Same arena; different angles

The second day of Sibos began and ended with views from the top of the industry. In between, regardless of the roles and locations of panel participants, as views are aired, several common concerns and opportunities are emerging.

Sibos participants in a European time zone were able to combine their morning coffee with a ‘View from the Top’ provided by Hironori Kamezawa, President and Group CEO of Mitsubishi UFJ Financial Group (MUFG).

MUFG’s new medium-term business plan aims to position the bank as a key business partner, pioneering the future through the power of finance and digital services. “We are committed to empowering a brighter future,” said Kamezawa.

This new vision is a broad one, encompassing all the bank’s many stakeholders: society at large, employees, customers and shareholders. It integrates efforts to address environmental and societal issues into management strategies. The bank has focused on 10 priority areas that it can address in a meaningful way, the three most crucial being climate change, Japan’s falling birth-rate and ageing population, and inclusion and diversity.

The bank released its Carbon Neutrality Declaration in May to make its intentions clear. It is aiming to achieve net zero greenhouse gas emissions across its finance portfolio by 2050, and in its own operations by 2030.

With regard to digital transformation, MUFG is focusing both on methods of connecting with customers and the data used in the process. It sees smartphones, in particular, as a major channel for connecting with customers. Meanwhile, by combining data on various customer attributes, MUFG hopes to create a new credit model.

Central concerns

The focus of the morning programme then shifted to central banks with a panel discussion exploring what a 21st Century central bank should look like. As the global economy and financial system face uncharted waters, Patricia Haas Cleveland, US president, OMFIF, the session moderator, noted that while central banks around the world have similar responsibilities for economic growth and financial stability, they are now under pressure to extend their mandate and respond to increasingly complex trends.

George Elhedery, Co-CEO, Global Banking and Markets, HSBC Group, presented a list of formidable challenges for central banks around the world: the need to incorporate climate considerations in central bank mandates for the management of risks; the scope of their engagement with digital currency; the emergence of unregulated decentralised finance (DeFi); how to create an ecosystem that allows for innovation, but is stable and safe; how to exit from quantitative easing; how to remain free from undue political influence; and how much active engagement to pursue in helping to tackle income inequality and indebtedness, while facing renewed inflationary pressures. “Central Banks must juggle with all of these,” he suggested.

On the issue of inflation, Ulrich Bindseil, Director General, Market Infrastructures and Payments, ECB, identified a long-term trend since 1982 of weaker inflationary pressure. Although some of the shocks arising from current supply shortages were most likely temporary, he said, the inflationary side-effects of central bank action in other areas needed to be borne in mind.

For Howard Lee, Deputy Chief Executive, HKMA, a key challenge facing central banks today is the need to ensure that the banking sector as a whole can continue to rise to financing challenges such as the provision of green financing. He acknowledged that this was not so much as area of traditional prudential supervision, but rather of capacity enhancement.

Added to this, continued digitalisation is a new challenge for both banks and their supervisors in terms of systemic risk awareness in the new dispensation. “We need to up our skills to understand how to supervise this,” he commented. In that regard, HSBC’s Georges Elhedery stressed that one of the biggest challenges for organisations such as his was the risk of fragmentation of jurisdictions.

The challenges of digitalisation were also visited in a mid-morning session: ‘Our digital future: if it ain’t broke don’t fix it?’ While the way consumers and clients access financial products has changed dramatically with the emergence of new channels and bank competitors, the financial products themselves have not fundamentally changed. Moving money from one place to the other remains the core product of banking, but the way that is being done in the digital world is faster and provides a much better experience for users.

On the frontiers, digital technology is being used in really interesting ways to develop new products and services and this is exploding because of the relatively light regulation. Technology always moves faster than regulation. Some of these products will work, some will fail.”

Sophie Gilder, Founding Member x15ventures team, Commonwealth Bank of Australia

John O’Neill, Director, Digital & Data, HSBC Bank identified two stages of digitisation: first, technologies such as cloud and artificial intelligence are being deployed to alter business models. The next stage is one in which specific financial technologies are employed to create new products. “Central bank digital currencies, stable coins, tokenisation and digital assets are collectively termed digital assets and currencies,” he said. “They will revolutionise some of the fundamental building blocks of banking such as payments and transfer of title. This second stage is very exciting and is more fundamental to the DNA of banking.”

Meanwhile, the tokenisation of assets and transfer of title to digital assets has been accelerating. “Recently listed securities have been tokenised, which poses an existential threat to traditional exchanges,” said Sean Foley, Associate Professor of Applied Finance, Macquarie University.

Firms can raise capital, create tokens and provide secondary trading all on the blockchain without having to pay a centralised venue. It is a big opportunity to challenge the raison d’etre of traditional exchanges.”

Sean Foley, Associate Professor of Applied Finance, Macquarie University

There is a regulatory disparity between the conventional forms of finance and the emerging digital forms – an issue addressed by a number of participants in different panels throughout the day. “In dealing with money, we have to be mindful of regulatory compliance, data security and cybersecurity,” said fintech venture investor, Anju Patwardhan. “There are no shortcuts and it is tough for regulators to balance between promoting innovation but at the same time focusing on consumer protection and financial stability.”

Crossing frontiers

A key aspect of digitalisation of daily importance to the SWIFT community is the changing nature of payments options. ‘FMIs: Linking systems for cross-border payments’ explored some of the recent developments in this area.

A huge number of initiatives are underway to link up financial market infrastructures (FMIs) in the payments arena to deliver instant, data-rich cross-border payments for retail, corporate and wholesale banking purposes. Various ‘end game’ mechanisms were discussed during this session, including the Bank for International Settlements’ (BIS) recent announcement of a central bank Project Nexus blueprint for global real-time payment (RTP) system connectivity and its Multiple mCBDC Bridge (central bank digital currency) co-creation project. “The main driver is the amount of friction that still exists on cross-border payments,” said Evelien Witlox, Global Director of Payments & Cards, ING Bank.

While numerous nations now have instant payment systems, linking them up using ISO 20022 standardised messaging is now possible. Russ Waterhouse, EVP, Product & Development at The Clearing House (TCH) in the US outlined their RTP system and how it has recently linked with the RT1 platform in Europe on a bilateral USD / EUR basis. “We’ve proved it works and the model is repeatable in other corridors in the future,” he said.

Marc Bayle de Jessé, CEO of CLS, the foreign exchange (FX) settlement risk elimination mechanism, understandably spoke up in favour of a multilateral model, such as Nexus, particularly for large value payments (LVP). “There are all kinds of legal, time-zone and other considerations,” he said, besides the technology link itself, while warning against “a spaghetti model” and arguing for “a hub in the middle”.

The challenges are not the same in retail and wholesale markets, he reminded the audience. CLS is working on a project with 12 participants to bring more currencies, especially from the emerging markets, into an alternative Payment versus Payment (PvP) settlement system.

There was some discussion around whether the ‘end game’ might be a global link powered by a technology firm rather than a bank. However, the power this might give a single ‘BigTech’ firm to monopolise cross-border payments was seen as a risk fork from a public policy perspective.

The issue of sustainability

‘Spotlight on Banking on change: Building the innovative and sustainable enterprise’ was the subject of a midday session, which began by exploring the changing nature of work. Eighteen months ago, going to work meant something very different than it does today, said Ayeesha Sachedina, Chief Transformation Officer, GTS, Bank of America. “Digital transformation plans for almost every company around the world were expedited,” she observed.

Although relationships are more challenging to build remotely, especially when training new hires, teams have still found the ability to connect.

Successful relationships ultimately come down to the ability to build trust, taking the time to listen and responding with humanity, and you can inject humanity into any platform”

Ayeesha Sachedina, Chief Transformation Officer, GTS, Bank of America

For banks, as for many companies, AI is used to power employee experiences. Zac Maufe of Google continued with the AI theme. “We have been saying for many years that the expectations of the consumer and of the commercial client are converging, but this is now also true for the employee and the pandemic has exposed how important it is to provide tools not only for clients but also for employees to do their jobs more effectively,” he said. Maufe urged the Sibos audience to apply lessons learned from the past 18 months in terms of work models, technologies and skill sets.

Anne-Sophie Castelnau of ING delivered the next part of the session. “How can it be that we don’t have an emergency plan when the alarm bells are ringing on climate change, especially given all the natural disasters?” she said, highlighting ING’s action in steering its portfolio toward meeting the goals of the net zero banking alliance, which aims to achieve net zero emissions by 2050. “We finance billions of euro of green projects and we use our loans to incentivise companies around the world to become greener themselves,” she added.

The climate was again front and centre in a discussion of ‘What is at stake? How can financial institutions take meaningful action of climate change?’ Billions of dollars of investment are required to enable the transition to net zero carbon emissions required by the Paris Agreement on climate change. Dozens of commitments to net zero have been made so far this year, and with the COP26 climate conference taking place at Glasgow in November, more action is likely to come.

Banks have an important part to play in ensuring that they and their clients are able to transition to the required low-carbon economy and that the commitments “have teeth”. They can do this by aligning with the Paris Agreement and joining industry organisations such as the UN-convened Net Zero Banking Alliance but must also understand their portfolios and where emissions are coming from. “This is simple to say, but as a large bank, difficult to deliver on,” admitted Amy West, Global Head of Sustainable Finance & Corporate Transitions, TD Securities.

Financial institutions must set short- and long-term, science-based zero emission targets. We saw a very active proxy season this year as investors and activists held organisations to account. It was uncomfortable, but it will instil accountability in organisations.”

Amy West, Global Head of Sustainable Finance & Corporate Transitions, TD Securities

Banking clients involved in carbon-intensive industries will have a bigger challenge in transitioning to net zero and there are many pathways to that target. “The notion of stranded assets and difficulty in accessing funds on the capital markets is a powerful incentive for clients to transition,” Yulanda Chung, Head of Sustainability, Institutional Banking Group, DBS, suggested.

Financial institutions should not, however, overstate the importance of their actions versus what can be done at the government level. For Laurent Adoult, Head of Sustainable Banking, FI & SSA Europe, Crédit Agricole, action by financial institutions is “absolutely necessary” but not sufficient on its own. “Around COP26, I expect some financial institutions will be making further net zero commitments, but these shouldn’t draw attention away from the actions that are required by governments; we are at a crucial moment and a lot is at stake,” Laurent Adoult of Credit Agricole warned.

Community power

The role of community cooperation in moulding change initiatives was evident in ‘Harnessing the power of community to deploy AI @ Scale.’ AI at scale is on the way both via new SWIFT projects and the banks’ own efforts. Transformative AI technology offers efficiency, compliance and other benefits to banks and is proliferating.

Protecting privacy and anonymity must, however, be at the heart of AI initiatives. The danger of social and racial bias being baked into such initiatives can be avoided if systems are designed well and, importantly, humans always make the big decisions.

Before the day drew to a close, three ‘Views from the top’ gave participants much food for thought before logging off. Jane Fraser, CEO, Citi addressed the changing architecture of finance. Everything is unbundling and re-bundling around a new digital architecture, she noted. If regulated markets remain static, they will be rendered obsolete by the unregulated sector. The regulated sector must adapt with speed and as a community, she urged. It should make use of financial technology to become more agile. It must embrace the potential for a tokenised future by developing innovative models for digital currencies and retail central bank digital currency solutions.

Frédéric Oudéa, CEO of Société Générale, argued that, since the height of the pandemic, the banking sector has rebounded well and supported the wider market. The financial sector is in good shape, but a key question going forward is the likelihood of increased inflation and what that could mean for monetary policy and interest rate levels.

Digital currencies and central bank digital currencies can expect exponential growth in the next five years, said Oudéa, though central banks will work to keep banks as intermediaries. There will always be a place for banks in the market; having a trusted partner in a regulatory framework remains priceless.

Finally, David McKay, President and CEO, RBC pointed to the lack of face-to-face contact during the pandemic, which has overturned the way that people interact with banks and has sparked a wave of new technological developments. The world is adjusting using AI and machine learning to adapt to the new climate, a trend accelerated by the pandemic.

With everything electronic and remote, defining customer intent is more challenging than ever. Without a person walking into a bank and saying, “I need a mortgage”, banks must now work out customer intent for themselves. For this reason, banks are using more social media as data collated from such sources gives an indicator of what a person’s desires are without them telling you. The future of the market will be defined by technological developments, said McKay, particularly 5G and internet of things.

We are moving increasingly towards a market where machines will continue to interact more heavily with one another and in which data will play a key role. As the second day of Sibos revealed, the future of humans in financial services, though assured in a broad sense, is still under review.