

to Euromoney last year the halving of its

network of retail banks.

“It can be a tough decision in some

countries that may have attractive demo-

graphics but where you lack scale or where

there are near-term political risks, but we

have gone from 50 countries to a target of

24,” Corbat told Euromoney. “And often it

is a straightforward decision.” 

Exiting countries has become the new

default mode.

One of the fi rst things Stuart Gulliver did

on becoming chief executive of HSBC in

2011 was to relegate the label of being the

world’s local bank from a statement of its

strategy to a mere happy-clappy marketing

slogan. Running a far-fl ung network to in-

tegrate fi nancial fl ows is no longer HSBC’s

job, especially not when it lands the bank

with big fi nancial penalties for handling the

accounts of Mexican drug dealers.

“The world is actually surprisingly

concentrated,” Gulliver told shareholders

on his fi rst investor day as chief executive.

“If you dig into trade fl ows, 35 countries

account for 90% of growth in trade fl ows

over the next 10 years, and that also holds

true for external debt, bank profi t growth,

wallet available for bank profi ts and,

indeed, FDI.”

He added: “We are not going to try to be

all things to all people in all markets.”

Hit by investigations into so-called

mirror trades in Russia last year, Deutsche

Bank, to take another example, simply

closed its markets business in Russia. It

reminded shareholders at the start of this

year that it would also retreat from 10 oth-

er so-called high-risk countries and would

be off-boarding hundreds of thousands of

customers.

For global banks, retrenching is the new

expanding. It has been that way for some

years now.

Shortly after taking on the role of

Deutsche Bank chief executive in 2015,

John Cryan said that in its signature global

markets business, it would exit half of its

customer relationships.

BUT THERE’S ALWAYS A DOWNSIDE.

If you are the corporate treasurer of a

medium-size business in Africa, the Carib-

bean, in Central Asia, or in the Pacifi c

region, the retreat of global banks may

look very different and quite alarmingly

unwelcome. It’s not just the reduction in

sources of credit that hurts companies,

although refi nancing risk is a big concern

for many leveraged corporations in emerg-

ing countries. Even more worrying is the

withdrawal of non-lending banking services

and most especially payments. Caught up

in the de-risking of global banks has been a

wholesale withdrawal from correspondent

banking relationships with smaller lenders

in many countries across all regions.

Banks have been told to cut back their

international operations by home regula-

tors that have ring-fenced both capital and

liquidity and raised capital requirements

against operational risk for banks deemed

highly complex and exposed to fi nes for

sanctions breaches and anti-money launder-

“Why should we care about this problem? Because affected countries

often are very vulnerable – they include small island economies and

countries in con� ict. These are countries with minimal access to

� nancial services in the best of circumstances”

Christine Lagarde, IMF

75%

5%10%

10%

DeclineIncrease

No change

No data

0

20

40%

60

80

USA U

K

Swit

z

Can Ger

Fra

Net

h

SAfr

Eu

r

Au

s

Swed HK

Jurisdictions

Global banks report CBRs withdrawalLarge banks (all regions): vostro accounts

US and UK banks lead reduction in correspondent banking relationshipsPercent of local/regional banks reporting terminations

Source: World Bank

Source: World Bank

0

Lending

Structured finance/foreign investments

FXservices

Investmentservices

Cash managementservices

Tradefinance

Chequeclearing

Clearing andsettlement

Internationalwire transfers

10050%

Consequences of the withdrawalPercent of authorities reporting on impact

Source: World Bank

Sibos 2016 www.euromoney.com8 9 www.euromoney.com Sibos 2016

Cover story

It is no surprise they have been getting out

of businesses and of countries where the

potential revenues don’t match up to the

costs, including swollen annual compliance

expenses and the risk of billion-dollar fi nes

for breaches of anti-money laundering and

know-your-customer regulations.

What is rational for each bank may be

bad for the system as a whole.

Liu observes: “Simultaneous actions by

many banks to cut off these relationships

could leave certain countries or regions at

the brink of losing access to the interna-

tional system.”

It may be too late to harp on about the

downside of de-risking the global banks so

soon after the enforcement actions of 2014,

when BNP Paribas forfeited $8.9 billion

over sanctions busting, JPMorgan paid

out $2.4 billion over anti-money launder-

ing failures related to Bernie Madoff, and

Credit Suisse paid $2.6 billion for helping

US individuals evade taxes.

Regulators and policymakers have been

pushing banks in one direction only since

the crisis: back towards their home markets

and core functions.

The ending of so many correspondent-

banking relationships is evidence that the

clean-up of global banking is working. Yes,

exclusion is a bad consequence for some

smaller economies. But need it be perma-

nent?

Developed-market regulators may point

out that if those countries did a better job

of excluding tax evaders, criminals and ter-

rorists from their domestic banking systems

then access might be restored. Mexico is

a revealing example. The authorities there

have issued new regulations to increase

anti-money laundering and combating the

fi nance-of-terrorism controls, including a

requirement for legal entity identifi ers for

banks and large fi rms involved in certain

high-risk transactions. These steps were

taken in coordination with the home au-

thorities of global banks, both to reduce the

risk of disruption in correspondent banking

and bolster the domestic regulatory frame-

work at the same time.

“In other jurisdictions, efforts may need

to go beyond improving compliance, how-

ever,” Lagarde admitted in her July speech.

“Business models that depend on opaque-

ness, offshore structures and a lack of

transparency clearly need to be reassessed.”

If certain banks and even whole coun-

tries fi nd themselves at risk of exclusion in

the meantime, surely that is a call to action.

“Why should we care about this prob-

lem?” Lagarde asked. “Because affected

countries often are very vulnerable – they

include small island economies and coun-

tries in confl ict. These are countries with

minimal access to fi nancial services in the

best of circumstances.”

Lagarde highlighted the impact on

smaller countries such as Liberia, where

global banks have terminated almost half

of the existing 75 correspondent relations,

severely affecting the ability of local banks

to conduct US dollar transactions, and

Samoa, where remittances account for 20%

of GDP and banks have been terminating

accounts of Samoa-linked money transfer

agents.

The impact is being felt on larger

countries as well: not just Mexico but also

the Philippines, and other economies that

rely heavily on cross-border fl ows such as

remittances, and where development is now

at risk.

“And even if the global implications of

these disruptions are not visible so far,” La-

garde warned, “they can become systemic if

left unaddressed.”

Lagarde did not specify what systemic

risks she means, leaving listeners to hear

confi rmation of their own fears: rising

defaults and bad debts, perhaps failed

states and heightened geopolitical risk and

regional insecurity.

Expect at the annual IMF meetings to

hear developed-market regulators covering

their backsides and claiming that they never

intended the banks under their charge to

terminate correspondent banking relation-

ships or exit countries on such a scale

and in such knee-jerk fashion in response

to a mere handful of multi-billion dollar

pay-outs extracted from the worst repeat

offenders.

That’s self-serving piffl e at best, admis-

sion of a fundamental misunderstanding of

banks at worst and a reminder for regula-

tors and policymakers to be careful what

they wish for.

But it’s largely irrelevant because there

are bigger forces at work here.

ARE WE WITNESSING THE END OF

the era of globalization that has de-

fi ned most of our lifetimes? In February,

McKinsey published a landmark study

on how cross-border data fl ow is increas-

ingly important to the global economy.

These digital data fl ows seem, in so far not

well-understood or much-studied ways, to

be picking up the baton from the now-

fl oundering drivers of the global economy

in the late 20th century and the fi rst decade

of this: namely the cross-border fl ows of

capital in bond and equity purchases, in

foreign direct investment and in interna-

tional bank lending often linked to trade in

manufactured goods and commodities.

McKinsey points out that cross-border

capital fl ows have fallen sharply since 2008

and show no sign of recovery. For 25 years

before the 2008 fi nancial crisis, these fl ows

grew faster than global GDP, rising from

$0.5 trillion in 1980 to $11.9 trillion in

2007.

Since that peak, fi nancial fl ows dropped

from the equivalent of 21% of global GDP

in 2007 to just 7% in 2014. Much of the

decline is evident in cross-border lending.

Partly it is a direct consequence of delev-

eraging by a ludicrously swollen fi nancial

system and a welcome retreat from the ex-

cessive fi nancialization of developing econ-

omies. This briefl y threatened to mimic that

in developed markets where issuance of,

and trading in, synthetic derivatives with

synthetic counterparties became the norm,

accepted and even encouraged by greedy

investors and sovereign tax authorities and

nodded through by supine regulators.

McKinsey is in no doubt why this col-

lapse in cross-border fl ows has happened.

“Facing new regulations on capital and

liquidity, as well as pressures from share-

holders and regulators to reduce risk, many

banks in advanced economies are winnow-

ing down the geographies and business

lines in which they operate.” The consul-

tancy fi rm points out that from early 2007

through the end of 2012, commercial banks

sold off more than $722 billion in assets

and operations, with foreign operations ac-

counting for almost half of that total.

This retrenchment has not simply seen

developed-market banks shunning emerging

markets. In the fi rst years of recovery after

the fi nancial crisis and subsequent reces-

sion, fl ows into emerging markets actually

picked up as these appeared to offer growth

amid a developed-market downturn. As

they de-levered in the fi rst fi ve years after

the fi nancial crisis, eurozone banks cut

cross-border lending by $3.7 trillion, but

loans and claims on other European coun-

tries accounted for three quarters of that

decline or fully $2.8 trillion.

Beyond the retrenchment in cross-border

lending, international investment fl ows in

bonds, equities and FDI are also fl at or

down. Cross-border bond and FDI fl ows

have declined 41% and 35%, respectively,

in absolute terms between the end of 2007

and the end of 2014, McKinsey fi nds.

Cross-border equity fl ows are essentially

fl at in value but have declined relative to

global GDP.

Data for 2015 show that global fi nancial

fl ows declined further across a broad range

of developing countries. The most recent

BIS quarterly lending report published in

June covers data up to the end of 2015. The

BIS reports that cross-border lending in

2015 shrank by 3%, continuing the sharp

retrenchment from a 20-year average posi-

tive growth rate of 6%. It noted that the

decline in the fourth quarter of 2015 was

evenly spread, but highlighted some new

signals.

Interbank lending has seen the greatest

fall in the era of declining cross-border

fl ows. In Europe for example, the ECB has

effectively replaced the interbank lending

market. Now, the BIS reports that in the

most recent quarter for which data have

been compiled “interbank activity again

accounted for the largest share and mainly

drove the overall decline. But claims on

non-bank borrowers, which had previously

held up better, also fell substantially (by

$177 billion)”.

It also noted a new trend: the appearance

of certain emerging market banks, notably

Chinese lenders, as an increasingly impor-

tant source of international bank credit. At

the end of December 2015, they were the

10th largest creditors in the international

banking system, according to the BIS, with

cross-border assets of $722 billion. Chinese

banks are an especially important source of

US dollar credit: their cross-border dollar

assets totalled $529 billion, larger than

those of banks in all but fi ve countries,

namely the US, UK, Japan, the Cayman

Islands and Hong Kong.

Despite the emergence of large local

emerging market and regional banks to

take up some of the slack from global

banks, it seems unlikely there will be any

revival of cross-border lending this year. In-

deed analysts are now looking for hopeful

signs amid the wreckage of global banking

in this decline in cross-border exposure.

In August, BNP Paribas once again tried

to fi gure out the systemic consequences

of a Fed rate hike later this year, thinking

of developed-market bank and investor

exposure to over-valued emerging market

55

50

45

40

35

30

25

20

2014

5

19901980

10

15

20

25

2000 2007

30

Finance

Goods

Services

$ tl

n, n

omin

al

All fl

ows as %

of GD

P

–14pp

Flows of goods, services, and fi nance have declined relative to GDP1980 to 2014

Source: McKinsey

“It can be a tough decision in some countries that may have attractive

demographics but where you lack scale or where there are near-term

political risks, but we have gone from 50 countries to a target of 24. And

often it is a straightforward decision”

Michael Corbat, Citi

Sibos 2016 www.euromoney.com10 11 www.euromoney.com Sibos 2016

Cover story

fi nancial assets and mal-investment driven

by low and even negative yields in devel-

oped markets.

Assessing cross-border claims on the

larger emerging countries at the end of the

fi rst quarter of 2016, BNP Paribas noted a

28% year-on-year decline in cross-border

claims on China; a 23% decline in claims

on Russia; a 16% decline in claims on

Brazil and a 7% decline on claims in India.

Cross-border lending to China, extended

mainly by developed-market banks, had

surged to $1.1 trillion in mid-2014. It was

down to just under $700 billion at the start

of the second quarter of this year. “This

decline in cross-border bank lending

reduces global systemic risks resulting

from US policy adjustments,” says Wike

Groenenberg, analyst at BNP Paribas.

If the slowing growth in many of

those large Asian emerging markets

continues into outright recession,

presumably only a churl would ask if

slowing cross-border lending might be

the cause of that faltering growth rather

than its consequence.

The BIS advises that any analysis of

the vulnerability of emerging market

economies to further disruption in

cross-border capital fl ows ought to start

by recognizing the substantial growth in

aggregate indebtedness of corporations,

on credit drawn from both domestic as

well as international sources.

This is already ringing alarm bells.

Slowing cross-border fl ows may not

be a sign of stability at all. According to

the BIS’s debt statistics, corporate debt

in the big emerging market economies

increased on aggregate from less than

60% of GDP in 2006 to 110% at end-

2015, much of it raised in bond mar-

kets. The BIS warns: “Given the steep

repayment schedule that lies ahead, the

refi nancing capacity of highly leveraged

emerging market companies is likely to

be tested soon, especially if the rise of

the US dollar continues.”

The BIS points out that while corpo-

rates’ international debts are smaller

than their domestic debts, international

fl ows are regularly the marginal source

of fi nancing in the run-up to crises. “In-

ternational capital outfl ows could affect

overall investor sentiment and credit

conditions, either by leading directly

to defaults or by steering corporates to

seek funding from the already stretched

domestic markets and banks”.

In a global economy characterized

by an absence of demand, most central

banks are striving to weaken their

currencies to revive trade while also

holding down the servicing cost for vast

government and private-sector debt

stocks they have no hope of repaying by

any conventional meaning of that term,

or of infl ating them away.

IT IS SOMEWHAT IRONIC, GIVEN

the IMF’s concern about the termination

of correspondent banking relationships,

that the only cross-border fi nancial

fl ows that have continued to grow since

the global fi nancial crisis and ensuing

recession are remittances. These were up

7% annually over the fi ve years to the

start of 2016 and are now worth $583

billion annually. Of course, the growth in

remittances refl ects the increasing fl ows

of migrants, against which there is now

a growing populist political backlash in

Europe, most evident in the UK vote to

leave the EU, and in the rallies supporting

Donald Trump’s campaign for the presi-

Could digital technology offer hope for a new era of fi nancial interconnectivity?Global banks are in retreat. Some

countries stand on the brink of

exclusion from the conventional

fi nancial system. Cross-border

capital and lending fl ows are de-

clining, albeit from previously un-

sustainable and dangerous highs.

Trade is lagging even anaemic

global expansion. Protectionism

and nationalism are the rising

political forces.

And yet away from war zones

and populations suffering from

the worst extremes of poverty,

the digital economy makes most

of us feel more inter-connected

than ever before.

Is it to be our redemption?

A McKinsey report, Digital

globalization: new era of global

fl ows, attempts to measure the

growth of cross-border fl ows in

data, which it estimates have in-

creased 45 times in the 10 years

from 2005, even as trade and

fi nancial fl ows have fl attened.

McKinsey contends that

the cross-border bandwidth of

data fl ows will grow by another

nine times in the next fi ve years

as digital fl ows of commerce,

information, searches, video,

communication and intra-com-

pany traffi c continue to surge.

It suggests that data fl ows are

already contributing more to GDP

growth than cross-border fl ows

of manufactured goods, and that

data fl ows account for $2.8 trillion

out of the total of $7.8 trillion of

global GDP contributed by the

combined cross-border fl ows of

traded goods, FDI and data in

2014.

McKinsey posits that globaliza-

tion has not stopped, as might

seem the case from the slowing

of trade and the retreat to home

markets of once globalizing

enterprises like the world’s largest

banks. Rather, small businesses

and individuals are becoming the

drivers of globalization.

It points out that small busi-

nesses worldwide are becoming

“micro-multinationals” by using

digital platforms such as eBay,

Amazon, Facebook and Alibaba

to connect with customers and

suppliers in other countries. Even

the smallest enterprises can be

born global: 86% of tech-based

start-ups McKinsey surveyed

report some type of cross-border

activity.

Once dominated by multina-

tional corporates funded by the

largest banks, globalization is

increasingly the preserve of indi-

viduals participating in it directly,

using digital platforms to learn,

fi nd work, showcase their talent

and build networks. Some 900

million people have international

connections on social media and

360 million take part in cross-

border e-commerce.

Approximately 12% of the

global goods trade is now

conducted via international

e-commerce, with much of it

driven by open platforms such as

Alibaba, Amazon, eBay, Flipkart

and Rakuten.

McKinsey runs through the

example of Taobao, the Chinese

consumer-to-consumer mar-

ketplace that Alibaba set up in

2003 that grew to be one of the

world’s top-10 visited sites within

a decade after starting, as familiar

to Chinese language shoppers

as eBay.

“Consider all of the tools and

platforms that a small Chinese

manufacturer has at its dis-

posal when it becomes a Taobao

merchant,” the report asks. “The

company can open and custom-

ize a Taobao ‘storefront’ for free

using a mobile app and upload

its merchandise for sale. It can

communicate with customers us-

ing an instant messaging service,

handle payments through Alipay,

choose an Alibaba-affi liated

logistics company for shipping,

place targeted digital ad buys

through Alimama, and get a small

loan instantly from an Alibaba

microfi nance subsidiary that can

evaluate the merchant’s credit

based on data about its business

performance on the platform.

“Finally, the company can use

Alibaba itself to buy supplies and

professional services.”

In 2010, The World Bank

estimated there were around

125 million small and medium-

sized enterprises in the world. By

2013 some 25 million of these

were active on Facebook. Today

Facebook reports 50 million SME

users. In the US, the share of

exports by large multinational

corporations dropped from 84%

in 1977 to 50% in 2013. Among

SMEs that export, the small-

est – those with fewer than 50

employees – are gaining share

the fastest, McKinsey fi nds.

In the past era of globalization

led by developed-market multi-

national corporations most of the

benefi ts fell to countries that were

the central hubs in fl ows of physi-

cal goods and of fi nance. In the

era of digital globalization, more

of the benefi t passes to countries

even at the fringe of such fl ows,

as long as they participate at all.

McKinsey argues: “The near-

zero marginal costs of digital

communications and transactions

open new possibilities for con-

ducting business across borders

on a massive scale.”

And what of the retreating

banks? Business, experience

suggests, just like nature, abhors

a vacuum. As McKinsey points

out for the small merchants on

Taobao, if they need fi nance,

some business will provide it,

whether the lending arm of their

digital shop-front host, an un-

regulated lender or a recognized

bank perhaps backing the line of

credit to a peer-to-peer lending

platform.

Similarly, if conventional banks

will not service the world’s largest

remittance corridors, new start-

ups with better technology will.

Euromoney has written about

TransferWise, Azimo and others.

New digital banks like Safello and

Wirex will use blockchain to ease

the fl ow of low-value, cross-bor-

der payments at high speed and

low cost for individuals and small

businesses. Corporations will

look to fi ntech companies for new

payment services if the estab-

lished banks won’t help them.

And if banks can’t adapt to the

new digital world, then so be it.

They are simply self-selecting for

extinction.

Effectively eliminated measures

Stockpile of restrictive measures

By mid-October 2010 By mid-May 2016

381 measures

1,583 measures

57

324

387

1,196

Stockpile of trade-restrictive measures2010-2016

Source: WTO Secretariat

Million

205256300300320321

400407

6501,0001,000

1,3141,372

1,590China

YouTube

Facebook

India

WhatsApp

Alibaba

Skype

Brazil

WeChat

Amazon

Indonesia

Twitter

US

Instagram

CountriesOnline platforms

The biggest platforms have user bases on par with the populations of the world’s biggest countries

Source: McKinsey

The candidacy of Donald Trump is part of a populist, nationalist trend that could even threaten global trade fl ows

Sibos 2016 www.euromoney.com12

Cover story

Revolution or digital transformation: where do you sit on this question?SM: Cash management is the

foremost of the bank’s transactional métiers, and digital in nature. What we call “the new communication technologies” have given us both the ability to integrate interactivity into our transactional processes, and the opportunity to widen channels of communication. For example, mobile technology means we can off er signatories more fl exibility in the validation of their transactions.

What does digital technology bring to cash management today?SM: Exchanges relating to payments, collections and reporting processes are already dematerialised in the main. We carry out our transactional activity in a heavily digitalised environment, and this leads to greater effi ciency and reliability. But in addition, the latest aspects of digitalisation are also allowing us to move into management processes associated.

SL: eBAM (Electronic Bank Account Management) is a good illustration of this. Account administration is among the priorities for companies with a foothold in several countries. The fi rst product we developed was aimed at these types of companies. It gives them the advantage of a real-time overview of who is able to do what in relation to all of their accounts.

Speed, effi ciency ... is the digital era the panacea of cash management?SM: Not on its own, as other factors of course have an infl uence. The globalisation of the economy is aff ecting businesses of all sizes, which are subject to an increasingly complex regulatory environment.

But there is a dichotomy: the benefi ts of digitalisation are very real the environment in which companies are developing requires them to implement tighter internal and security-related controls.

SL: Treasurers need to produce reliable and consolidated data, and their reports must be up-to-the-minute, even though requirements vary between countries. The treasurer must meet objectives whilst being a pivotal aspect of the company’s development.

Exactly: can digital working off set this increased complexity?SL: Digitalisation must take place within accepted practices. This requires both command of the technology, which is a prerequisite (such as for XML formats), but also extensive knowledge of the regulatory requirements of each country.

Digital transformation must be taken forward by all those operating in the cash management environment. If this happens, the many challenges of the digital era can be met and its full potential exploited in the long run.

SM: I should add that while digitisation means greater simplicity, it also lets us reinvent the customer experience; it can make it more intuitive and add more subjective dimensions, taking it beyond being simply satisfactory.

Doesn’t the digital transformation allow precisely that, to put the customer back at the heart of the various processes?SM: Absolutely. This looks much more like a fundamental shi� than a temporary trend. So our customers are also shi� ing their paradigm, resulting in this new customer experience. This means they expect the same proactive approach from their bank. The digital transformation has been underway at BNP Paribas cash management for a very long time.

Where will this take you?SM: Today, our ambition is to continue to support the change at operational level by dematerialising the key processes, while also making a stronger contribution to the development of businesses. Digital technology can and must continue to improve effi ciency, and convey our advice and expertise to customers.

SL: We are already commi� ed to this form of action by designing new digital tools that will assist us in our advisory function: among others, we could cite the fi nancial information now published

online, tutorials, and also knowledge-sharing tools.

So can nothing stop the digital wave?SL: Certainly, the increasing number of compliance-related requirements, as well as the growing prevalence of internet fraud demand extra care and greater expertise. In the long run though, the advantages of digitalisation will far outweigh the investment needed.

SM: As a bank, we have a dual role: on one hand, we need to support digitalisation of the core processes to ensure our customers’ transactions are processed in complete safety and compliance. On the other hand, our role is to use our services and expertise, via a new kind of customer experience, to help companies face the challenges of a world of great and rapid change.

THE DIGITAL TRANSFORMATION: NEW CORPORATE FAD OR TIDAL WAVE OF CHANGE?Sophie Michel (SM) and Steven Lenaerts (SL) reveal their views on the digital transformation and the impact it is having on cash management processes, as well as on financial strategies more broadly.

Our Atlas and Currency Guide tools, as well as our sites dedicated to cash management and trade solutions, can

be found online:

currencyguide.bnpparibas.com/

cashmanagement.bnpparibas.com/atlas-countries

www.youtube.com/watch?v=uRqLxmTK5qM

www.cashmanagement.bnpparibas.com

www.tradesolutions.bnpparibas.com

S P O N S O R E D C O N T E N T

dency of the US. At the same time as saying

they will erect real or metaphoric barriers to

immigration, politicians riding the surging

wave of new nationalism are also increasingly

hostile to free trade.

Stephen Gallagher, an economist at Société

Générale, looking ahead to the economic

impact of the US presidential election, notes:

“Both candidates have criticized the Trans-

Pacific Partnership (TPP). Their positions

reflect voter sentiment. Clinton is more

likely to maintain the current trade status

quo, whereas Trump promises to re-open

discussions on the North America Free Trade

Agreement (Nafta).”

Gallagher admits that: “Precisely what

he wants to renegotiate is unclear – Canada

and Mexico are not eager to negotiate, and

changes from a Trump administration could

be unilateral.”

He also notes Trump’s talk of throwing up

punitive tariffs, which tends to go down well

at rallies, and says: “These signals on trade

could reduce potential US GDP over a long

time period.”

In a survey published in June of trade

measures implemented between mid-October

2015 and mid-May 2016, the WTO reports

a marked rise in protectionism, with 145

new trade-restrictive measures introduced in

that period, and these are now coming at the

fastest monthly rate since the WTO began

surveying such measures in 2009.

“In the current environment, a rise in

trade restrictions is the last thing the global

economy needs,” says Roberto Azevêdo,

director general of the WTO, drawing the

traditional link between trade and economic

growth. “This increase could have a further

chilling effect on trade flows, with knock-on

effects for economic growth and job creation.

“We hope that this will not be an indica-

tion of things to come, and clearly action

is needed,” he says. “Out of the more than

2,800 trade-restrictive measures recorded by

this exercise since October 2008, only 25%

have been removed.”

This adds further uncertainty to the

outlook for trade. The WTO pleads with the

leading G20 economies to set an example in

the fight against protectionism by rejecting

new trade-restrictive measures and rolling

back exiting ones. Even with Trump trailing

in the autumn polls, let’s hope no one at the

WTO is holding their breath on that.

McKinsey points out that for two decades

in the run-up to the financial crisis, the

world’s trade in goods, including commodi-

ties, finished goods and intermediate inputs,

grew roughly twice as fast as global GDP, as

multinationals expanded their supply chains

and established new bases of production in

countries with low-cost labour.

Global trade in goods soared from 13.8%

of world GDP in 1986 to 26.6% in 2008 on

the eve of the financial crisis. This was the

heyday of globalization, when global elites

largely embraced the so-called Washington

consensus lionizing unfettered free mar-

kets, free movement of capital and goods

everywhere, whatever the consequences for

populations. They hoped that voters’ fear of

falling wages and rising unemployment might

be bought off with cheap imported TVs and,

of course, low-rate financing to speculate on

housing and financial assets to compensate

for declining regular earnings from tradi-

tional sources like… actual jobs.

After a sharp decline following the finan-

cial crisis and a short-lived rebound after the

ensuing recession, however, the goods trade

has been growing more slowly even than

lacklustre world GDP in recent years, puz-

zling economists and business leaders alike.

In July, after the UK population voted to

leave the EU, the IMF refined its forecasts for

global GDP growth this year and next. It now

forecasts global growth of 3.1% in 2016 and

3.4% in 2017. In April, the WTO forecast

global trade to grow at below this rate, at just

2.8% in 2016, the same rate at which it grew

in 2015. Instead of exceeding and leading

GDP growth, which was 3.1% for 2015,

trade continues to lag.

According to McKinsey: “Some of this

decline is cyclical. Our analysis suggests that

weak demand and plummeting prices for

commodities account for nearly three-quar-

ters of the decline in trade.”

But trade in both finished and intermediate

manufactured goods has also declined. The

makers of many finished goods are beginning

to place less importance on labour costs and

more on speed to market, McKinsey argues.

As a result, some production is moving closer

to end-consumers. Trade is also declining for

many intermediate goods such as chemicals,

paper, textile fabrics, and communications

and electrical equipment. This suggests that

global value chains may be shortening, at

least in part because of the cost of managing

complex, lengthy supply chains.

There is also an argument that organized

labour in developed markets has been bat-

tered into submission. Even in countries such

as the US, seemingly at the point of full em-

ployment, hourly wages are not rising. Does

this reflect lack of investment in productivity-

enhancing technology, or perhaps workers

in developed economies accepting they

must compete with hourly rates in emerging

markets? “In the decade ahead, the global

goods trade may continue to decline relative

to world GDP,” McKinsey suggests.

That’s not good news for banks that have

depended on a rise in globalization for much

of their growth for a generation or more.

Structurally lower trade means less need for

cross-border payments, cash management,

foreign exchange, cross-border investment

flows and inter-regional M&A. How banks

react to these challenges will define the indus-

try for the next generation.

397

1,020

’18

30

744

’19’15’14 ’20

1,397

’17

543211

’13

147’16’10

1,914

702021

Estimated

290

’12’11

46’09’08

112005

5 19’07’06

7 101

ForecastActual

45x

>9x

Cross-border bandwidth has grown 45 times larger over the past decadeTerabits/second

Source: McKinsey

Sibos 2016 www.euromoney.com14 15www.euromoney.com Sibos 2016

Correspondent banking

As the number of truly international banks shrinks, new alliances and networks are being formed to meet the needs of clients. Choosing the right partner is an important and complex process. Increasingly, corporate treasury teams are taking a keen interest in the banks’ decisions

Ask almost any bank about

their international ambi-

tions in recent years and

you would get the same

response: We’re not look-

ing to expand for expansion’s sake, but we

will go with our clients where they want us

to go with them.

But is that still really the case? Pressured

by costs, falling revenues and regulation,

many banks are starting to ask the question:

If we expand our geographic footprint to

support our clients, are we going to generate

enough revenue to make the costs and the

risks worthwhile?

Then there are the challenges facing the

few banks left with truly global ambitions.

Once, they took pride in having a presence

in as many countries as possible. Global

expansion seemed a goal in itself – the prof-

its would surely follow. But, generally, they

did not. Costs rose and profits fell. Stricter

know-your-client (KYC) requirements

turned the conversation away from global

banks being too big to fail, to simply being

too big to manage.

Leda Glyptis, a director at consultants

Sapient, says: “Historically there have been

two assumptions with a bank’s international

presence: that global is good and that it

does not have to be deep. Neither of these is

necessarily true.”

Whether it is RBS deciding to sell its

transaction banking business outside the

UK, HSBC selling its Brazilian business to

Banco Bradesco, or ANZ pulling back from

its ambitions in Asia, the era of global or

even regional expansion seems to be draw-

ing to a close.

Anurag Bajaj, global head of correspond-

ent banking at Standard Chartered, says:

“The number of truly global banks has

declined as more and more institutions

focus on their core markets to follow their

strategy. In the recent past, many banks

pursued opportunistic growth to expand

beyond their home markets, only to find out

that this strategy was not sustainable in the

long-term.

“An eastern Europe bank, for example,

chasing opportunities in Asia will suddenly

find that the cost of doing business in terms

of regulation and operations outstrips the

opportunity.”

Instead, a new approach is emerging, with

New networks change the face of transaction banking

process. On top of the standard KYC and

anti-money laundering (AML) requirements,

there has to be an assessment of the bank

itself. What is its culture and can the teams

work well together? What are their stand-

ards on customer service, and do they match

the bank’s own?

Magnus McNeill, head of banks and bro-

ker dealers at SEB, says: “Working through

regulatory constraints, competitive aspects

and confidentiality concerns is a complex

exercise when determining which banks

are most suitable as partners. It needs to be

a bank with a similar culture. Is their ap-

proach towards customers the same as ours?

Do they deal with customers personally, or

refer them to a call centre? We’d rather not

provide a service than provide it badly.”

George Koutzen, head of business risk

and control management, global liquidity

and cash management at HSBC, notes it is

an important business decision; the bank

must trust the correspondent to work to its

own exacting standards.

“It is not a casual relationship when you

engage with another bank, it needs to be

strong as the partner will engage with your

clients,” he says. “There needs to be proper

due diligence and an understanding of

operations. Through taking a disciplined ap-

proach, it is also how they can learn about

how we operate.”

When a corporate signs an agreement

with its primary cash management bank, re-

gardless of the method in which transactions

are completed, it is up to the bank to ensure

it is delivering on the promised standard.

“Clients understand the need to use part-

ners and we are always up front about this.

But ultimately it is still HSBC’s responsibility

to deliver,” says Koutzen.

Dub Newman, managing director, head

of North America GTS, Bank of America

Merrill Lynch, says the bank ensures the

client receives the same consistent, high level

of service, whether it comes from BAML

or their partner: “We employ an integrated

partner bank model, which we believe is

the best way to serve our clients. No matter

where in the world they conduct business,

our clients can then receive a consistent ex-

perience – they’ll receive the same standard

of service, the same contract documentation

and access to our integrated technology.”

McNeill adds that clients will notice if

certain regions or markets. Institutions that

have tried to operate across multiple regions

or segments have for the most part been

unsuccessful.”

But can alliances really fill the gaps and

offer clients a seamless service? Will clients

find particular products or offerings falling

through the cracks? Or could it be possible

that an alliance of specialists actually gives

clients a better overall service?

THE IMPORTANCE OF HAVING A

strong counterparty network has grown, but

comes with its own problems to navigate.

Each bank has to decide which other banks

it wants to work with. It is a detailed

the correspondent banking network at its

core.

“The period of global expansion is behind

us,” says Glyptis. “While there is now

stability, there is limited scope for additional

growth. After a short period of concern and

activity over what impact the cryptocurren-

cies could have on correspondent banking, it

has quietened down again.”

Banks are becoming more specialized in

their services, targeting key client segments

and product sets. Dominic Broom, head of

treasury services EMEA at Bank of New

York Mellon, says: “Correspondent banking

has moved towards selective specialism;

leveraging non-compete local-global bank

alliances that bring together experts in

By: Kimberley Long

Sibos 2016 www.euromoney.com16 17 www.euromoney.com Sibos 2016

Correspondent banking

there is a deterioration in service quality

when processes move to the correspond-

ent: “Many of our largest clients are

extremely sophisticated and have a deep

understanding of which service providers

and correspondent banks we use. They

notice when something changes or a

process deviates.”

Correspondent banking is at its core a

relationship that needs to work for both

parties. Just as a global bank will assess

the risk of a small, regional or country-

specifi c provider, the smaller bank must

also evaluate the risks and rewards of

the relationship.

“Correspondent banking is a two-

way relationship,” says Broom at BNY

Mellon. “Both parties evaluate their

partners on an ongoing basis to examine

whether their network remains effective,

sustainable and best positioned to meet

the evolving needs of the clients that it is

designed to serve.”

Standard Chartered’s Bajaj reiter-

ates this view of the mutually benefi cial

relationship: “When choosing the best

bank partner in the market, you cannot

simply just choose the bank – the bank

also has to choose you. It is a two-way

marriage, and both have to fulfi l the

standards of the bank they are accepting

to work with.”

THE NATURE OF CORRESPONDENT

banking means it works two ways. It is

not just a question of big international

banks looking for partners in smaller

jurisdictions; the smaller banks need in-

ternational partners too. And while two

banks may not be equal in size and scale,

do not assume that the smaller partner

has less stringent requirements than the

bigger one in any negotiations. A tie-up

with a big bank making headlines for all

the wrong reasons can have a knock-

on impact for a smaller correspondent

partner. And in the current environment,

the smaller partner has to be wary of a

sudden withdrawal from a product or

service by a bigger bank provider.

Dena Stefanopoulos, senior direc-

tor of product management at Silicon

Valley Bank (SVB), says: “As a buyer

of correspondent banking services, we

have to be more diligent now and have

contingency plans in place to ensure that

we have a back-up provider for that

market or service in case the incumbent

exits. There is less stability and certainty

to correspondent banking relationships

today than in the past. The instability in

the market could also open up opportu-

nities for non-banks that choose to play

in the space.”

A look into the network used by SVB

shows how complex it needs to be. The

bank has correspondent relationships to

access clearing in 25 different currencies.

The bank uses a combination of global

fi nancial institutions, such as Deutsche

Bank for euros and Standard Chartered

for Singapore dollars. But for smaller

currencies, it also looks to the local

fi nancial institutions, working with Absa

Bank on South African rand and K&H

Bank on the Hungarian forint.

“There are many variables that factor

into which banks to use,” adds Stefa-

nopoulos. “Many banks have a formal

request-for-proposal process to defi ne

the services they’re looking for and to

qualify the top providers regarding risk

and services provided. Then there are

business issues to consider: competi-

tive issues, service levels, other business

with that bank across the enterprise,

reciprocity.”

Glyptis at Sapient says more stable

partnerships are emerging: “Operation-

ally it makes sense. Unless you tie it with

the partner, they could undercut you.” To

keep both the correspondent bank and

the corporate client happy, the global

bank is under pressure to ensure they

can offer an unrivalled service or they

risk losing the business. If a corporate

fi nds they could receive the same level

of service at a lower price direct from

the correspondent bank, they may not

hesitate to move.

Glyptis adds that the big banks need

to be sure they are offering the highest

standard of product and services to en-

sure customer loyalty: “The whole pack-

age needs to be such that the big names

offer the most obvious advantages. It

won’t be done on price, so it needs to be

through the bundled package.”

Not every bank has decided to hand

over their operations to a correspondent

network. Naveed Sultan, global head of

treasury and trade solutions at Citi, says

in his experience the banks do not need

to be deep on the ground, but they do

need to have some market presence in

a region. Working at arm’s-length from

the clients through a correspondent

relationship is not the same as a direct

relationship.

“Although it does not have to be sub-

stantial, a physical presence in a country

is necessary. The expansion of the digital

network does not mean being on the

ground is becoming irrelevant.”

There are risks, says Sultan, of simply

delegating your presence in a region

to another bank: “Banks that do not

already have a presence in some of the

growth markets will fi nd it diffi cult to do

business in a meaningful manner. Lack

of presence in these markets will not allow

the banks to make as big an impact when

these become more attractive.”

THE CHOICE OF COUNTERPARTY IS

an increasingly important topic for corpo-

rate treasury teams. They cannot simply del-

egate network decisions to their lead banks

any more. They are under greater regulatory

scrutiny themselves; they want to know who

in the chain is handling their money at every

turn, and they sometimes want to have a say

in it too.

Susan Skerritt, managing director and

head global transaction banking Americas

at Deutsche Bank, says customers are taking

a keener interest in specifi c markets and

banks need to be on hand with the answers:

“As certain markets open up and others

become more diffi cult, it is not unusual for a

corporate making a payment to ask a bank

how the funds are being handled. If they

are concerned, we will walk them through

what it will look like. Corporates operating

in markets where there could be questions

are often very knowledgeable about the

problems they face.”

It is a process that needs to be regularly

monitored, as banks switch to new providers

and shareholders change.

“As part of KYC, due diligence needs to

be carried out on the ownership structure of

the provider, unwrapped down to the benefi -

cial owner. If there are changes this needs to

be reassessed,” says Bajaj.

It is essential for corporates to be kept in

the loop over who is providing which service

to ensure they keep on top of their own

AML and KYC requirements. A corporate

may have carried out their due diligence on

their chosen banking partner, but do they

know the same level of detail on the banks

lower down the chain? Simply trusting their

bank to make the right choice will not cut it

with the regulator.

Stefanopoulos at SVB says: “Corporates

want to know who is in the network, and

it’s often diffi cult for them to keep track of

all the changes, some of which may impact

their business operations. They rely on their

bankers to update them on changes in their

correspondent banking network. Corporates

understand regulations as they also have to

comply with those that apply to them. Cor-

respondent banks today are under tremen-

dous scrutiny from regulators, and most

corporates understand this.

“But corporates need to run their global

business operations smoothly and effi ciently,

without disruption or unexpected change.

They expect their bank to help them manage

this, regardless of the shifts in the industry.”

HSBC’s Koutzen adds: “Clients are hold-

ing their banks accountable on their ability

to deliver across the network. Picking a

clearing counterparty is really important.

Picking the wrong partner could mean not

only letting the customers down but sacrifi c-

ing the control standards. It is an important

topic.”

Not all corporate treasury teams are this

hands-on, of course. Jean-François Mazure,

co-director of cash clearing services at

Société Générale, says for the most part, the

primary concern of a corporate is that their

payment is processed: “Choosing providers,

reliability and long-term commitment are

very important. The client wants to be able

to send a payment and for it to be processed,

they are not preoccupied by which bank is

doing it.

“Reliability and long-term commitment

have become really key decision factors

when it comes to selecting a correspondent.

The ultimate client, in our French network

for instance, merely wants to send pay-

ments, easily and cost-effectively. In most

cases, they are not preoccupied by the banks

involved in the routing.”

Getting the money moving is not much

of a problem as most banks, regardless of

size, have access to the same network. Says

Deutsche’s Skerritt: “The most important

thing in the whole network is Swift. The

movement of funds cross-border is seamless

now, and at Deutsche Bank we see straight-

through-processing rates of more than

97%.”

OVERALL, THE WAY CORRESPONDENT

banking operates is changing. Clients are

again looking to move into new territories,

and it is up to the banks to decide if they

want to follow them. Changes to sanctions

mean that Iran and Cuba are re-opening

their borders.

One banker says they are already starting

to have companies ask questions about

how they can do business in former no-go

areas: “Some of our clients are seeing busi-

ness opportunities in previously sanctioned

locations and, as a result, they’re looking to

open bank accounts in those countries.”

The same banker adds that some transac-

tions have been completed, but they are

not without their problems: “We’ve had

situations of payments being sent to a corre-

spondent bank and held up in the screening

process. In one example, a company doing

business in Cuba was sending payments

from the US to Germany. However, the

payment was stopped because the attached

messaging included the word Havana.

We clarifi ed the situation with the various

parties and the payment eventually went

through.”

“Historically there have been two

assumptions with a bank’s international

presence: that global is good and that

it does not have to be deep. Neither of

these is necessarily true”

Leda Glyptis, Sapient

“Correspondent banking

has moved towards selective

specialism; leveraging non-

compete local-global bank

alliances that bring together

experts in certain regions or

markets. Institutions that have

tried to operate across multiple

regions or segments have for the

most part been unsuccessful”

Dominic Broom,

Bank of New York Mellon

Sibos 2016 www.euromoney.com18 19www.euromoney.com Sibos 2016

Transaction services

The internet has created a new kind of company that needs to be international and multi-currency from the outset. They are businesses that usually understand technology better than their banking partners. So how are the world’s leading cash managers meeting the challenges posed by these new clients?

From the moment their website

goes live, many e-commerce

companies are operating

across borders and in multiple

currencies. The expectations

of consumers mean the process of buying

and receiving payment needs to be faultless

from the outset. For their banks, this requires

providing multiple payment options, straight-

through processing and highly sophisticated

treasury services.

The numbers involved are growing fast.

Deloitte’s ‘Global powers of retailing 2016’

report found Amazon to be the world’s most

profitable online-only retailer, recording a

retail revenue of $70 billion. The report also

found that 11 of the top 50 e-commerce

sites were operated by online-only compa-

nies. These companies are transacting huge

volumes of payments across borders and

need their transaction banks to make their

business work.

E-commerce companies operate with a

radically different mind-set from traditional

multinationals, which have progressed to

global scale over many years. They are

also businesses that do not just understand

technology, they have the latest tech at the

heart of their business. They are not going to

be easily impressed by a bank’s latest systems

offering.

It is a complex challenge, one that spans

the full spectrum, from the internet giants to

smaller startups selling apps that have only

a handful of employees but many millions

in revenues in dozens of different countries

and currencies. This new breed of company

is forcing transaction banks to create a new

blueprint of how to do business.

FOR A START, BANKS NEED TO LOOK

at how they categorize companies that sit

beneath the digital umbrella – internet com-

panies are not a homogenous group.

“There is a tendency to view fintechs,

e-commerce companies and startups all in

the same way. They are actually three distinct

businesses, with different needs. Trying to

implement one solution for them all will not

work,” says David Watson, global head of

product development at Deutsche Bank.

He explains that a fintech will provide soft-

ware; a startup is a small company looking

to accelerate its growth; while an e-commerce

company is a retailer selling directly to con-

sumers. Under the definition of e-commerce,

the structure can be broken down further,

from focused e-commerce companies selling

their own products direct to consumers, to

online marketplaces with a complex structure

aggregating smaller traders.

These marketplace companies create an

additional level of complexity. Nick Howden,

Asia Pacific technology, media and telecom

sector head, treasury and trade solutions, at

Citi, explains: “Marketplaces create some

unique challenges as regulators often regard

the flow of funds between parties as client

monies, which have special reporting and

fiduciary requirements on the banks that

process the payments in the background.”

Where revenues are accrued and kept is an

increasingly political subject: the €13 billion

fine levied against Apple by the EU recently is

just one example of the sensitivities involved.

Keeping up with the internet giants

their account within hours. This puts further

pressure on banks serving e-commerce clients

to be nimble.

For the fast-paced e-commerce compa-

nies, the reality of what their banks can

do for them – and how long it will take to

complete – can be very different from what

they expect. A successful relationship partly

comes down to finding a way to manage

expectations. What they have experienced

from consumer banking will be very different

when cross-border payments, AML regula-

tion and fluctuating FX rates are all taken

into account.

“There are expectations that a corporate

bank will be the same as a consumer bank.

That’s where the need for education comes

in, to explain that sending a payment within

the US is not using the same architecture as

sending funds to India, as an example,” says

Minick.

Cindy Murray, head of platform transfor-

mation, digital channels and client experience

at BAML, adds that the lack of homogeni-

zation across banking platforms between

countries could be a culture shock to the

corporates: “E-commerce companies look for

global consistency, but there is no such thing.

For the banks, this means trying to smooth

out the experience. The ISO standards have

certainly helped with this and can be lever-

aged to have a consistent experience in how

payments are sent.”

THE PAYMENT METHOD THE

company accepts itself can vary wildly and

the processes available differ hugely between

countries. PayPal operates across 202 coun-

tries, but does not include Pakistan, Bangla-

desh and Ghana. Even apparently universal

payment methods have their blind spots.

Sanjeet Rao, software development vice-

president for Oracle Financial Services, says:

“E-commerce companies may want to offer

multiple choices for payments and financ-

ing that banks should have the necessary

technology to integrate into the e-commerce

experience. PayPal, wallets, debit cards, cash

on delivery – even a six month payment plan

in instalments. E-commerce companies may

also want to offer closed-loop stored-value

wallets and loyalty that can be hosted by the

bank.”

SEB’s Da Silva adds: “E-commerce retail-

ers need a wide range of payment options,

e-commerce platform that could represent

their entire workforce. Their treasury func-

tions need to be simple, despite their inherent

complexity.

“E-commerce companies are very lean. We

are often asked why these companies aren’t

present at more events and conferences – the

simple answer is they do not have the head-

count to be out of the office,” says Minick.

COMPANIES OFFERING A MULTI-

device, 24/7 service to their customers expect

the same level of access back from their

banks. Joanne Scheier, corporate segment

market manager for BNY Mellon Treasury

Services, says companies expect the consisten-

cy of service they provide for their own cus-

tomers: “The impact of e-commerce on banks

has far more to do with how e-commerce

has changed societal expectations regarding

the speed, efficiency and user-friendliness of

transactions.”

Compared with traditional companies,

online retailers are not as willing to wait for

a solution.

Leda Glyptis, director at consultant Sapi-

ent, says: “E-commerce companies are more

impatient. They build businesses with low

friction and expect the same in their banking

relationships. Their tolerance for slow or

cumbersome methods is very low. Their will-

ingness to indulge their bank and input the

same information three times into a banking

system will be very low.”

John Campbell, head of regional and FI

sales, transaction banking at ANZ, com-

ments: “Technology has been available for

many years allowing logistics companies such

as Fedex to help customers track where their

parcel is, yet banks can’t tell our customers

where their payment is.

“E-commerce companies like Amazon

want speed and transparency and hence will

only work with banks that are capable of

helping them to deliver this consistent client

experience.”

The needs of companies are further dic-

tated by what their own customers expect.

“E-commerce companies demand speed and

access. They need services to be up and run-

ning quickly, and the demands of their clients

influence their expectations on banks,” says

Da Silva.

Consumers are no longer happy to wait

days for a refund if their payment has left

It is also an example of how complex these

businesses can be.

Howden explains that the process of sup-

porting just marketplace companies runs into

a whole new way of working that can span

many markets and currencies.

“Client money often needs to be segre-

gated from corporate profits and attracts

more regulatory considerations on a cross-

border trade basis. Marketplaces are usually

licensed to sell goods and services on behalf

of merchants and may require regulatory

approval to operate in certain countries,” says

Howden.

“Often these regulatory approvals need

to be supported by a bank with the requisite

local experience. The bank seeking the ap-

proval needs to understand the end-to-end

trading model and funds flow as well as the

AML [anti-money laundering] monitoring

on transactions, and KYC [know-your-client]

processes for on-boarding sellers across the

marketplace.”

The cross-border nature of e-commerce

gives the potential for huge volumes. Accen-

ture’s ‘Cross-border B2C e-commerce market

trends’ report forecasts that cross-border

e-commerce payments will reach $1 trillion

in 2020. The casual request for multi-regional

and currency capabilities from a company

may prove to be a big task for the bank

receiving it.

Paula da Silva, head of transaction services

at SEB, explains: “These companies need an

agile cash pooling structure that takes into

account their multi-country operations, since

they are often operating with a number of

foreign currencies. We recently worked with a

company that needed to set up business in 10

countries at the same time.”

It is up to the bank to get a true under-

standing of the business and the company

specifically to engineer the best solutions.

Liz Minick, global head of corporate sales,

Bank of America Merrill Lynch, says: “These

companies do not interact with a bank in the

traditional manner of sending requests for

proposals every set number of years. From

a relationship management standpoint, the

teams are getting used to the fact that the

traditional bid cycles do not hold true in this

space, and reaction time is key.”

Despite their scale and turnover, resources

can be scarce. While the biggest traditional

companies may have at least two or three

dedicated staff in their treasury team, at an

By: Kimberley Long

Sibos 2016 www.euromoney.com20

Transaction services

21 www.euromoney.com Sibos 2016

While HSBC scores a notable double in Euromoney’s annual global rankings, the record response rate of almost 35,000 validated votes generated a host of changes at the upper end of our cash management survey. Regional banks move to the fore and some previous global leaders have dropped back

Change usually comes to the

cash management industry

at a gradual pace. That’s not

surprising in a market where

it might take clients up to a

decade to begin a new transaction relation-

ship with a bank. But eight years after the

onset of the global � nancial crisis, signs of

a new era in global cash management are

clearly apparent in the annual Euromoney

benchmark survey.

This won’t necessarily be visible among

the rankings of the top half dozen global

banks. Globally, the dominance of the inter-

national banks goes relatively unchallenged.

For a number of years, Citi and HSBC have

competed for the top position, with the likes

of Deutsche Bank, Bank of America Merrill

Lynch and BNP Paribas jostling underneath.

In the 2016 rankings, HSBC maintains

top spot globally, with Citi in second place

and Deutsche and BNPP holding on to third

and fourth place respectively.

Below this, however, the changes begin.

Bank of America falls from � fth place to

eighth. Banks with global capabilities but a

more regional focus rise within the top 10:

Italy’s UniCredit moves into the top � ve,

while Standard Chartered, Japan’s MUFG

and France’s Société Générale all gain places.

Beneath that, in the rankings from 11th

to 20th place, the changes are even more

stark. Regional powerhouses such as Itaú

Unibanco, Bank of China, ICBC, Santander,

ADCB, DBS and Sumitomo all post big rises

in their overall global rankings.

In total, more than 300 banks that

provide cash management services received

votes in this year’s survey. Euromoney

received a record number of validated votes:

more than 32,000 corporates took part and

more than 2,200 � nancial institutions voted.

With only 31% of respondents stating

they have just one provider, it is clear that

using multiple providers is the norm. The

percentage of those with seven or more

providers has risen to 8% this year. With so

many banks receiving votes, corporates are

evidently looking to spread their business,

or looking to have strong regional partners

alongside domestic or global banks.

That only tells part of the story. This year

34% of respondents have either changed,

added, or removed a cash management pro-

vider. The scope for smaller, more focused

banks to provide services alongside those of

the international banks is growing.

In the regional categories, these changes

are becoming even more apparent. Although

the top-ranked banks regionally are often

among the global leaders – Deutsche Bank

in Western Europe, Citi in CEE, Africa and

Latin America, and HSBC in the Middle

East and North America – those pre-eminent

positions are under greater threat than ever

before.

That’s certainly the case in Asia. As

recently as 2010, local banks were wholly

absent from the top � ve places in the region.

The 2016 results show how the strategy of

growth by the regional players has paid off.

Bank of China has pushed HSBC off the

top spot, a position it had held resolutely

for more than � ve years. Industrial Bank of

China takes the third spot and DBS clinches

fourth – an impressive rise from 15th place

last year.

Further down the table the results are

even more remarkable, with UOB leaping to

7th place from 43rd last year. Overall, there

are now six regional banks in the top 10

Asia results.

The arrival of this new regional com-

petition has been recognised by corporate

treasurers – 88% of respondents stated

there is now more competition for their

business. And 89% stated they feel more

competition has improved the quality of

service being provided. It has also resulted

in cost savings for the corporates, as 79%

responded that increased competition has

been bene� cial to the price of cash manage-

ment services.

In this year’s set of results, Euromoney

publishes in-depth country rankings on

� ve of the leading emerging markets. It is

notable that in four of these – Brazil (Itaú

Unibanco), China (ICBC), Russia (Promsvy-

azbank) and the UAE (ADCB) the winner

overall is a local bank. The exception is In-

dia, where HSBC wins and � fth-place HDFC

is the top-ranked domestic institution.

HSBC completes a notable double win

this year by also topping the overall � nan-

cial institutions rankings. Last year’s winner,

Deutsche Bank, slips to third place behind

Citi.

In a market where many banks are

considering their correspondent banking

relationships, there are two surprise new

entrants to the top � ve overall: Bank of New

York Mellon and Sumitomo. JPMorgan

jumps from eighth place to sixth. Com-

merzbank, BAML, Standard Chartered and

Barclays all fall by at least three places,

although they maintain their footholds in

the top 10.

Regional banks on the rise in global cash management

By: Kimberley Long

including cards, and are dependent on each

country’s standards and practices. Accessible

payment options are often a more pressing

issue than speed.”

Even the most common payment methods

create dif� culties for end-to-end processing

across borders.

“The great majority of payments are being

completed through credit cards, and their

biggest pain is reliance on cards because there

is no truly global player in the merchant ac-

quiring space – it’s country-by-country,” says

BAML’s Minick.

In some jurisdictions, the need to process

cash payments is also necessary, as consum-

ers either prefer or do not have the banking

facilities to make a payment through another

method. In India, for example, Amazon takes

payments for around half of its transactions

in cash.

This creates a further layer of complexity

in reconciliation.

Rao says: “A traditional payment method

like cash is not easy to handle. In the case

of cash on delivery, banks will need to work

with the courier company to facilitate the

quick settlement cycles. Needless to say, any

APIs [application programming interfaces]

that the banks use to support e-commerce

need to provide quick responses and be

highly scalable.”

With all these payments, a huge amount

of data is produced. Tapping into these data

� ows is the next challenge for banks. BAML’s

Murray says corporates are looking for more

granular detail: “They are frustrated that the

data doesn’t automatically come with the

payment, they prefer the information to � ow

through.”

Murray adds e-commerce companies want

to be able to treat their downstream clients in

the same way as they expect to receive their

payments. This information is available, but

is not being provided in a timely way: “There

is a greater degree of urgency with payments.

They want to pay customers within 24 hours,

and the data involved is critical.”

The nature of the people who run the

companies is also dictating this desire for in-

formation. Cyrus Daftary, managing director

and CEO of Markit CTI Tax Solutions, says:

“This new generation of innovators are very

technology orientated. They are more astute

and comfortable with collecting data and

analysis and running queries. These needs are

underserved, and in the next few years there

are opportunities for FIs to capitalize and

turn this into a revenue opportunity.”

To provide this ef� ciency, banks may need

to overhaul their approach to the online

community.

“Banks are still lagging behind, the experi-

ence is geared towards the needs of individu-

als and not corporations. There has to be a

paradigm shift, taking into account all of the

regulatory pressures from Mi� d II, Basel III,

BEPs, Fatca and more. Everyone tackles the

regulations in a silo. They need to think more

about the strategy,” adds Daftary.

Deutsche Bank’s Watson adds that there

needs to be a more collaborative approach to

creating the network these companies need

to make the most of what the technology

can do: “There is not enough being done to

service this sector. There is a need to acceler-

ate the speed of progress, and this means

engaging clients, the tech providers and the

banking industry directly.”

WITH SO MUCH CHANGE ON THE

horizon, banks may � nd themselves in an

unstable position. Future regulation may

well change the face of e-commerce banking

further. The implementation of the EU’s

revised Payment Services Directive (PSD2)

could have a big impact, opening up the

payments space to third-party providers.

There is a possibility e-commerce com-

panies will look to skip the banks and card

vendors entirely, obtaining funds dir ectly

from accounts themselves. Lu Zurawski,

solutions practice lead, consumer payments

EMEA, at ACI Worldwide, says companies

are demanding more and looking at how

they can achieve it themselves: “The arrival

of PSD2 will open up the API interface

mechanism. It will open up online payments

to both corporates and newcomers, respond-

ing to changing global payments needs.”

The bene� ts of this on the end user could

make it very appealing to customer-driven

e-commerce platforms. Says Zurawski: “Pay-

ments will not be issued through a card and

will happen much faster than at the present

time. Why shouldn’t the consumer have ac-

cess to both of these bene� ts?”

The arrival of online-based payment

methods could even further remove the

need for banks. But it isn’t clear yet if cor-

porates have an appetite for this.

Rao says: “Alternate payments in e-com-

merce, like cryptocurrencies or direct car-

rier billing, could move the entire payments

cycle away from the banks. Companies

need to think about either partnering with

the banks, or doing it on their own. But

are they looking to set up on their own?

Do they have the competencies of run-

ning a bank? Do they want that additional

undertaking?”

The appetite for innovation extends

beyond their technology. If companies � nd

they are not receiving the support of tradi-

tional banks, they will not hesitate to look

for support elsewhere.

Sapient’s Glyptis says: “These companies

are willing to crowdfund, they are willing

to look for novel ways of raising capital.

They will negotiate the traditional elements

of banking relationships. I don’t think

banks have given these changes enough

attention. It is not prevalent enough right

now to worry the banks, but when it is it

will be too late.”

“E-commerce companies

are very lean. We are often

asked why these companies

aren’t present at more events

and conferences – the simple

answer is they do not have

the headcount to be out of the

of� ce”

Liz Minick,

Bank of America Merrill Lynch

Sibos 2016 www.euromoney.com22 23www.euromoney.com Sibos 2016

Cash management survey 2016

Non-financial institutionsAmong non-financial institutions,which ICMs do you use most?Global2016 2015 Bank Score

1 1 HSBC 11,041

2 2 Citi 7,389

3 3 Deutsche Bank 4,238

4 4 BNP Paribas 3,448

5 6 UniCredit 2,192

6 7 Standard Chartered 1,654

7 10 Bank of Tokyo-Mitsubishi UFJ 1,626

8 5 Bank of America Merrill Lynch 1,475

9 8 JPMorgan 1,397

10 11 Société Générale 1,217

11 9 Commerzbank 1,186

12 14 Itaú UniBanco 1,173

13 18 Bank of China 1,123

14 36= Industrial & Commercial Bank of China 1,059

15 19 Santander 806

16 27 ADCB 780

17 35 DBS Bank 768

18 21 Yapi Kredi 698

19 28 Sumitomo Mitsui Banking Corporation 690

20 13 Barclays 675

Best regional cash manager Western Europe 2016 2015 Bank Score

1 1 Deutsche Bank 2,349

2 4 HSBC 1,971

3 3 Citi 1,893

4 2 BNP Paribas 1,822

5 5 UniCredit 1,239

6 6 Commerzbank 930

7 10 Société Générale 764

8 8 UBS 610

9 13 Bank of Tokyo-Mitsubishi UFJ 606

10 11 Barclays 501

Central & Eastern Europe 2016 2015 Bank Score

1 1 Citi 2,130

2 2 UniCredit 1,355

3 3 HSBC 819

4 5 Deutsche Bank 504

5 4 BNP Paribas 495

6 7 Société Générale 481

7 6 Yapi Kredi 287

8 8 Commerzbank 277

9 10 ING Group 253

10 11 RZB 189

North America2016 2015 Bank Score

1 2 HSBC 690

2 3 Citi 508

3 1 Bank of America Merrill Lynch 226

4 4 JPMorgan 189

5 6 Deutsche Bank 90

6 9 Itaú UniBanco 80

7 8 Bank of Tokyo-Mitsubishi UFJ 72

8 5 Wells Fargo 64

9 7 BNP Paribas 58

10 31= Bank of China 48

Latin America2016 2015 Bank Score

1 1 Citi 1,649

2 2 Itaú UniBanco 1,295

3 3 HSBC 634

4 4 Santander 469

5 5 BBVA 448

6 6 JPMorgan 95

7 7 Banco do Brasil 92

8 16 Industrial & Commercial Bank of China 81

9= 9 Banco Bradesco 80

9= 10 Deutsche Bank 80

Asia 2016 2015 Bank Score

1 2 Bank of China 10,001

2 1 HSBC 9,553

3 8 Industrial & Commercial Bank of China 5,502

4 15 DBS Bank 4,153

5 3 Citi 3,219

6 4 Deutsche Bank 2,317

7 43 UOB 1,996

8 7 Standard Chartered 1,800

9 Cathay United Bank 1,747

10 16 China Merchants Bank 1,743

Middle East2016 2015 Bank Score

1 1 HSBC 3,833

2 2 Citi 1,503

3 5 ADCB 1,157

4 3 BNP Paribas 656

5 4 Standard Chartered 604

6 6 National Bank of Abu Dhabi 185

7 11= Yapi Kredi 158

8 9 Arab Bank 150

9 11= Emirates NBD 129

10 16 Bank of China 100

Africa2016 2015 Bank Score

1 1 Citi 623

2 3 Standard Chartered 306

3 2 Barclays 300

4 4 HSBC 191

5 7 Société Générale 142

6 5 Standard Bank 120

7 Industrial & Commercial Bank of China 98

8 6 BNP Paribas 55

9 8 Deutsche Bank 38

10= 14= Bank of China 27

10= 9 Ecobank 27

Australasia2016 2015 Bank Score

1 1 HSBC 483

2 2 Citi 193

3 10 Deutsche Bank 87

4 4 ANZ Banking Group 67

5 6 Westpac 46

In-depth country rankings Brazil 2016 2015 Bank

1 1 Itaú UniBanco

2 2 Santander

3 3 Banco Bradesco

4 5 Banco do Brasil

5 4 HSBC

Quality of personnel Itaú UniBanco

Treasury management systems Itaú UniBanco

Understanding of your business Bank of America Merrill Lynch

China 2016 2015 Bank

1 5 Industrial & Commercial Bank of China

2 2 Bank of China

3 8 China Merchants Bank

4 1 HSBC

5 7 China Construction Bank

Quality of personnel Bank of China

Treasury management systems Bank of China

Understanding of your business Bank of China

India 2016 2015 Bank

1 1 HSBC

2 3 Deutsche Bank

3 2 BNP Paribas

4 4 Citi

5 7 HDFC

Quality of personnel Bank of America Merrill Lynch

Treasury management systems Bank of America Merrill Lynch

Understanding of your business Bank of America Merrill Lynch

Russia2016 2015 Bank

1 Promsvyazbank

2 5 UniCredit

3 1 Citi

4 6 Sberbank

5 2 HSBC

Quality of personnel HSBC

Treasury management systems UniCredit

Understanding of your business HSBC

United Arab Emirates2016 2015 Bank

1 2 ADCB

2 1 HSBC

3 3 Citi

4 4 BNP Paribas

5 5 Standard Chartered

Quality of personnel ADCB

Treasury management systems ADCB

Understanding of your business ADCB

United Kingdom2016 2015 Bank

1 1 HSBC

2 2 Barclays

3 3 RBS

4 4 Lloyds TSB

5 7 Santander

Quality of personnel Barclays

Treasury management systems HSBC

Understanding of your business Barclays

Sibos 2016 www.euromoney.com24

Cash management survey 2016

25www.euromoney.com Sibos 2015

Financial institutionsAmong financial institutions,which ICMs do you use most?GlobalAll transactions2016 2015 Bank Score

1 2 HSBC 6,548

2 3 Citi 3,830

3 1 Deutsche Bank 3,116

4 13 Bank of New York Mellon 1,728

5 14 Sumitomo Mitsui Banking Corporation 1,536

6 8 JPMorgan 1,534

7 5 Commerzbank 1,359

8 4 Bank of America Merrill Lynch 1,339

9 6 Standard Chartered 1,305

10 7 Barclays 1,303

11 9 Bank of Tokyo-Mitsubishi UFJ 1,209

12 32 Industrial & Commercial Bank of China 1,057

13 45 DBS Bank 1,045

14 12 Wells Fargo 823

15 11 Bank of China 817

16 19 Société Générale 721

17 18 Mizuho Bank 692

18 16 UniCredit 607

19 21 ADCB 605

20 15 RBS 535

Regional Western EuropeEuro transactions 2016 2015 Bank Score

1 1 Deutsche Bank 566

2 2 Commerzbank 342

3 3 HSBC 311

Dollar transactions2016 2015 Bank Score

1 3 HSBC 312

2 2 Citi 295

3 1 Deutsche Bank 224

Sterling transactions 2016 2015 Bank Score

1 1 HSBC 428

2 2 Barclays 341

3 4 RBS 177

Yen transactions 2016 2015 Bank Score

1 3= Sumitomo Mitsui Banking Corporation 202

2 1 Bank of Tokyo-Mitsubishi UFJ 166

3 3= HSBC 114

North America Euro transactions 2016 2015 Bank Score

1 1 Deutsche Bank 229

2 2 Commerzbank 137

3 5 Citi 129

Dollar transactions2016 2015 Bank Score

1 3 Citi 361

2 7 Bank of New York Mellon 341

3 4 JPMorgan 310

Sterling transactions2016 2015 Bank Score

1 1 HSBC 165

2 2 Barclays 119

3 12 Bank of New York Mellon 57

Yen transactions2016 2015 Bank Score

1 1 Bank of Tokyo-Mitsubishi UFJ 138

2 2 Sumitomo Mitsui Banking Corporation 137

3 5= Mizuho Bank 80

Asia Euro transactions2016 2015 Bank Score

1 1 HSBC 562

2 2 Deutsche Bank 429

3 20 Industrial & Commercial Bank of China 356

Dollar transactions2016 2015 Bank Score

1 1 HSBC 1,012

2 4 Citi 482

3 20 DBS Bank 475

Sterling transactions2016 2015 Bank Score

1 1 HSBC 459

2 3 Barclays 131

3 27= DBS Bank 120

Yen transactions2016 2015 Bank Score

1 3 Sumitomo Mitsui Banking Corporation 652

2 2 Bank of Tokyo-Mitsubishi UFJ 438

3 1 HSBC 358

Latin America Euro transactions2016 2015 Bank Score

1 2 HSBC 60

2 1 Deutsche Bank 38

3 3 Citi 36

Dollar transactions2016 2015 Bank Score

1 2 Citi 110

2 5 HSBC 100

3 4 Bank of America Merrill Lynch 65

Sterling transactions2016 2015 Bank Score

1 1 HSBC 63

2 3 Barclays 20

3 4 Citi 15

Yen transactions2016 2015 Bank Score

1 3 Sumitomo Mitsui Banking Corporation 44

2 1 HSBC 31

3 6 Citi 18

Middle EastEuro transactions2016 2015 Bank Score

1 2 HSBC 239

2 1 Deutsche Bank 98

3 4 Citi 96

For the full results, visit euromoney.com

BY COUNTRYAlgeria2016 2015 Bank

1 1 Citi

Argentina1 2 HSBC

Australia1 1 HSBC

Austria1 1 UniCredit

Bahrain1 1 HSBC

Bangladesh1 1 HSBC

Belgium1 3 Deutsche Bank

Bulgaria1 2 UniCredit Bulbank

Cameroon1 1 Citi

Colombia1 2 Bancolombia

Croatia1 2 Splitska banka

Czech Republic1 2 Citi

Egypt1 1 HSBC

France1 3 HSBC

Germany1 1 Deutsche Bank

Ghana1 1 Barclays

Greece1 1 Eurobank Ergasias

Hong Kong1 1 HSBC

Hungary1 1 UniCredit

Indonesia1 1 HSBC

Italy1 1 Banca Nazionale del Lavoro

Japan1 Mizuho Bank

Kenya1 2 Barclays

Kuwait1 1 HSBC

Lebanon1 1 HSBC

Malaysia1 13= UOB

Mexico1 1 HSBC

Morocco1 1 Citi

Nigeria1 1 Citi

Oman1 1 HSBC

Peru1 1 BBVA

Philippines1 1 HSBC

Poland1 1 Citi Handlowy

Qatar1 1 HSBC

Romania1 1 UniCredit Tiriac

Serbia1 2 Société Générale

Singapore1 11 UOB

Slovakia1 1 Citi

South Korea1 1 HSBC

Spain1 1 Deutsche Bank

Switzerland1 1 UBS

Taiwan1 16= Cathay United Bank

Thailand1 8 Siam Commercial Bank

Turkey1 1 Yapi Kredi

Uganda1 4 Citi

Ukraine1 1 Citi

USA1 1 Bank of America Merrill Lynch

Vietnam1 1 HSBC

Zambia1 1 Barclays

Euromoney surveys cash managers, treasurers and financial officers

worldwide.

The survey is split into a non-financial institutions questionnaire and a

financial institutions questionnaire.

Respondents are asked:

• To indicate which three banks they use most for their cash manage-

ment services

• To rate their lead cash manager on a sliding scale of

1= very poor to 7= excellent across various service categories.

Non-financial institutions

In the lead categories, each voter’s nominated top bank is awarded four

points, second place three points and third place two points.

Each voter’s score is then weighted depending on the annual gross

sales of the part of the business for which the voter is responsible.

Financial institutions

Respondents are asked to nominate their lead providers by region and

by transactional currency. In the lead categories, each voter’s nominated

top bank is awarded four points, second place three points and third

place two points. These scores are then totalled for each bank to give a

final score.

We received 53,427 responses to the non-financial institutions part of

the poll and 6,041 to the financial institutions part. After data verification

and validation, 32,019 valid responses went into creating the non-

financial institutions results and 2,203 into the financial institutions

results.

The main reasons for deletion were insufficient contact details, multiple

responses from the same firm, self-voting, lack of confirmation from the

respondent of their identity and irregularities in the data given.

Please direct comments and questions to Tessa Wilkie at

twilkie@euromoney.com.

A full methodology is available online at www.euromoney.com

Cash management survey methodology 2016

Sibos 2016 www.euromoney.com26

Cash management survey 2016

Dollar transactions2016 2015 Bank Score

1 1 HSBC 320

2 3 Citi 172

3 8 ADCB 105

Sterling transactions2016 2015 Bank Score

1 1 HSBC 176

2= 6 ADCB 56

2= 5 Citi 56

Yen transactions2016 2015 Bank Score

1 1 HSBC 81

2 4 Sumitomo Mitsui Banking Corporation 66

3 2 Bank of Tokyo-Mitsubishi UFJ 53

Central & Eastern EuropeEuro transactions2016 2015 Bank Score

1 3 Citi 245

2 1 Deutsche Bank 237

3 4 HSBC 210

Dollar transactions2016 2015 Bank Score

1 2 Citi 267

2 3 HSBC 191

3 1 Deutsche Bank 104

Sterling transactions 2016 2015 Bank Score

1 1 HSBC 157

2 4 Citi 105

3 3 Barclays 104

Yen transactions 2016 2015 Bank Score

1 4 Sumitomo Mitsui Banking Corporation 82

2= 1 Bank of Tokyo-Mitsubishi UFJ 75

2= 3 HSBC 75

Africa Euro transactions 2016 2015 Bank Score

1= 3 HSBC 51

1= 1 Deutsche Bank 51

3 2 Citi 41

Dollar transactions 2016 2015 Bank Score

1 1 Citi 95

2 3 HSBC 90

3 4 Barclays 45

Sterling transactions 2016 2015 Bank Score

1 1 Barclays 41

2 2 HSBC 39

3 4 Citi 19

Yen transactions 2016 2015 Bank Score

1 2 Sumitomo Mitsui Banking Corporation 35

2 1 Bank of Tokyo-Mitsubishi UFJ 28

3 3 HSBC 16

Australasia Euro transactions 2016 2015 Bank Score

1 Deutsche Bank 83

2 HSBC 79

3 Commerzbank 35

Dollar transactions 2016 2015 Bank Score

1 HSBC 138

2 Bank of New York Mellon 64

3 Citi 63

Sterling transactions 2016 2015 Bank Score

1 HSBC 93

2 Barclays 26

3 RBS 23

Yen transactions 2016 2015 Bank Score

1 Sumitomo Mitsui Banking Corporation 64

2 Bank of Tokyo-Mitsubishi UFJ 60

3 Mizuho Bank 42

Nordics & Baltics Euro transactions 2016 2015 Bank Score

1 Deutsche Bank 90

2 Commerzbank 54

3 HSBC 37

Dollar transactions 2016 2015 Bank Score

1 Citi 57

2 Bank of New York Mellon 51

3 JPMorgan 46

Sterling transactions 2016 2015 Bank Score

1 HSBC 64

2 Barclays 59

3 RBS 37

Yen transactions2016 2015 Bank Score

1 Bank of Tokyo-Mitsubishi UFJ 58

2 Sumitomo Mitsui Banking Corporation 49

3 Mizuho Bank 43

Our bespoke cash management data can help you improve your understanding of your business and clients’ needs.

Contact Mark Lilley at Euromoney today to find out moremark.lilley@euromoneyplc.com or +44 207 779 8820

• Live country ratings for over 180 sovereigns• Granular data on up to 18 variables of political and economic risk• Email alerts whenever a country rating changes• News & analysis on your key markets from Euromoney’s business titles

EUROMONEYCOUNTRY RISK Brings you...

For more information please contact Alex Vaughan-Fowler +44 20777 97298 | alex.vaughanfowler@euromoneyplc.com

Sibos 2016 www.euromoney.com28 29www.euromoney.com Sibos 2016

Fintech

But it also carries a promise of greater efficiency and reduced cost.

Participants in the financial system have always each managed their

own separate ledgers, databases of asset ownership and transactions

that they each control, that only they can modify and that are pass-

word protected. Each bank runs many thousands of them.

The blockchain holds out the prospect of mutualizing cost

through shared databases, secured by encryption that might at the

very least remove the hefty annual expense of data duplication, data

gaps and of reconciling inconsistencies between separate databases.

This does not sound anywhere near as exciting as transforming

the global payments mechanism, unless you happen to be an inves-

tor in bank stock or a bank executive.

If it does nothing else, just by making digital ledgers more ef-

ficient, the blockchain could reduce operating costs for the global

banking industry substantially, cutting banks’ infrastructure costs

attributable just to cross-border payments, securities trading and

regulatory compliance by between $15 billion to $20 billion a year,

according to one estimate from Santander. That is before billions

more in potential savings on collateral management.

Others suggest the annual savings could be tens of billions of dol-

lars more than that because there are indirect expenses and oppor-

tunity costs too. The database discrepancies inherent in the current

financial architecture in turn require maintenance of costly capital

and cash collateral cushions to protect against market breakdowns

from disputed trades. If that capital could be freed up and churned

more rapidly, banks would boost their returns on equity.

With those returns now so low, banks can hardly sniff at this.

Charley Cooper, managing director at R3 CEV, which manages a

consortium of 45 of the world’s largest banks working on shared

ledger technology, says: “Banks in the consortium funding experi-

If 2015 was the year of peak hype around the blockchain,

when banks first woke up to its potentially transformative

power, then 2016 is the year of busy experimentation with

shared-ledger technology and testing of commercial applica-

tions that might eventually come into use in 2017 and, more

likely, 2018.

The blockchain is an extraordinary breakthrough in computer

science that holds out the prospect of market participants own-

ing shared databases of financial transactions, with new entries

confirmed by consensus and protected by encryption, and contain-

ing immutable golden stores of agreed data and time-stamped

transaction history. It holds out the prospect of a new approach to

payments, transfer of securities and other assets, identity verification

and regulatory reporting that could entirely reconfigure finance.

The global financial system has rested for centuries on interlock-

ing networks of trusted third parties that handle their customers’

money and financial assets for them: banks to manage cash accounts

and transfer payments; central banks to back these commercial

banks and hold reserves to manage temporary imbalances between

them; custodians and clearing counterparties to do the same for

equities, bonds and derivatives.

The development of the blockchain as the rails on which to move

bitcoin, a revolutionary new censorship-resistant cryptocurrency,

suggests that, rather than trusting third parties to intermediate

payments for them, banks’ customers might be able to transact

themselves directly with each other on a digital network that is itself

trustworthy, even if some of the participants on it might not be.

This presents commercial banks, custodians, depositories and

even central banks with a clear threat of eventual disintermediation.

Remove the need for trusted third parties and what are banks for?

By: Peter Lee Illustration: Jonathan Williams

Everything you thought you knew about blockchain is wrong. Rather than wait for the blockchain to re-engineer banking, the banks are going to re-engineer the blockchain. It will not be public, it will be private. And across the shared ledger there will not be that much sharing. In an atmosphere somewhere between excitement and paranoia, banks are trying to turn an existential threat into a competitive advantage

Sibos 2016 www.euromoney.com30 31 www.euromoney.com Sibos 2016

Fintech

mentation at a cost in the single-digit mil-

lions of dollars each could each secure op-

erational savings measured in the hundreds

of millions of dollars a year each, perhaps

higher for the biggest banks. Commercial-

izing shared-ledger technology could be the

best investment these banks ever make.”

Earlier this year Blythe Masters, the for-

mer JPMorgan banker who heads Digital

Asset Holdings, spelled out at the Morgan

Stanley fi nancial services conference how

blockchain is the ultimate example of what

was once anathema to banks but which

many are now desperate to implement –

shared infrastructure. It can bring improved

security through encryption, real-time

regulatory reporting, but most important it

can cut costs.

“And we’re not talking fi ve, 10 or 15%

cuts in costs; we’re talking 30%, 40%,

50%,” according to Masters. “There’s only

one way to do that and that is to share a

mutualized common infrastructure that

previously was kept separately and run

independently by every market participant.”

The blockchain arrived last year like

some mysterious millennial cult. It held out

to a global banking system already beset by

the cost of regulation, weak core profi t-

ability and threats from fi ntech disrupters

the ultimate existential threat of systemic

disintermediation.

But it also held out the hope of new

gains if the banks embraced it. Adding

to the mystery, no one in the established

banking industry really understood it. What

have we learned in the last six months as

banks have begun testing use cases?

Gideon Greenspan, chief executive of

MultiChain, a provider to banks of a dis-

tributed database for multi-asset fi nancial

transactions within a private peer-to-peer

network, notes: “To begin with, the first

idea that we and many others started with,

appears to be wrong. This idea, inspired by

bitcoin directly, was that private block-

chains or shared ledgers could be used to

directly settle high volumes of payment and

exchange transactions in the finance sector,

using on-chain tokens to represent cash,

stocks, bonds and more.”

Banks tell Euromoney that this is

perfectly workable on a technical level. So

what is the problem?

“In a word, confidentiality,” says

Greenspan. “If multiple institutions are

using a shared ledger, then every institu-

tion sees every transaction on that ledger,

even if they don’t immediately know the

real-world identities of the parties involved.

This turns out to be a huge issue, both in

terms of regulation and the commercial

realities of inter-bank competition.”

Greenspan tells Euromoney: “For now

it’s not feasible for public blockchains,

which must also work on home computers,

to process the volume of transactions banks

need to conduct. But more than that, there

is just no way that any regulator would

ever sanction a system where settlement

ultimately depends on some pseudonymous

miners in a distant geography.”

It is not much talked about openly, but

concerns about state-sponsored cyber

terrorism make public blockchains a

nonstarter for global regulators and law en-

forcement agencies. “For the banks, public

blockchains are not relevant for the next 10

to 15 years at least,” says Greenspan.

Or, as one banker testing use cases

around custody tells Euromoney, when

asked if banks are collectively hobbling

adoption of the blockchain to protect their

vested interests: “Let me get this straight.

Some computer scientist sitting in his

garage in Palo fucking Alto with $1 million

of venture capital tells you that his new

distributed ledger is going to put the DTCC

out of business in six months, JPMorgan

the year after and that the Federal Reserve

might not have much longer. And you

believed him?”

Huw van Steenis, banks analyst at

Morgan Stanley, recently researched the

potential for the blockchain to either disin-

termediate banks or bring big expense re-

ductions through mutualization of market

infrastructure utilities. He suggests proof

of concepts will continue into 2018, with

the fi rst shared infrastructure perhaps just

starting to emerge next year and gathering

pace up to 2020. Van Steenis says: “We see

no impact on bank earnings for at least the

next two years. The challenges to make this

technology work in a resilient way accept-

able to regulators are not exactly trivial.”

Van Steenis tells Euromoney that much

investment in the technology is motivated

by banks’ instinct for self-preservation. “If

you look at post-trade settlement, it is no

wonder that the banks that have spent the

most and taken the lead for example in the

HyperLedger project are the ones that may

have the most to lose if something emerges

that is truly disruptive.”

He does not see anything much emerging

soon. Van Steenis says: “No policymaker

will even countenance an unpermissioned

blockchain. And so while many of the

banks are genuinely worried where this

technology might eventually take the

industry, the banks may also feel they have

a moat protecting them.” He says: “I don’t

think it is going to be disruptive in the next

three years because the blockchain will

emerge into application among closed net-

works of fi nancial institutions, with a few

participants that won’t let new competitors

into the system.”

So the question now becomes how much

do banks invest in the blockchain at a time

when they are not very profi table and the

return on that investment is not clear? Van

Steenis sees a prosaic challenge in recent

weak results. “This is going to be a very

tough year for bank earnings. And if all

budgets including IT have to be trimmed,

then blue-sky investing in change-the-world

technology might not be top of the list of

projects to be maintained.”

But if the stick of disintermediation

appears, for now at least, to be held at

bay, the carrot of lower operating costs is

strongly tempting. With banking revenues

clearly ex-growth, the only way for man-

agement teams to improve margins is to

invest in cost reduction.

Jurgen Vroegh, global head of payments

at ING, has a group of 25 to 30 people

working on blockchain use cases, including

through the consortium of 45 banks work-

ing with R3 CEV and separately on ING’s

own initiative. In a business with over

50,000 employees, the efforts of this small

group are high profi le. “I can tell you that

the board of directors of ING is very keen

to learn about and is directly involved in

what we are doing on blockchain,” Vroegh

tells Euromoney.

Last November, ING together with a

small handful of other large Dutch banks

conducted tests in exchanging value

between them on blockchain. Vroegh says:

“We learned fi rst that if we all wanted to

do this, we could make it work techni-

cally, though of course it would need the

participation of central banks because this

would be a virtual version of real currency.

For our tests, each bank was a node on the

network and we also created a central bank

node, though the central bank itself did not

take part.

“The second thing we learned is that

each test throws up more questions in

turn: around resiliency, security, scalability,

processing speed and governance. There

are more questions than answers right

now, and we continue to experiment. A key

question for the regulators is identity. We

recently ran a pilot test with the tax au-

thorities on using bank credentials to verify

identities for tax returns.”

He says: “It may be that our experiments

on payments eventually show the need for

different kinds of oversight and regulation

than we have right now.”

In almost every discussion on

blockchain there are certain clichés

that are constantly repeated. One

is the quote from Bill Gates that in

assessing the impact of new tech-

nology, markets tend to overestimate what

progress should be made in two years and

underestimate what can be achieved in 10.

“If we are now in the blockchain’s

equivalent year to 1993 for the internet,

there’s no point complaining that no one

has yet created the Netfl ix of money,” says

Peter Kirby, chief executive of Factom, a

company building blockchain-based im-

mutable, distributed ledgers for banks and

other customers including governments.

“Let’s just get on and create the email of

money.”

Another phrase often heard is that while

blockchain is almost certainly the answer,

the banks have not yet defi ned quite what

the question is.

As banks continue to experiment on their

own and in collaboration with each other,

it seems that many are reaching the same

conclusion about transparency – and how

unhelpful it can be on the blockchain – that

Greenspan identifi es.

Last year, banks stripped the blockchain

away from bitcoin and decided to work

on it separately from the cryptocurrency

for which it was fi rst built. Now they are

decomposing the blockchain itself and

searching for ways to keep the benefi ts of

a shared ledger, protected and uncontested,

while removing the ability of all partici-

pants to see every transaction even if the

identities of parties are hidden.

Instead of waiting for the blockchain to

reshape the banking industry, the banks are

reshaping the blockchain.

The three most important projects

underway testing the potential applica-

tion of blockchain to wholesale fi nancial

services are: the collaborative efforts run by

R3 CEV and 45 member banks to build a

base layer-distributed ledger platform and

then test commercial applications across

multiple use cases to run on it; the project

announced this January by the Australian

Stock Exchange in conjunction with Digital

Asset Holdings to explore whether shared

ledger technology might replace the ageing

Chess system for post-trade clearing and

settlement of Australian cash equities; and

the so-called HyperLedger project, also sup-

ported by Digital Asset Holdings, in which

leading custodians such as JPMorgan, BNY

Mellon, State Street plus central clear-

ing counterparties and various exchanges

aim to advance blockchain technology for

recording and verifying transactions.

“We will inform the market by

2017 of our decision and how

stakeholders will be engaged

through any subsequent

phases. We are cautiously

optimistic about the potential

application of distributed ledger

technology”

Cliff Richards, ASX

“We’re not talking � ve, 10 or 15% cuts in costs; we’re talking 30%,

40%, 50%. There’s only one way to do that and that is to share a

mutualized common infrastructure that previously was kept separately

and run independently by every market participant”

Blythe Masters, Digital Asset Holdings

This article was first published in the June issue of Euromoney

Sibos 2016 www.euromoney.com32 33 www.euromoney.com Sibos 2016

Fintech

Cliff Richards, general manager of equity

post-trade services at ASX (the Austral-

ian Stock Exchange), tells Euromoney the

exchange is not an evangelist for distrib-

uted ledger technology. “ASX is being

pragmatic in its assessment of distributed

ledger technology (DLT). A key to this is

asking ourselves if the problems we’re seek-

ing to solve for customers and the market

generally can be better solved with existing

technology or, if not, whether DLT is most

appropriate.

“Once we decided to work with Digital

Asset Holdings we set out to examine

three broad aspects of the technology by

building a meaningful prototype that will:

fi rst, address non-functional requirements,

including through-put capacity, scalability,

resiliency, privacy and security; second, test

whether there is enough sophistication in

the core business logic of distributed ledger

technology to, at a bare minimum, replace

what Chess already does and be robust

and extensible; and third, explore blue-sky

possibilities about what new opportunities

the technology may open up – for example,

capturing in encrypted form more granular

data on the benefi cial owners behind legal

entity names in the settlement system.”

In the blockchain world everyone wants

an update from the ASX. On the timetable

for making its choice, Richards says: “We

are still in assessment phase and have not

made any decision about whether to go

forward with distributed ledger technology

yet. However, we will inform the market by

2017 of our decision and how stakeholders

will be engaged through any subsequent

phases.”

He tells Euromoney: “We are cautiously

optimistic about the potential application

of distributed ledger technology. We have

enough time to continue to experiment and

we have learned a lot already. We want to

involve all interested stakeholders in the

process.”

And what has the exchange learned in

the experiments it has undertaken since

January?

Richards says: “There is a spectrum of

confi gurations you can apply to distributed

ledger technology. There is much discussion

around a public blockchain verifi ed with

proof of work, versus private permissioned

blockchains. The Australian equity market

has a capitalization of A$1.6 trillion ($1.16

trillion). We need a resilient, scalable system

that can process hundreds if not thousands

of transactions per second, and we believe a

public blockchain based on proof of work

simply cannot handle that at present. In any

case, operating in highly regulated markets,

ASX could only ever countenance a private

network, permissioned only to parties

that already meet our and our regulator’s

requirements.”

WHILE THE ASX SEES POTENTIAL IN A

tamper-proof shared ledger for high-value

assets, it is not enamoured of the notion

that all participants should see everything.

Richards explains: “Almost from day

one, our strong hypothesis has been that

only the regulators should be able to see

everything. Entries will be encrypted and

parties will have private keys, but they

would only be able to use them to see

full details of transactions to which they

themselves are party.” He adds: “It might

be possible for a party to confi rm that

another entity has claim to an asset of a

certain value but not to identify that asset,

effectively a zero-knowledge proof.”

Blockchain enthusiasts in the banking

industry will continue to watch events in

Sydney closely. Post-trade settlement for

all manner of assets – loans, mortgages,

derivatives, collateral, corporate bonds – is

one of the key use cases quickly identi-

fi ed last year as open to potentially big

effi ciency gains from blockchain.

Those big gains may come from using

blockchain to reduce clearing periods and

settlement times in slow-moving markets

where netting is diffi cult and collateral is

tied up against counterparty performance

risk for days and even weeks: markets such

as corporate and mortgage whole loans.

And here the ASX is conducting a real-time

experiment in one of the fi rst cash equities

markets in the world to have been fully

dematerialized, one that is reasonably well

vertically integrated with self-contained

banks, brokers, asset managers, exchange,

clearing counterparty and regulator.

The experiment is prompted by the

collective decision to get ready to replace

Chess as it approaches the end of its natu-

ral life. In the background lurks the ques-

tion of how fast technology allows clearing

to become and the balance between who

gains and loses from speedier settlement.

Van Steenis notes that the primary

reason for multi-day settlement periods is

regulatory, legal and market practice, which

enables a broader participation by retail in-

vestors. “Current technology could deliver

T+0 settlement today in a broad range of

asset classes if regulatory and legal rules

allow for it. You don’t need a blockchain to

deliver T+0,” he argues. It may not even be

desirable. “Markets with T+0 today appear

to have less liquidity and more volatility

than markets with a settlement window for

several reasons, chief among them [being]

that in a T+0 settlement window there is no

shorting.”

Shorter settlement times might help in-

vestment banks that want to turn over their

now much smaller amounts of capital as

rapidly as possible but hurt custodians that

benefi t from carry on cash and collateral.

Richards says: “Australia has joined

much of Europe on the move from settle-

ment in T+3 to T+2. While we have never

said that we would move the whole market

onto T+0, there may be a business opportu-

nity to offer settlement options with dura-

tions shorter than T+2.” However, he adds:

“It’s important to remember that many of

our clients get considerable benefi t for the

operational and balance-sheet netting that

comes with T+2 net settlement.”

It would be intriguing if the blockchain

allowed for different options on settlement

time.

For the ASX, as for every fi nancial mar-

ket participant experimenting with block-

chains, there remain interesting questions

about managing the boundaries and con-

nections between any private, permissioned

distributed ledger for recording changes of

ownership in a specifi c asset class and asso-

ciated systems, for example those handling

payments. The Reserve Bank of Australia

and the Australia Payments Clearing As-

sociation are working on a new payments

facility due in 2017 that will enable any

Australian citizen with an Australian bank

account to transfer payments to another in

real time, as fast as sending a text or email.

It remains to be seen how the new equities

post-trade clearing and settlement system

will tie into that.

Richards returns to the potential of

distributed ledger technology around port-

able identity. “It would seem likely that

you could use distributed ledger technology

and cryptography to inject considerable

effi ciency by mutualizing identity data that

is for now stored in fragmented, siloed

systems and enhance privacy and security

characteristics. We have, for example, been

talking to the tax authorities about how,

if we could capture and use more granular

information about benefi cial ownership of

Australian equities, it might be a basis to

auto-populate tax returns.”

NEXT YEAR COULD BE THE GAME-

changer: 2017 is the year in which Charley

Cooper, managing director of R3 CEV, says

the wholesale fi nancial services industry

will see the fi rst deployment of commercial

applications of blockchain on a limited

scale.

R3 CEV is doing two things. It is de-

veloping an underlying distributed ledger

technology platform called Corda, fi rst

details of which emerged in April and

which R3 CEV says is heavily inspired by

and captures the benefi ts of blockchain

systems and which choreographs workfl ows

between fi rms without a central controller.

However – rather like ASX – Corda has no

unnecessary sharing of data. Only those

parties with a legitimate need to know can

see the data within a fi nancial agreement.

“There will not be a single blockchain on

which all wholesale fi nancial markets run,”

Cooper tells Euromoney. “Instead, rather

like the internet, which is a series of inter-

operable platforms communicating through

TCP, there will be a number of interoperat-

ing distributed ledger platforms including

Corda, Ethereum, Eris, Chain. These are

already in operation, will be quite robust

by 2017 and are learning to interoperate.

All manner of commercial applications for

the distributed ledger will run across this

fabric layer. We are working with our mem-

ber banks to develop a number of these,

broadly relating to pre-trade information

and post-trade processing, always aiming to

fi t the solutions to the actual requirements

of our members.”

The pitch for R3 CEV, as a member-

funded consortium, is that it can develop

distributed ledger technology that fi ts the

business requirements of a heavily regu-

lated banking industry, rather than create

something technically brilliant that banks

cannot actually use.

Cooper describes the key founding

principle of Corda – that not every piece of

information should be distributed among

all participants on a shared ledger – as

“massively important”. He says: “The

notion that every market participant gets

to see every entry in the ledger simply does

not work for the banking community. Why

should any participant see details of trans-

actions to which it is not a party, unless it

is the regulator or an exchange or clearing

member of a market?”

And there is also a very practical issue,

says Cooper: “Sending an excess of infor-

mation to third parties in encrypted form

that they cannot even read, heavily burdens

a shared ledger, impacts its scalability and

may make conventional blockchains a

nonstarter in most markets. Simply altering

that one aspect of the shared ledger – not

distributing every piece of data to every

participant – could be a key turning point

in adapting this technology to the real-

world problems that fi nancial institutions

need to solve.”

Members of the blockchain venture

“The notion that every market

participant gets to see every

entry in the ledger simply

does not work for the banking

community”

Charley Cooper, R3 CEV

“We learned � rst that if we all wanted to do this, we could make it

work technically, though of course it would need the participation of

central banks because this would be a virtual version of real currency”

Jurgen Vroegh, ING

Sibos 2016 www.euromoney.com34 35 www.euromoney.com Sibos 2016

Fintech

capital community often talk scepti-

cally about the governance of a banking

consortium seeking to develop new

technology solutions that could poten-

tially damage the interests of certain

members. One tells Euromoney: “Don’t

expect R3 CEV to move fast or even

to develop the killer blockchain app

because that is likely to hurt the very

banks funding it.”

Partly to counteract this, the com-

pany has split banks into separate

working groups, reasoning that no one

bank should be working on each use

case and that banks should not have

much of a say in developing blockchain

applications for markets they do not

operate in. While some use cases being

tested are of interest to all banks, such

as payments and regulatory reporting,

many aren’t: custodian banks looking

at new ways to digitize transaction and

ownership records, trade fi nance banks

looking at that market, and so on.

Members of R3 CEV are working

on many potential applications for the

shared ledger, most intensely on: trade

fi nance; smart contracts in fi xed income,

where the fi rst large-scale tests have

been done on commercial paper and

credit default swaps; payments; regula-

tory reporting, especially relating to

identity, know-your-customer and anti-

money laundering; and reference data.

“We have tested smart contracts in

commercial paper and swaps, reason-

ing that the general logic and lessons

learned might apply across many asset

classes,” says Cooper. “We have also

been looking at a whole suite of risk-

management products. There is a mas-

sive opportunity to reduce operational

risk and better manage credit, market

and compliance risk.”

One of the biggest problems banks

faced in the fi nancial crisis was the

inability of hundreds of internal

databases to collate in an accurate and

timely fashion aggregate exposures to

market and counterparty credit risk.

Today operational risk is the one that

regulators have squarely in their sights,

demanding banks hold yet more capital

against it.

And while the sceptical venture capi-

talists may well be right that R3 CEV is

an unlikely venue to produce block-

chain applications that disintermediate

the entire banking system outright, it

might well produce real-world uses for

the technology that can profoundly

change how fi nancial markets work.

Cooper, who previously worked at

Deutsche Bank and State Street, says:

“The reason why you see so many

of the world’s largest banks com-

ing together through R3 CEV is that

they realize the development of this

technology, which clearly has disruptive

elements, is inevitable. They also under-

stand that the power of this technology

comes from the network effect, so the

more users, the better for everyone.

The banks can’t just walk away from

it, refuse to invest in it and hope it

withers on the vine. They can either get

involved and help shape application of

this transformative technology to their

highly complex and heavily regulated

markets, or they can sit on the sidelines

and pray that whatever comes out

doesn’t hurt them.

“Faced with that choice, most banks

would like a seat at the table,” he says.

While central banks and industry

regulators may be shy of participating

in individual banks’ blockchain experi-

ments for fear of being seen to favour

commercial enterprises they oversee,

they may be more willing to work with

a large industry consortium. Cooper

tells Euromoney: “We are in discussions

right now on proposals with a small

number of central banks, securities

regulators and payments regulators to

participate in experiments in our labs.”

AS BANKS TOIL AWAY WITH

their blockchain experiments, they

should remember that they are not

alone. Other industries are exploring uses

for shared ledger too. And the extent to

which they change the technology for track-

ing the provenance and ownership of assets

– property, commodities, traded goods, cars

– that might touch the banking system as

security for loans or prompts for payments,

means banks must keep up to speed.

One banker tells Euromoney: “We’re

taking to auto-makers who are looking at

ways the shared ledger could authenticate

and time stamp not just changes of owner-

ship but also when a car has been serviced,

which parts have been replaced and when,

all of which might impact the secondary

market and residual values.”

Peter Kirby at Factom has been work-

ing with banks and non-banks, including

governments, on blockchain projects. “The

consensus computing underpinning block-

chain may be hard to do but it’s no wonder

that everyone who even starts to under-

stand it soon becomes very excited by it.

When you boil it down, it’s a data manage-

ment technology that allows multiple par-

ties to agree to a single version of the truth,

to time-stamp that, and then never need

to take their haggles over who said what

to whom and when back to some central

authority in the middle of the system. It lets

you trust the math, not the people,” he says.

In some ways banking is the least ame-

nable industry to blockchain technology

because it is built around central regulatory

authorities at the core of each market. They

ultimately have to bless market partici-

pants’ adoption of any new technology.

And blockchain technology is, among

other things, an existential threat to central

authorities as well. The regulators are what

blockchain computer scientists sometimes

call the asshole in the middle of traditional

database systems, the central authority to

which subscribers appeal. The blockchain

does away with the asshole in the middle.

The fi nancial services industry also has a

fi xation on confi dentiality and a reluctance

to share data, as evidenced by the develop-

ment of Corda and the work of ASX. It is

hard to see it having much relevance to sys-

tems for trading high-value fi nancial assets.

Greenspan at MultiChain says: “One of

the areas where we see the most interest is

lightweight fi nancial systems, in which the

problem of information leakage is less of

a concern. This might imply participants

exchanging low-value goods, such as loyalty

points, or a few participants that are not

competing directly with each other making

occasional transactions, such as corporate

pension plan sponsors exchanging assets with

each other rather than via intermediaries.”

Blockchain venture capitalists are start-

ing to look away from developed world

fi nancial markets. Greenspan says: “We

have noticed a greater openness to block-

chain in the developing world, for example

in Asia, where privacy and confi dentiality

may be less of a concern than overcoming

the potential for corrupt offi cials to tamper

with and falsify title deeds and records of

ownership.”

Factom has been working with the

government of Honduras on a project to

put its land registry on blockchain. It is also

working with Chinese municipal authorities

on using the shared ledger to manage smart

cities’ data derived, for example, from traf-

fi c sensors and power producers.

“The blockchain may have been

pioneered by bitcoin, but at its core it is

essentially about moving data and record

keeping, not about moving money,” says

Kirby. To an extent, this is semantics. Banks

are little more than vast collections of

databases of fi nancial transactions. That

is why venture capitalists have thrown so

much money at computer scientists to cre-

ate blockchain services and products to sell

into the vast banking market.

It is a natural step from using the block-

chain to record changes in the land registry,

to property titles and record keeping

relating to mortgages and indeed any other

collateral. “In 2008, the world learned the

impact on global fi nancial markets and the

economy from a problem that began with

terrible record keeping for US mortgages,”

says Kirby. “Today, partly in response to

the consequent regulation, a US mortgage

can be 1,000 pages of legal documents

covering tax forms, credit appraisals, title

records, servicing history.”

Factom suggests that when Bank of

America bought Countrywide, the biggest

mortgage provider in America, it had to

transfer 10 billion pages of legal documents.

It was lousy scrutiny of those records that

ultimately cost Bank of America $17 billion

in legal settlements. Factom is developing

a system for banks to enter each original

mortgage document in digital form and each

record of subsequent payments onto direc-

tory blocks, hashed for reference onto the

blockchain and tied to business logic that

fl ags up a missing credit appraisal or title

document before allowing verifi cation. It can

also audit records to check if they have been

backdated or tampered with.

Kirby says: “The record-keeping require-

ments imposed on banks after the crisis

have almost frozen parts of the banking

industry because the potential punishment

for failure to comply is so great. But it

turns out that compliance with regulatory

record-keeping is just about collecting data

and time-stamping it. A distributed ledger

can help do that. We are not quite ready to

announce anything yet, but we are working

on very interesting partnerships to bring

this to market. The data layer runs on the

bitcoin blockchain now and in the future

on Ethereum or Ripple.”

It is a big prize: data collection, record

keeping and monitoring for every fi nancial

instrument used as collateral for banks to

lend against. And banks are determined

that they should be the recipients of it.

“If we are now in the blockchain’s equivalent year to 1993 for

the internet, there’s no point complaining that no one has yet

created the Net� ix of money”

Peter Kirby, Factom

“For the banks, public

blockchains are not relevant for

the next 10 to 15 years at least”

Gideon Greenspan, MultiChain

37 www.euromoney.com Sibos 201636 37

Marco, what can we do

about AI? Marco, are

we doing enough on

AI?” The questions all

come from senior ex-

ecutives, desperate to harness the potential

that AI promises.

Yet Bressan is bemused by how the tech-

nology is talked about at board level and in

the media. “Currently it denotes a vision of

the future; an aspect of the sci-� imagination;

something that you still can’t do. But the

truth is senior � nancial executives have been

doing AI-related work, research and deploy-

ment of products for years.”

At the most rudimentary level, AI

involves teaching machines to learn and

to interact in order to undertake cogni-

tive tasks that were usually performed by

humans. The type of AI featured in sci-�

� lms in which machines possess a human-

like intelligence, sometimes referred to as

general arti� cial intelligence, remains a

distant and elusive prospect. The most opti-

mistic experts, such as Google’s director of

engineering, Ray Kurzweil, predict that AI

will be able to outsmart humans by 2029.

Conservative predictions expect this to take

at least 100 years, if at all.

Of more immediate relevance to those

working in � nancial services is the deploy-

ment of narrow arti� cial intelligence. These

applications undertake speci� c tasks using

problem solving, deduction, reasoning and

natural language processing. Such pro-

grammes are being applied across � nancial

services, from the development of customer

service programmes that use natural lan-

guage processing to manage and � eld cus-

tomer queries, through to programmes that

can conduct � nancial research and make

sophisticated models of � nancial markets to

identify trading opportunities.

The potential for narrow applications

has led to a boom in AI investment. Tech-

nology companies are undoubtedly leading

the way. In 2015 the giants of AI – Micro-

soft, Google and Facebook – spent $8.5 bil-

lion on AI research, acquisitions and talent.

In comparison, � nancial institutions

have made a cautious foray into the � eld. A

handful are making investments by hiring

high-level data scientists or acquiring AI

companies. The hedge fund Bridgewater

Associates hired the former chief engineer

behind IBM’s Watson supercomputer.

BlackRock has also been busy hiring some

high-pro� le names and has announced a

joint venture with Google to explore how

to use AI to improve investment decision-

making. Goldman Sachs has acquired a

number of promising AI start-ups, includ-

ing the � nancial research platform Kensho.

Yet most � nancial institutions have been

slow to adopt AI, even though it is likely

to usher in a new type of bank, with data

and technology as its heart. Failure to

adapt may lead to extinction for some. As

Neil Dwane, global strategist at Allianz

Global Investors, explains: “Technological

competence is absolutely essential for at

least staying in the game. You may still lose,

but if you’re not in it, you have no hope of

winning.”

AI HAS BEEN AROUND FOR OVER 50

years. Many commentators are quick to say

that there have been previous periods of

hype about AI. Is it really different this time

around? The director of the Laboratory for

Financial Engineering at MIT, Professor

Andrew Lo, believes that there has been

a step-change in the technology: “All new

technologies come with a certain degree

of hype, but I do think there has been a

material change in the technology today

against where things stood even just � ve

years ago.”

The key driving force is the rapid expan-

sion in the amount and availability of data.

Whether it is data created from interactions

on social media sites, � nancial transactions

or even mobile phone data, there has been

an unprecedented growth in the amount

of information available for collection and

analysis. In combination with exponential

increases in computer processing power

(Moore’s Law), increased storage enabled

by cloud computing and the re� nement

of techniques such as deep learning, this

data is used to train and optimize learning

algorithms.

As Bressan explains: “The data is the

key enabler. Suddenly we can work with 10

years of history of every single transaction

of the millions of transactions that take

place every day, and use that to train some

kind of learning algorithm. We could not

do that before but we can do it now.”

The barriers to experimenting with AI

are also coming down. Although cutting-

edge research and development still require

highly specialized skills, it is becoming

easier for non-specialists to develop basic

AI programmes. As the resident � ntech

expert at Oxford University, Huy Nguyen

Trieu, recalls: “Ten years ago, if you wanted

to develop an app for your smartphone

that recognized what you said, you would

need a PhD from Stanford or MIT. Today,

you can be a very basic programmer, using

[programming language] Python and search

libraries, and you can develop this app.”

Even as the requirements for experiment-

ing with AI are becoming less stringent,

� nancial services remains a sector with

ample specialist skills in mathematics, sta-

tistics and data science. This pool of talent

is helping encourage experimentation with

technology.

As Lo notes: “Financial services now has

a very large population of quants in the

industry, much more than ever before, who

are ideally positioned to make use of these

technologies.”

THE PROMISE OF AI MAY SEEM MORE

tangible than before, yet determining

where this technology will have the most

profound impact in � nancial services is less

certain. In March, Euromoney Thought

Leadership launched a global survey with

By: Tom Upchurch

Sitting in his offi ce in central Madrid, Marco Bressan, the chief data scientist at BBVA, gives a small chuckle when asked about the topic of artifi cial intelligence. He notices that as soon as a new article is written in Wired or the Harvard Business Review, his phone starts ringing

Sibos 2016 www.euromoney.com

Technology

Sibos 2016 www.euromoney.com38 39 www.euromoney.com Sibos 2016

Technology

the law � rm Baker & McKenzie exploring

the future of arti� cial intelligence in � nan-

cial services. The results showed an uneasy

tension between attitudes that on the one

hand identify AI as a tool for enhanced

risk management and ef� ciency and on the

other see it as a source of systemic risk,

volatility and industry fragmentation.

When asked where they expected AI

technologies to be deployed within their

organization over the next three years, 49%

of the survey participants chose risk assess-

ment as the most popular application.

Bressan agrees. For him AI is, “all about

decision-making, internally within the bank

and, externally, on the side of the client.”

Data can be fed into any manual decision-

making processes and can be used to help

solve internal management questions, such

as whether or not to open a new branch in

a new location or whether or not to give a

client a new loan.

The technology’s ability to crunch huge

amounts of data quickly will also have an

impact on how rapidly institutions can

respond to risks. As Lo argues: “Now,

when investors are faced with headline

risk, they can actually take action from an

algorithmic perspective rather than waiting

for a trader to get in, read the news and

then make a decision based on his or her

assessment.”

Financial research was identi� ed as

the second most-promising application,

with 45% identifying it as a key area for

development. Lo attributes this to recent

advances in natural language processing.

The ability to process contextual informa-

tion was previously regarded as a capability

unique to humans.

But, as Lo explains, “the progress made

by machine learning with respect to natural

language processing has really changed that

perspective and we now have algorithms

that can read annual reports, 10k � lings

and other kinds of text and process them in

quantitative ways.”

The acquisition of Kensho – a specialist

AI research out� t – by Goldman Sachs, is

testament to the potential of this applica-

tion.

Portfolio management and trading were

also identi� ed as promising areas for AI

development, with 37% and 33% of the

vote respectively. Oliver Bussmann, the for-

mer group information of� cer of UBS,

sees great potential with AI in re� ning

algorithmic trading. He is con� dent

that these applications will receive

investment because “trying to � gure out

how the market is moving is something

that, constrained by normal human ca-

pacities, is very hard to do.” Bussmann

also believes that the direct and positive

impact on revenue these applications

could bring will make them attractive

to senior management.

Robo-advisers have proved to be

somewhat contentious. The technology

is still relatively primitive. During the

last months of market volatility, there

have been reports of investors calling

their robo-adviser wealth managers,

demanding to speak to a human. Lo

concedes that this is an example of

the shortcomings of technology, yet

he still believes that, over time, the

robo-advisory offering will be re� ned

and improved. “We’ve got version 1.0

of robo-advisers,” he says. “Version 1.5 is

going to be considerably more robust and

user-friendly.”

Applications aimed at sales and customer

service were deemed less important by the

surveyed executives. Only 14% believed

that AI programmes will be used to drive

sales. However Nguyen Trieu thinks oth-

erwise and looks at how Amazon employs

its recommendation engine to help drive

sales and deliver, “an intensely personal-

ized service”. If banks were able to harness

their customers’ data in a similar fashion,

Nguyen Trieu believes that they could begin

offering truly personalized products, shaped

around the customer’s needs.

IN NOVEMBER 2015, ANTONY

Jenkins, former chief executive of Barclays,

warned of an Uber-style disruption to the

structure of the banking sector, mostly as

a result of new technologies. His gloomy

forecast suggested that as many as 50% of

jobs at big banks could be cut over the next

10 years. Alarmingly similar sentiments

were shared by our surveyed executives,

who identi� ed “changes to the structure of

the human workforce” as the most negative

implication of AI.

Banking has already seen big reduc-

tions in headcount over the last 15 years.

In this sense, AI’s introduction is just the

continuation of a process of automation

that is already well underway. As Nguyen

Trieu argues: “AI is all about digitalization

and automation. In all types of banks you

still have millions of processes in which

a similar task is repeatedly executed. The

major trend will be going back and seeing

which of these processes can be digitalized

and automated.”

Indeed investors are pushing for banks

to demonstrate cost reductions. Dwane of

Allianz Global Investors does not invest

in banks and currently � nds them “un-

investable”. However he does believe that

any chance of banks receiving recognition

“will only truly come if there are real cost

bene� ts from such a transformation”.

In Dwane’s view, cost reductions are an

absolute necessity if banks want to stay

competitive and attract investment. In the age

of AI, the ineluctable logic of automation will

very likely mean mass redundancies.

The pace of restructuring could be

quicker than some institutions anticipate.

Lo believes that Jenkins’ predictions are

“realistic” if investments in AI research and

development continue undisrupted.

Sean Park, the founder of the � ntech

venture capital � rm, Anthemis, believes that

change will be rapid and disruptive: “The

scary thing about AI and machine learning

is that you don’t necessarily see a slow lin-

ear shift towards technological automation.

It’s more that, in some banking businesses

where there is an obvious and immediate

application, the 100 people that once ran

that business can be reduced to just 10 or

� ve, or even no one in some cases.”

Where redundancies occur is dependent

upon a number of different factors, includ-

ing the repetitive nature of the job and the

availability of data, relevant to the speci� c

function. It will also be dependent on the

particular strategy of the � nancial institu-

tion, as Bressan explains: “If I’m worried

about margins, the main impact will be on

the back end. If I’m worried about increas-

ing value to my customers, in developed

saturated markets, the main impact will be

in the customer experience. If I’m wor-

ried about growth in the market, the main

impact will be in knowledge about my

non-customers.”

Disruption is expected to go beyond the

internal structure of � nancial institutions

and is likely to impact the structure of the

industry as a whole. Of our surveyed execu-

tives 56% believe that AI will drive market

diversity, with more small and medium-

sized participants entering the marketplace.

Only 8% believe that there will be no

change to the structure of the � nancial

services sector. Nguyen Trieu agrees that AI

will accelerate the fragmentation of bigger

� nancial institutions, as seen in the private

banking sector where, “you see many more

people setting up their own small family

of� ce or boutique � rm. This is much more

easily achieved, as from an infrastructure

perspective it is much simpler to outsource

infrastructure to smaller companies.”

OVER THE PAST FEW YEARS A

number of high-pro� le data scientists

have moved from technology companies

to � nancial institutions. They have been

hired to help banks leverage the wealth of

customer and market data they hold.

These scientists bring a rare blend of

skills in computer science, mathematics and

business. Their rarity means they com-

mand enormous salaries. In line with this

demand, our surveyed executives identi� ed

the shortage of specialist skills in technol-

0 10 20 30 40 50%

Risk assessment

Financial analysis/research

Investment/portfolio mngmnt

Trading

IT

0 10 20 30 40

Structure of the human workforce

Market stability

Regulation

%

0 10 20 30 40

Cost of AI systems

Shortage of specialist skills to operate/maintain the technology

Senior management/board buy in

%

Will drive marketdiversity, withmore SMEs enteringA few companies

will dominate, able to invest in the technology

Don’t know

There will be no change

Top fi ve areas for AI investment over next three years

Top three negative implications from AI

Top three obstacles to implementing AI How will AI change the structure of fi nancial services?

Source: Euromoney Thought Leadership

Source: Euromoney Thought Leadership

Source: Euromoney Thought Leadership Source: Euromoney Thought Leadership

“The scary thing about AI

and machine learning is that

you don’t necessarily see a

slow linear shift towards

technological automation.

It’s more that the 100 people

that once ran that business

can be reduced to just 10”

Sean Park, Anthemis

“Technological competence is

an absolute essential for at least

staying in the game. You may

still lose, but if you’re not in it,

you have no hope of winning”

Neil Dwane, Allianz Global Investors

This article was first published in the August issue of Euromoney

Sibos 2016 www.euromoney.com40 41 www.euromoney.com Sibos 2016

Technology

ogy as the second-most signi� cant obstacle

with introducing AI into their organization.

“If I was sitting on the board of a big bank,

the biggest challenge they have is acquiring

the best talent,” says Park.

Financial institutions will struggle to

compete with big technology companies in

acquiring the very best talent in mathemat-

ics, data science and computer science.

Companies like Google and Facebook

can offer the compensation, intellectual

stimulation and brand appeal that brilliant

young people crave.

As Park puts it: “Today, if you’re, say,

Goldman Sachs, forget about trying to

poach the best technologist talent away

from an Amazon, Google or Alibaba, it’s

very dif� cult.” This will make it more chal-

lenging for banks to engage in experimental

AI research and development.

However banks do not necessarily need

the very best technologists to develop

successful AI systems, products and pro-

grammes.

Nguyen Trieu believes the future talent

challenge for the banking sector lies in

� nding individuals with hybrid expertise –

some technology expertise combined with

knowledge of their industry.

As the level of AI being applied to � nan-

cial services is moving away from the realm

of pure R&D and towards technically

simpler applications, Nguyen Trieu believes

that tomorrow it will be about “� nding the

people who understand how to apply AI to

different business environments and differ-

ent processes.”

This challenge could be harder to over-

come than � nding pure scientists. In many

� nancial organizations there is a great

disconnect between business and technol-

ogy. Nguyen Trieu suggests that institutions

should be encouraging the cross-fertiliza-

tion of skills by arranging tailored graduate

programmes that encourage those in busi-

ness to train in technology and vice versa.

Financial institutions can also bene� t

from the increasing importance of open-

source. Don Duet, head of technology at

Goldman Sachs, thinks this has an impor-

tant impact on the type of individuals he

needs to hire to run a successful team. As

technology companies share most of their

latest advances in an open-source format,

this means that Goldman Sachs can focus

on hiring people with domain expertise:

“Being able to bring together people with

deep domain expertise and bring them

together with people with deep technologi-

cal expertise helps drive to success… that

intersection point is very important.”

Bressan is less convinced that the em-

phasis should be placed on hybrid-talent.

He believes that business knowledge is

more easily acquired than the technical

knowledge of arti� cial intelligence, deep

statistics and mathematics. The real key lies

in “building multidisciplinary teams that

complement each other… rather than to

have mono-talent.” Despite the competition

that technology companies pose to � nancial

institutions, Bressan is con� dent that FIs can

attract top talent, chie� y because “we have

very rich data and we have non-solved, deep

problems.”

AS FINANCIAL INSTITUTIONS

become increasingly dependent upon AI and

data, they will be exposed to new risks and

vulnerabilities. As Lo explains: “The big risk

is Moore’s Law meets Murphy’s Law.”

As computer power increases exponen-

tially (Moore’s law), the chance of it all go-

ing wrong also increases (Murphy’s Law.)

We have already seen this combination in

high-frequency trading where new technol-

ogy has enabled organizations to trade and

make mistakes at far greater speeds.

Beyond the realm of trading, what could

go wrong with employing AI in other parts

of your business? Bressan believes that the

main, all-encompassing risk is something he

refers to as “algorithmic quality.” Although

machine learning techniques have advanced

over the years, the successful training of

algorithms is highly dependent upon the

correct use of data. If not enough data is

used, or if the data is biased or unbalanced,

then this will be re� ected in the algorithm.

As Bressan explains: “If you use biased

data, the algorithm will also learn your bi-

ases. If you use data that is biased against a

particular minority, which is not adequately

represented in your data set, the output

algorithm will completely ignore that

minority because it was not able to learn

about the behaviour of that minority.” As

a consequence you will have an algorithm

that is intrinsically discriminative.

Algorithms also need constant updating,

to match the changing nature of reality.

Any failure to do this may make the algo-

rithm irrelevant and liable to error. Bressan

mentions an interesting example from the

� eld of epidemiology. A few years ago

researchers estimated that the outbreak of

� u virus could be predicted more accurately

by analyzing Google search terms and key

words. At � rst, the algorithm did indeed

prove more accurate than the predic-

tion models employed by national health

organizations. However after a few years of

using the same algorithm, they found it was

no longer working. The reason for this was

because the way people searched Google

had changed. As Bressan warns: “These

algorithms need to have the right data, they

need to evolve over time and they need to

be robust and consistent.”

The scope for algorithmic failure opens

up a range of potential legal risks. These

risks are yet to be clearly de� ned, as regula-

tion and legislation are slow to catch-up

with rapid technological change. However

if � awed investment decisions are made as

a result of poor data or malfunctioning al-

gorithms this could pose corporate liability

risks. Data protection and privacy risk also

arise, if, for example, personal investor data

fell into the wrong hands. As Steve Holmes,

TMT partner at Baker & McKenzie, points

out: “Some of these risks are very speci� c,

including increased likelihood of security

breaches, data loss, fraud or intellectual

property infringements. While digital rep-

resents a signi� cant opportunity for most

companies, there are also legal risks that

need to be considered.”

Incidents such as the Knight Capital

crash, in which the trading � rm lost $440

million due to a programming error, are

likely to reoccur, particularly as more

systems become automated. Despite these

risks, however, Nguyen Trieu believes that

greater than the threat of � ash crashes is

the business risk of not investing in the

technology and being left behind.

For Nguyen Trieu: “AI is a little bit like

electricity.” Just as those companies that did

not invest in electricity eventually suffered

huge competitive disadvantages and were

quickly left behind, so too will companies

resistant to AI. He believes that this is

already happening now, across a variety of

businesses “where automation of previously

manual processes are creating cost-savings

of at least � ve times.”

When it comes to regulation, our survey

demonstrated a lack of con� dence in the

regulators’ ability to stay ahead of technol-

ogy trends – 69% of respondents were

either ‘not very con� dent’ or ‘not con� dent

at all’ in the regulators’ understanding of

technology. However the challenge for

regulators is extremely dif� cult to manage.

They are under-resourced in talent and cap-

ital, compared with � nancial institutions.

Perhaps more importantly, they have to

strike a balance between preparing for new

technologies while avoiding the temptation

to indulge in anticipatory regulation.

Lo, himself a member of the OFR Finan-

cial Research Advisory Committee, sees a

challenge ahead for regulators: “Instead of

being two steps behind, regulators could

be � ve steps behind if the pace of � nancial

innovation continues. That’s the concern.”

Regulators themselves will have to consider

making similar investments in AI technol-

ogy to help them oversee markets.

IS AI THE FUTURE OF BANKING?

If referring to AI as a wider process of

automation then the answer has to be an

unequivocal yes. The more pertinent ques-

tion is whether large � nancial institutions

are in a position to adapt to this future. Park

remains puzzled by the paradoxical situation

where banks “have huge � nancial and hu-

man resources to deploy, but there is still a

challenge in taking these technologies from

the laboratory to the real world… culturally,

it’s like turning a super tanker. Not easy.”

The � rst big obstacle is adopting new

technologies, while being encumbered by

a dense and debilitating network of legacy

IT systems. AI can actually play a part in

helping to reduce complexity and improve

the ef� ciency of old computer systems. Duet

mentions that Goldman Sachs has used AI

to do just that. But Dwane remains sceptical

that banks are in a position to change: “I

know many CTOs at large banks currently

spending 100% of their money on effectively

keeping the lights on the bank’s technology.”

If all efforts are focussed on just keeping

the machine running, then it is unlikely that

investments in AI will prove successful.

The second and perhaps bigger obstacle

is the cultural shift that AI and associated

technologies demand of organizations.

Banking leaders need to fully understand,

practice and preach the art of total data.

Park’s view is damning: “If you look at

the executive suites or boards of banks, and

you’re objective about it, they don’t have the

right people to make these changes.”

“Ten years ago, if you wanted

to develop an app for your

smartphone that recognized

what you said, you would need

a PhD from Stanford or MIT.

Today, you can be a very basic

programmer and develop this

app”

Huy Nguyen Trieu, Oxford University

“If you use biased data, the

algorithm will also learn your

biases. If you use data that

is biased against a particular

minority, which is not

adequately represented in your

data set, the output algorithm

will completely ignore that

minority”

Marco Bressan, BBVA

“Trying to � gure out

how the market is

moving is something that,

constrained by normal

human capacities, is very

hard to do”

Oliver Bussmann

Tom Upchurch is managing editor

of Euromoney Institutional Investor

Thought Leadership

Biometric banking and the $600 billion opportunity

43www.euromoney.com Sibos 2016Sibos 2016 www.euromoney.com42

Technology

An extraordinary revolution is taking place in digital banking in India. Driven by the state, it is anchored on a billion-strong biometric database to finally bring financial inclusion to a country that needs it more than any other. Banks may face a binary outcome: be quick or be dead

It’s already happening. Leaving Nilekani’s

Bangalore office for the airport, Euromoney

asks where best to hail a cab from, paying in

cash. He frowns. “You can’t, really,” he says.

“It’s all Uber in Bangalore.”

Some will make a fortune from this; others

are just not ready.

Credit Suisse analyst Ashish Gupta divides

banks into two camps: the quick and the

dead. “As the twin forces of disintermediation

and digitization accelerate the pace of change,

the quick – banks able to perform – will not

only survive but capture increasing market

share, while the dead – banks unable to cope

with the change – will get marginalized.”

He believes there is a $600 billion market

cap opportunity to play for among the banks,

which is some claim, given that all India’s

private banks collectively have a market cap

of just $127 billion today.

The pace of development and change in

Indian financial tech has been bewildering.

It is particularly transformative because

of the starting point. Only 5% of personal

expenditure in India is conducted electroni-

cally; 95% is still cash. Credit Suisse says

that even now consumer payments are worth

$1.3 trillion annually. When magnified by the

world’s second-largest national population,

the potential is very clear.

It has been a bold evolution, undertaken at

breakneck speed. “The stack was not built in

a day,” says Nilekani. “We did not conceptu-

alise all of it in the early days. When I began

as the chairman of Aadhaar seven years back,

the focus was just on putting 1 billion people

on the system and using it for authentica-

tion.” Everything else followed as various

parties realised the benefits.

Having got there, does he consider India’s

process as having been unique? “Totally,” he

says.

There is an equivalent in the US, he adds,

when the public sector was involved in the

early days of the creation of the world wide

web, and when US president Bill Clinton

decided to put GPS in the public domain in

2000; but since then digital public infra-

structure has been entirely about the private

sector, Google and Facebook and Amazon

and Alibaba. “But if these things are done as

public infrastructure, they create a level play-

ing field, and innovation happens on the top

of that infrastructure.

“It was a crazy idea. But what has hap-

pened in India is unique.”

almost nine) – and the only one to have done

so entirely domestically and driven not by a

private-sector tech leader but a government.

Nandan Nilekani, co-founder of Infosys,

who entered government with the task of

spearheading this preposterous conceit, smiles

as he recalls it: first the original idea, then

building an architecture that could enrol 1.5

million people a day through 75 competing

enrolment agencies, despite use of the card

never being mandatory.

“We decided it was scalable,” he says. “But

1 billion people? It was a bit of a surprise to

us also.”

But if Aadhaar is itself a great – and, some

say, sinister – social achievement, it also has

the chance to revolutionise financial services

in India: to bank the unbanked, to shake up

the landscape for providing banking services,

to move swiftly towards a cashless society. “A

WhatsApp moment is now upon us in Indian

banking,” Nilekani says.

In the history of computing, only 12

applications have achieved 1 bil-

lion users. Windows, and its Office

sibling, were the first two; Google

search was next; Gmail, YouTube,

Facebook and the Android operating system

have all followed in time, with WhatsApp the

latest. Then there is Aadhaar.

Aadhaar? Few outside India know it, but

it is a truly remarkable story. It represents an

audacious attempt to get India’s entire 1.25

billion population on to a single biometric

card system, from the Buddhists in Himala-

yan Ladakh to the Tamils in Thoothukudi

and the isolated tribespeople of the Anda-

man and Nicobar Islands, embracing 1,600

languages and almost 300 million adults who

cannot read or write.

Absurdly, it worked, and then some: when

it crossed the 1 billion mark in April, it

became the fastest of all platforms to do so

– in just five and a half years (Facebook took

By: Chris Wright

From Aadhaar to iSPIRT –your guide to Indian biometrics page 46

Sibos 2016 www.euromoney.com44 45 www.euromoney.com Sibos 2016

Technology

ON THE TOP FLOOR OF A COLONIAL-

era building in Mumbai’s Fort District, there

is a bank that doesn’t look much like a bank.

Half the space is given over to a funky-

industrial coffee shop, in which staff sit and

pore over tablets; the area where the staff

work is all exposed air-con ducts, dartboards

and graffi ti-style graphics saying: ‘Tomorrow

starts here’.

This, pretty much in its entirety, is the

front-offi ce staff of DBS Digibank, a mobile-

only bank launched in India in April. It is

perhaps the most brazen attempt to make use

of India’s new technological infrastructure

so far.

“Our India agenda is to move from thou-

sands to 5 million customers on the back of

Digi, and I think we can do it,” says Piyush

Gupta, chief executive of DBS in Singapore.

“It’s a complete game-changer. It’s not

just doing an app. We’ve been doing mobile

banking for 15 years,” he says. “It’s not about

a bank putting out another channel. This

is a clean sheet of paper and reimagining

banking.

“We reckoned we could do with 19 people

what would normally take 300 people to do:

that’s the kind of bank we want to create,”

he adds. “In the end we might need 60 or

70, but that’s it.” It will never have a single

private banks to swallow hard.

Paytm started out in life in 2010 as a sim-

ple way to recharge mobile prepaid accounts,

a role it still performs, and gradually diversi-

fi ed into Uber taxi payments and simple con-

sumer services like cinema tickets. It became

a broad-based mobile wallet system and then,

in August 2015, was granted a payments

bank licence by the Reserve Bank of India, by

which time it had welcomed Alibaba as an

investor.

At the time of writing Paytm has a sub-

scriber base of 125 million, but it is growing

so fast that that number will be out of date

by the time you read this, and out of date

again by the time you’ve Googled it to see

what the fuss is about.

The payments bank arm is due to launch

in the second half of 2016, and has appointed

a CEO, Shinjini Kumar, a former Pricewater-

houseCoopers partner who led the banking

and capital markets practice for India there,

and who spent 16 years at the RBI. Merchant

and agent acquisition will be headed by Sau-

rabh Sharma, a former Airtel executive. Vijay

Shekhar Sharma, CEO of Paytm itself, has

branch, with conversion into a full-fl edged

bank account happening at Café Coffee Day

outlets, where customers only have to provide

their Aadhaar details and have their fi nger-

prints scanned on a handheld device.

DBS’s Gupta believes he can pull off this

extraordinary trick because of Aadhaar

and the opportunities it creates. In the past,

when expanding into a country, one needed

branches to bring in customers. Aadhaar –

and more specifi cally, the regulation allowing

Aadhaar’s electronic know-your-customer

(eKYC) mechanism to be used as a way to

authenticate new clients – changed that.

“No Aadhaar, no Digibank,” Gupta says.

Aadhaar’s not the whole story – the bank

also makes unprecedented use of artifi cial

intelligence in its call centre, using systems

developed by the same people who built

Apple’s Siri product – but it is the foundation

that allows it to be attempted.

“We are the fi rst bank to create a system

that utilizes the whole ecosystem of India

Stack,” says Shantanu Sengupta, head of

consumer banking for DBS in Mumbai. He

says the fi rst phase is a simple banking plat-

form, for fund transfers, bill payments and

e-commerce; a second stage will add more

products, such as lending and perhaps insur-

ance. Interviewed in July, he would not give

numbers about clients or assets, except to say

that take-up has been positive.

Clearly the job is not done yet; as one tech-

loving foreign bank CEO notes: “The jury is

still out on DBS. They will have to convert

those accounts into money.” One Indian

banker adds: “They still have to provide a

proposition, and that to me is the bigger

challenge. Cobbling together advances in the

marketplace is insuffi cient. But the direction

is right, and if it evolves, it is good for the

market. I wish them well.”

Sengupta thinks the bank is well-posi-

tioned for the opportunities that come with

a changing environment. “The Digital India

push is creating a signifi cant differentiation

in the market,” he says. “The government

is focusing on minimizing cash and driving

fi nancial inclusion and making sure payments

are electronic as much as possible. It’s all con-

verging, and we are in the right place at the

right time. The model of banking is changing

enormously: people don’t walk into branches

so easily. “

It is striking that DBS was not impeded as

a foreign bank from being an early entrant

into this market, and indeed both Sengupta

and Gupta say the regulator was helpful and

encouraging, offering a level playing fi eld.

One could argue that foreign banks have

the most to gain from India’s increasingly dig-

ital and phone-led society, since it frees them

from the need to build a bricks-and-mortar

network that will simply never replicate that

of the long-established local houses.

“The intent is transformational,” says

Kartik Kaushik, country business manager at

Citi’s global consumer bank in Mumbai, of

UPI (unifi ed payment interface) and similar

initiatives. “If they get the scope of what they

have done through to execution, it has the

potential not only to transform the P2P (peer-

to-peer) segment but the entire ecosystem

for payments.” What UPI needs, he says, is

more use cases, and time: immediate payment

service (IMPS) is considered a huge success

today but it only became one after several

years of existence.

“It was a fi ve year journey, ahead of its

time. UPI will go through the same process

and the potential for disruption is much

larger.”

What does it mean for Citi? In a nutshell,

good news, because its relative lack of on-the-

ground presence in India matters less now.

“The way I see it, I am a smaller physical

participant in the Indian fi nancial ecosystem,”

says Kaushik. “So we were the fi rst adopters

of IMPS. We went headlong into it because

we saw it as value, because my business

model is digital: even with a smaller percent-

age of overall accounts we have a very large

percentage of IMPS transactions today.” UPI

will be the same. “With the lack of a physical

presence, the opportunity is much larger. We

want to be a part of it, we want to see its

whole scope come alive, and we are prepared

to invest in our own use cases,” which in his

case means things that make life easier for the

consumer.

IF THAT’S TRUE, WHAT HAPPENS FOR

the banks that today are dominant because

of their huge physical networks? Do they lose

out? State Bank of India, by far the biggest,

is a special case, but for the rest, there is both

opportunity and threat. Ashish Gupta at

Credit Suisse believes that the larger private

banks, specifi cally HDFC, ICICI and Axis,

are best positioned. Firstly, he says, private

banks have always tended to be more nimble

in capturing share in new segments, such as

consumer lending and credit cards; he says

that although they have only 22% of India’s

deposits, they have 40% of its consumer

loans and 77% of its credit cards. They also

have a disproportionate share of digital

channels.

The private-sector banks have been busy,

and Credit Suisse argues that digital leaders

could see their worth expand 10 times over

as they corner greater market share. It also

argues that the benefi ts of digitization could

improve consumer banks’ profi tability by be-

tween 30% and 70%, driven by lower costs

on branch banking and transactions, and

better revenues from acceleration in customer

acquisition, higher cross-sell ratios and a rise

in fee income.

The fl ipside, though, is that these banks

are facing a more competitive domestic

environment than ever. The RBI has given

licences to over 20 new banks, some of

them designated purely as payments banks,

although Euromoney understands that not all

of them have chosen to take up their licences.

Most of the new payments banks are fi ntech

players, wallet operators and telcos – a whole

new competitive wave that will cause existing

0

100

200

300

400

500

600

700

800

900

0

10

20

30

40

50

60

70

80

90

100

2015 2016 2017 2018 2019 2020

Non-cash-transactions Cash transactions

Non

-cash-tran

sactions ($b

ln)

%

India’s cashless future?$850bln digital transactions by 2020

Source: RBI, Credit Suisse estimates

“It was a crazy idea. But what has happened in India is unique”

Nandan Nilekani, Infosys

How India’s banks are setting up for the tech revolution

India’s leading private banks

have been busy, with each

carving out niches in par-

ticular products. ICICI Bank

Pockets, for example, has

been the most successful

mobile wallet to be launched

by a bank to date, and has

already been downloaded

almost 4 million times. Similar

products exist at HDFC

(called PayZapp), Axis (Axis

Lime) and State Bank of India

(SBI Buddy). Pockets allow

users to send money to any

e-mail ID, mobile number,

bank account or even a

Facebook friend, to pay bills,

top up mobile phones, order

food or share expenses.

ICICI has also been quick

to launch NFC cards – like

the Contactless system

in the UK – and more

than 70% of its customer

transactions now happen

through digital channels.

HDFC, meanwhile, can

claim a dominant market

share in digital channels,

with Credit Suisse estimat-

ing its share of merchant

acquiring business at 40%,

credit cards at 24% and

point-of-sale terminals at

31%. It was one of the

fi rst banks to establish an

internal data warehouse

integrated with customer-

relationship-management

solutions, and it has devel-

oped strong analytics and

digital infrastructure.

“This should continue to

be its source of competitive

advantage over its peers as

it would be diffi cult for its

peers to replicate a similar

information infrastructure

quickly,” says Credit Suisse

analyst Ashish Gupta.

Its PayZapp product

claims to be the only

payment solution where

customers can complete

a transaction with just one

click, which seems to be

something of a holy grail for

Indian banks and fi ntechs,

though one wonders how

many people are put off by

the burden of an additional

click or two.

At Axis, Credit Suisse

credits digital with the

bank’s success in growing

its retail business, which

now accounts for 65% of

the whole bank. “The digital

approach has been a key

enabler of Axis Bank’s retail

strategy with its retail loan

book built from scratch with

a focus on internal custom-

ers,” says Gupta at Credit

Suisse. Examples include

the Ping Pay system that

works on the IMPS platform

for instant money transfer.

Kotak Mahindra Bank has

a payment app, Kaypay;

an e-commerce platform,

Kotak Marketplace; and a

mobile app.

This article was first published in the September issue of Euromoney

Sibos 2016 www.euromoney.com46 47 www.euromoney.com Sibos 2016

Technology

said that once it is launched, the bank will

target 200 million account holders within a

year – much of it by use of the Aadhaar KYC

system – and Rs100 billion of deposits.

Within the bank channel, “it plans to

focus on earning money by monetizing data

captured through the payment transactions

done through Paytm,” says Credit Suisse’s

Gupta, and this is an important point. Banks’

ability to thrive in the digital environment

will depend on their ability to collect, under-

stand and monetize the huge amounts of data

that will be generated by the India Stack. As

Nilekani puts it: “Data will become the new

currency, and fi nancial institutions will be

willing to forego transaction fees to get rich

digital information on their customers.”

So, for example, credit penetration is very

weak in India, particularly at the unsecured

level. But if a bank is able to use all the new

data that is created by these digital streams,

then it becomes much easier to assess

creditworthiness, and indeed target potential

customers based on their preferences. Con-

sequently, Credit Suisse estimates consumer

and SME credit will grow from $620 billion

today to $3.02 trillion 10 years from now.

Banks like HDFC are already building data

warehouses to get ahead of this trend.

The payment banks generally could have

a considerable impact, because as Gupta

at Credit Suisse points out, no matter how

much digital disruption has hit the bank-

ing sector in recent years, the ownership of

the customer has always remained with the

banks. “However, we believe the upcoming

wave of smartphone app-based disruption by

payments banks could be quite different in its

impact on the banking sector, in that for the

fi rst time, the ownership of the customer is at

risk for banks,” he says. This has implications

for margins, fees, and the ownership of this

vital transactional data on the customer.

Nilekani expects a shake-out for Indian

banking.

“Today, the commanding heights of the

economy are controlled by public sector

banks: 70% and SBI alone 20%,” he says.

“I think they are in for a diffi cult time. They

are already reeling under the impact of bad

loans, and tech disruption is hitting them at

the worst possible time when they are under

massive government scrutiny.

“My view is that the market share of these

banks will come down quite dramatically

in the next 10 years, from 70% to less than

50%.”

That, he says, is good for the private

banks. “They have three levels of opportuni-

ty. One is the normal growth of the economy.

Then there’s the market-share loss by the

public-sector banks, which they can in some

sense replace. And fi nally there is the deepen-

ing of the market, because fi nancial inclusion

will take you further. So if somebody plays

their cards well, they can grow at 30% to

40% for the next 10 years, compounded.” In

terms of? “Assets. By using data, and reduc-

ing transaction costs.

“Now, who will take that? Existing private

banks will certainly take a lot of it because

they are already there, but it is not clear to

me how much they are fundamentally ready

to reimagine their operations.”

There will be a lot of reimagining required.

“Our view is all this stuff is going to drive

transaction costs to zero,” says Nilekani.

“And if your big balance-sheet contributor is

fee income, then you don’t want to canni-

balise that income, so they will face a classic

dilemma.”

But private banks that are not prepared

to make this trade-off – accepting the loss

• Aadhaar is a biometric ID card,

but it is signifi cant to fi nancial

services as a method of authen-

tication. Using the card and a

fi ngerprint or iris scan, it becomes

possible to identify oneself ac-

curately from anywhere, and

without the need for a paper trail.

A feature of Aadhaar called eKYC

(electronic know-your-customer)

allows a cardholder to open a bank

account instantly, just using their

Aadhaar number and their own

biometrics. Subsequent initiatives

linked to Aadhaar include a digital

signature to make documents

secure; and a digital locker to store

those documents.

• Prime minister Narendra Modi

was elected on a platform of inclu-

sion, and on Indian Independence

Day in 2014, from New Delhi’s Red

Fort, he introduced a keystone

initiative to ensure that every family

living in India has a bank account.

This is known as Jan Dhan Yojana(in full, Pradhan Mantri Jan Dhan

Yojana, or ‘prime minister’s people

money scheme’). Many open with

a zero balance, but the idea is that

it connects the disenfranchised to

the economy. Also, it’s free, and

comes with life cover. By June

2016, 220 million accounts had

been opened, including 18 million

in the fi rst week in August 2014,

which apparently got it into the

Guinness World Records.

• One of the benefi ts that comes

with a Jan Dhan Yojana account

is the RuPay debit card, usable at

ATMs, point-of-sale machines and

e-commerce sites at cheaper rates

than Visa and MasterCard. By May

2016, 267 million debit cards had

been issued. “It was conceived to

fulfi l RBI’s vision to offer a domes-

tic, open-loop, multilateral system,

which will allow all Indian banks

and fi nancial institutions in India to

participate in electronic payments,”

says Puneet Gulati at JM Financial.

Axis Capital calculates that RuPay

has already built a 38% market

share after four years of opera-

tions. A RuPay credit card will

follow later this year.

• RuPay is one of many initiatives

by the National Payments Corp of India, a fascinating institu-

tion that has been a key driver of

banking technology (as has the

Reserve Bank of India, which has

encouraged it throughout). NPCI

was set up in 2009 by the RBI and

the Indian Banks Association, and

is a non-profi t organization owned

and promoted collectively by 10

of the biggest banks in India, from

public State Bank of India to pri-

vate sector ICICI and HDFC, and

foreigners Citibank and HSBC. It is

an umbrella organization for all the

retail payments systems in India.

“It is creating infrastructure which

rests on the principle of large scale

and high volumes, resulting in pay-

ment services at a fraction of the

present cost structure,” explains

Priya Rohira, executive director at

Axis Capital. The various products

that have come out of NPCI have

gone from handling 2 million

transactions a day six years ago to

about 22 million a day now, with an

aim of reaching 100 million a day.

• Aside from RuPay, two key

NPCI initiatives are the Aadhaar Payments Bridge System and

Aadhaar Enabled Payments System, and this is where the

interconnections between the

various initiatives in India start to

get interesting. Through these, the

payment of government benefi ts,

such as subsidies for natural gas,

are handled automatically and paid

into an account verifi ed through

the Aadhaar card. More than 1

billion transactions have been

completed using the payments

bridge so far, and 260 million bank

accounts are directly linked to Aad-

haar. This is the clearest illustration

of what the government is trying to

do: the Aadhaar ID has facilitated

the opening of a bank account; the

automatic payment of government

benefi ts into it has made that bank

account active; and suddenly that

person is part of the fi nancial main-

stream, with the added benefi t that

wastage, corruption and fraud are

removed from the system.

• Another NPCI success is the

Immediate Payment Service,

or IMPS, which provides mobile-

based fund transfer. The smart-

phone is going to be instrumental

to India’s fi nancial journey, perhaps

even more so than elsewhere;

through it, Credit Suisse analyst

Ashish Gupta argues that India is

going to skip two generations in

banking, largely going straight from

branch banking to mobile banking.

Gupta also expects virtually all

bank deposit holders to own a

smartphone by 2020. IMPS has

been a huge success: transactions

through it grew by 180% year on

year in fi scal 2016, with Rs1.62 tril-

lion ($24 billion) transacted through

the system in a single year.

• However, the newest initiative,

the Unifi ed Payments Interface,

launched on July 31, goes further

still. IMPS is by most standards

a great system, but it does have

limitations: only banks that are

members of NPCI’s IMPS system

can access its database, meaning

that mobile wallets are excluded

from it; the process of transfer

can be cumbersome at fi rst; and

it only allows for so-called ‘push’

transactions, through which the

sender initiates the transaction.

What is revolutionary about UPI

is inter-operability, which means

money can be transacted across

multiple different bank accounts,

cards, wallets and banks. (At least

15 banks are believed to have

rolled it out on July 31, with others

following.) Mobile numbers can

be used to identify recipients. And

where IMPS can only push, UPI

can pull, too, where the recipient

initiates the transfer – for example,

a merchant’s billing system initiat-

ing a payment. “It’s the world’s fi rst

inter-operable mobile payments

system,” says Nandan Nilekani,

cofounder of Infosys. “Pushing or

pulling money from a smartphone

will be as easy as sending or

receiving an email.”

• Next comes the Bahrat Bill Payment Service (BBPS), which

is aimed specifi cally at regular bill

payments. Credit Suisse reckons

$115 billion of bills are processed

in India each year, and paper-

based payments constitute over

90% of those payments. BBPS will

be an inter-operable system, oper-

ating as a single authority through

which customers can pay all their

bills electronically.

• This whole combination of

elements is known generically as

India Stack, a term coined by the

think-tank iSPIRT. You might think

of it as a pyramid, with Aadhaar as

the foundation, and various other

layers built on top of it, culminating

with UPI, all of it assisted by the

growing use of the mobile phone.

Jan Dhan means everyone will

have a bank account; Aadhaar

means everyone has a unique

identity for verifi cation; mobile

connectivity means anyone can

access it all from anywhere.

• One other important point to un-

derstand, particularly from a bank-

ing perspective, is that all of this

means that India moves from being

data poor to data rich. “A large

majority of Indians are today invis-

ible to formal lenders due to them

being thin-fi le or no-fi le customers

from the point of view of lenders,”

says Credit Suisse’s Gupta. “The

result is low credit penetration and,

in particular, low unsecured credit.”

But one result of all these digital

initiatives is that “more of modern

life gets captured in digital data

streams”, says Gupta.

• Consequently there is, perhaps,

one layer left to build: Nilekani calls

it the Electronic Consent Archi-tecture. “There’s all this data that

is going to start spewing out of

every system, this digital footprint,”

he says. “Is there a way to make

it simple for an individual or busi-

ness to leverage his own data for

his own benefi t? If I want a loan,

and I can show through this data

that I have a consistent record of

payment, then it’s more likely I will

get a loan.” He is talking with the

Reserve Bank to see if this can be

accessible to the fi nancial sector

as a standard way of assessing

applicants. “And that,” he says,

“hopefully, will be the last step.”

Understanding India’s push into biometrics

“Our India agenda is to move from thousands to 5 million customers

on the back of Digi, and I think we can do it”

Piyush Gupta, DBS

Sibos 2016 www.euromoney.com48 49www.euromoney.com Sibos 2016

Technology

of fee income, knowing that they ought to

be able to make money elsewhere through

intelligent use of all the extra data they are

receiving – may get left behind, letting newer

entrants like Paytm take the opportunity. A

huge amount of the banking sector – remit-

tances, fixed deposits, current accounts, credit

cards, mutual funds – stands to be disrupted.

“There is going to be a definite re-ordering of

stuff. It’s all up for grabs. Here’s an opportu-

nity. If you want to go for it, go for it. I’m just

watching.”

THE DRIVER THAT LED TO ALL THIS

was a simple objective: financial inclusion.

No matter what else happens in terms of the

ability of that average middle-class Indian to

be able to conduct e-commerce with one click

and no fees, the whole India Stack initiative

will ultimately be judged by whether or not

it brought the hundreds of millions of un-

banked citizens into the financial mainstream.

Of course, a project of this type and on

such a scale is not without its critics. When

you put 1 billion people on a single biometric

ID card, there is inevitably a sense of concern

about what it means for privacy.

When the Aadhaar Bill was pushed

through parliament in a week, many com-

mentators – such as Chinmayi Arun, execu-

tive director at the Centre for Communica-

tion Governance at National Law University

in New Delhi – were unhappy. “Aadhaar

has had an invasive and controversial pres-

ence well before the government’s attempt

to legitimise it,” she said in March. “The

safeguards contained within the Aadhaar Bill

are appalling, even by very outdated Indian

standards. By international standards, they

are laughable.”

Surveillance is one issue, but also it doesn’t

take a genius to wonder if the vast swathes

of data that come with financial inclusion

might eventually be passed to the tax office. A

strengthening of the tax net could potentially

transform the entire Indian economy, but it

would not be especially popular.

As for the banks, they don’t have access to

Aadhaar data; it only works as a method of

authentication. “Is it an available marketing

database? The answer is no,” says Kaushik

at Citi. “And that’s the right way, because

opening up that database would create a lot

of unintended consequences and risks. To

me, Aadhaar is all about the opportunity to

validate.”

Nilekani is certain the positives outweigh

any drawbacks. “I think it’s a work in

progress,” he says. “The direct benefits can

be called a success: there are 280 million

Aadhaar-linked accounts and billions of

dollars of social security and gas subsidies

have been transferred through over 1 billion

transactions.

“If you can take subsidies and make them

transactions into people’s accounts, it makes

them active. That is the first step to financial

inclusion. That, we can declare a success.”

There is more to come, too: he says the

government spends as much as $80 billion

annually on different subsidies, all of which

will gradually be put on this electronic

platform.

Another important step in progress is

what he calls a Micro ATM, which means

that instead of a bank opening a branch in

a village, it can appoint a grocery store, so

that anybody can go into it and access money

using the Aadhaar card for verification. Also,

there can be more than one shop in the same

village offering the same service, creating

competition and driving efficiency. “That’s all

inclusion,” says Nilekani.

But there’s more to it than that. “His-

torically, inclusion in India has been seen as

something the government is pushing, be-

cause there is no money in it: the transaction

costs are too high, the values of the transac-

tions are too low and the fees are not there,”

he says. “A market player would prefer to

stick with customers who they are able to

make money from.

“But what India Stack does is it dramati-

cally reduces transaction costs. So inclusion

will happen not just because the government

says so but because it makes business sense.

“All the pieces are in place. Now we need

to see how the next five years pan out.”

1985 1990 1995 2000 2005 2010 2015

Windows

Office25 yrs

Google search

Gmail

YouTube

Maps

Android

Chrome

12 yrs

8 yrs

6 yrs

WhatsApp

8.7 yrs6.8 yrs

Facebook

Aadhaar 5.5 yrs

App Store

WeChat????

PRESENCE-LESS LAYER

CONSENT LAYER

PAPERLESS LAYER

CASHLESS LAYER

Aadhaar AuthenticationUnique digital biometric identity with open access of nearly 1 billion users

Open Personal Data StoreProvides a modern privacy data-sharing framework

Aadhaar e-KYC, E-sign, Digital Locker

Rapidly growing base of paperless systems with billions of artifacts

IMPS, AEPS, APB, and UPIGame changing electronic payment systems and transition to cashless economy

India

Stack

How far and how fastHow long it has taken platforms or apps to reach 1 billion users

Unique, modern, game-changing?Layers of the Indian Stack

Source: Nandan Nilekani

Source: iSPIRT