“Community is the hardest thing to build in financial services today”

November 2012

Conversation with Gottfried Leibbrandt, CEO of SWIFT, on – SWIFT’s architecture and upcoming strategies – facilitating global interconnectivity – dealing with increased regulatory pressure

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Here is the transcript of the video.

1. Becoming CEO of SWIFT

Emmanuel Daniel (ED): Gottfried Leibbrandt took over as chief executive officer of SWIFT, the global payments network, in July of 2012. He took over from Lazaro Campos, who spent the last few years preparing the organisation for the next phase in its development. How does it feel like to be CEO of SWIFT?

Gottfried Leibbrandt (GL): As I keep telling people, if you don’t like this job, what job would you like? It’s a privilege to run an organisation like SWIFT, which has a unique position in the market, and especially at SIBOS. What does it feel like? The biggest change when you become CEO is that people start listening to you and start getting things done, even if they’re just unfinished thoughts. You have to be more aware of how people interpret your behavior, actions and words.

ED: Let’s talk about your career as a whole so far. Was payments and banking an important part of what you did?

GL: It was. At McKinsey, I’ve done the banking and payments practice. I co-led the payments practice in Europe, so a lot of the work I did at McKinsey was in transactions payments and retail payments. I did my share of credit card and ACH work.

ED: Did you see leadership as being important in your career to bring about ideas that you might’ve been festering?

GL: No. I have to say I sort of fell into this role. I’ve thought leadership, and it’s true that if you want to achieve things, you need to take charge. Even consultants have leadership roles to play when they provide advice to customers. I did make the conscious decision to transit from being a consultant to moving into a company as a line manager. I don’t think I have ever envisioned becoming a CEO. That happened more or less by chance as Campos decided to pursue other interests.

ED: What was the architecture that came about in order to hand you that role?

GL: The organisation’s board made a conscious decision to go for an internal candidate. In their assessment, SWIFT had a very strong management branch, which was created by Campos. They also felt that in terms of strategy and execution, SWIFT was well on track – and they were looking for continuity in that sphere. I think SWIFT was looking for a steady course – the course that Campos had plotted and that I and the other executives helped craft in terms of the SWIFT 2015 strategy.

ED: You were very deeply involved in the SWIFT 2015 strategy?

GL: Yes, I was.

ED: The essence of that strategy is in the continuity, cost reduction, value proposition, and an element of going local in the different markets SWIFT serves Cost reduction and going local – do they contradict each other?

GL: I’m not sure that cost – price reduction – is a big part of that strategy. Price reduction is enabled by expanding volumes and attracting more volumes. In that strategy, going local fits because it allows you to expand volume in local markets and use that to reduce prices for everybody. We went through a lean period after the global financial crisis in 2008. This continued through 2009 and 2010. This allowed us to get the house in order, and enabled us to install a mindset of efficiency.

From that perspective, it is part of the strategy. But the real core of the strategy was growing volume and really focusing on our core business. Our belief is that the core business is very healthy and has got lots of mileage left in it, if we can expand it to various local markets, as we’re doing in Asia. I would say there are a couple of legs to the strategy. One was stick to the core business by going local. The second leg really is all about expanding that core selectively, looking for opportunities in sanctions screening, matching, and reference data and business intelligence – and everything that had to do with it. The third leg of the strategy was about Asia and growing in that area. There’s a link with going local, but a big part of what we did is to make investments in Asia, increase our presence here; build a local operating hub as we’re doing in Kuala Lumpur where we will complement our operational capabilities in Europe and the Americas. We have a well-formulated Asia strategy supported by significant resources to tap into the economic growth of this region.

ED: Some areas of SWIFT are growing very dramatically; some areas have seen their peak. In 2011, the securities business was separate from treasury, and the trade business seems to be leveling off. Building volume is central to being able to build the localisation capability. This is because if you don’t see the volume, you’re going to be adding costs in different parts.

GL: I don’t think growth, cost reduction – or going local in cost reduction, are contradictory. In fact, let’s take the Kuala Lumpur hub as an example. We’re building a location in Asia, which helps us in terms of presence, but it’s also an opportunity to reduce our costs because we transfer and grow operational capabilities through access to cheaper costs. I also think that in many of these Asian markets where we compete locally, they are highly competitive; they’re cost conscious. They force us to be much more efficient about how we do things.

Those lessons will translate back to our existing business in the West. That’s a second area where I think cost reduction and growth can go hand-in-hand. Back to your point, yes, all these different businesses have the potential to add costs of complexity. I think what we’ve done well in the past is performing on a single platform. We have lots of communities on that single thin platform. We did payments, foreign exchange, securities and corporate actions on the same platform. We were therefore, be able to share costs. We’re doing a bit the same now.

Our strategy for connecting these local communities is really interoperability, which is a set of capabilities that we’re able to reuse in many of these local markets. We enable them locally, and then we connect them to the rest of the community. So there is a strategy of reuse of components and reuse of platform behind it.

ED: Is there an attraction of adding sentient screening, for example, as a value-added component – a new revenue-generating element – to the business model?

GL: Yes. For somebody with our core mission and with our relevance for the community, it would not make sense to see growth very far away from our core business. A lot of what we do is leverage the installed base we already have. Sanctions-creating is a perfect example. For a bank with the necessary infrastructure in place, all you need to do is inform us that you want to screen your payments, and we will turn on that screening engine.

You will have to rework payments system, but there will be no need to install local software and change your local infrastructure. A lot of what we try to do is reuse that infrastructure in such a way that it really minimises the cost on our members, and sanctions-creating is one of those.

2. Surviving the competition

ED: At that point, you would start becoming a competitor to some of the external lenders, for example, who service their clients. What’s your thinking on that front?

GL: It has always been a competitive world. When SWIFT started, we competed with Telex, and I would argue that we drove Telex out of business. That means that the Telex vendors have had to adapt. If we provide a better solution, we force the vendors to either come up with something equally good or find a new business. We are competing with others. There are many service bureaus that offer sanction-screening, and there we are an alternative. At the end of the day, we serve our owners, the banks. We try to drive the best value for the banks, and that may involve introduction of competition with some of their vendors to reduce prices.

ED: Is there a chance that SWIFT might become a for-profit type of business model in the foreseeable future?

GL: There isn’t. It makes perfect sense to have SWIFT as a not-for-profit firm. I’ve seen the privatisation of stock exchanges, Visa and MasterCard. In the case of Visa and MasterCard and in the stock exchanges, the privatization was followed by a drastic price increase to the members. So they got a one-time cash flow, and after that they do see their cost go up. In the case of Visa and MasterCard, it’s led to new competitors. They are now competing with their former owners, and the banks are having second thoughts. In the case of stock exchanges, it’s led to a huge fragmentation. Shouldn’t a utility be jointly owned by the people that use it? In the case of SWIFT, it is perfectly logical that it is owned by our users at the end of the day.

ED: The path that you will be pursuing is very clearly a utility model?

GL: Yes, a utility model that operates in a commercial way. But we do set ourselves targets. One of the targets is to reduce prices. The difference between SWIFT and a purely commercial company is that instead of returning the money as dividends to our shareholders, we like to return it to our users in the form of lower prices.

ED: Community is the hardest thing to build in the financial services today. US regulators are putting demand on anything that is a global infrastructure, while the Europeans have a very different agenda. As an organisation that is committed to a neutral platform, you do have to start taking positions on issues. How do you see yourself playing through these problems?

GL: That’s one of the interesting aspects of this job because that’s a debate to be had. How do you operate in a global world that is becoming more politicised and more multipolar? It is my contention that you do need global infrastructures to make it work. We needInternet that connects to all the countries; we need a phone system that connects all the countries; we need a United Nations that connects all the countries. I would argue we need something like a SWIFT interbank network that connects all the countries if we are to facilitate global interconnectivity.

ED: And yet, some regulators will ask you to switch off some countries.

GL: That poses a challenge to us, and I think we’re engaging with those regulators. In the case Iran, which was one, at least we got to a point of cementing an agreement between the Americans and Europeans on which banks were involved and under what framework. Clearly, from our perspective, on the one hand we had to comply with applicable regulations; we will do that and take it as a given. But on the other hand, we have pointed out that if this were to become a precedent, then you reach a point where a global franchise like SWIFT is no longer viable. That would be a loss to the banking community because they would see the same fragmentation in the banking network that they see in stock exchanges or in others.

3. Challenges and opportunities in the face of increased regulatory pressure

ED: You seem to be taking a very passive posture because your members are also putting more information on the message. They want to make it richer; they want to make it more real-time. A lot more information is now available to regulators, and they’re not going to stop asking for more. It would appear that that SWIFT should have a religion, as to what you really are.

GL: Our religion is that of a global utility, and we cherish that role – which means that the focus of our efforts will be to let our members comply and facilitate their compliance. A lot of the services that we are developing are aimed at allowing our members to comply with their applicable regulations. Those regulations will differ, whether it’s a member in one country or in another – and what we provide are the tools to comply with those applicable rules. Sanction screening is one of them; another one is standards – which standards will you use? We introduced the MT202 cover payments to allow banks to comply with US requirements and other currency zones to include information if it’s cleared in a certain currency. We added a field 50F to many of our messages to include the underlying beneficiary information, again, to allow the banks to report on that. All of these are aimed at allowing banks to to comply with applicable regulation. That is the religion that we have.

ED: Shouldn’t the need for such compliance not come from the regulators but come from your members?

GL: Yes. We are having a discussion with our members. They are now seeing the costs of compliance go up tremendously, and the larger banks typically face compliance cost in the hundreds of millions for a single bank. For a medium-sized bank, it could be easily in the tens of millions. These are costs that are not giving them any competitive advantage or any commercial benefit. So the big discussion is, shouldn’t we share some of that? Doesn’t that become cooperative space? If so, what is the appropriate platform, and what role can SWIFT play?

ED: What’s the conversation that you’re having with your member banks on FATCA, for example?

GL: That’s exactly along the lines of what I said. You want to provide tools for banks to comply with FATCA. Another religion that we have is that we are not a lobbying organisation. Unlike some of the other banks, our focus is clearly on serving our member banks. We are not into lobbying on behalf of our members. They need to do that locally with their banking associations. In the sense of this discussion about FATCA, do you like it, or do you not like it? We leave that to our member banks. I think at some point if you want to do business with US banks, you will have to comply with FATCA regulations in one way or another. We will then provide the tools needed to do just that.

ED: In general, it is becoming increasingly difficult being the lowest common denominator?

GL: It is. In a world that has people asking if SWIFT is becoming more political, my answer to that is that the world has become more political. The world has become more political after 9/11, with the rise of the emerging markets and with the introduction of international terrorism. That process has challenged us to operate differently, as we have seen with the treasury terrorist financing tracking program. I think we’ve been able to deal with that so far. We were subpoenaed by the US government to hand over data in the wake of 9/11. We have put a program around that supported by the EU and the US – very limited data extraction with audits around it – two sets of audits. The US government allows audits inside their facilities, so it really is a far-reaching and well-structured program. We’re now trying, with sanctions, to get into a stable situation. But it is a challenge, and I’m sure that we’ll be handed more challenges. It is also an opportunity because that pressure is also on our banks, and we can provide the tools to help them with compliance.

ED: The US features very strongly today in terms of sanctions. But there are aspects where the relationships are very benign. Even Cuba can be considered as a benign relationship, which the US is concerned about but many other countries aren’t. Are there situations where you can have different sizes fit different types of regions, different types of customer base and so on?

GL: We’ve looked at that option to break it up. You could regionalise it and say there’s an US SWIFT branch that deals with the US regulator. At the end of the day, we’ve chosen against that for two reasons. One is because you would then recreate the problem of how to get connections between these different things. You would get the same fragmentation that you try to avoid. Secondly, we will have to comply with the regulators. Whether benign or not, it is not for us to decide. If the US government makes a decision, we will have to comply, and the same goes for banks.

ED: Let’s move very quickly into technology. You’re moving aggressively into the cloud. Not all regulators are happy about the cloud as a shared environment. What are some of the safeguards that you have in place in order to play the cloud and at the same time keep your transactions secure?

GL: We have always been a cloud provider, and therefore, we have always been confronted with the same issues that cloud providers now face around security, data storage, data privacy and resilience. To go down that list, I think in terms of resilience we’ve done a remarkable job with what we call five nines – 99.999 percent availability, five minutes per year down max – which we have made in almost every year up until now. There are not many cloud providers that have done that.

In terms of security, where we have a highly sophisticated, I’m not going to say that we’re invulnerable, but I think we have a very solid understanding and track record there. In terms of data privacy and data retrieval location, the issue I just sketched, where is your data located? Well, in our case it’s clear. It’s located in our data centers, and some of the data for trans-Atlantic transactions sits in two data centers in the US and Europe. European data sits in two European data centers more than 500 kilometers from each other. I think many of the cloud issues have been dealt with by us.

Another angle we’re talking about is the SWIFT software, which is used to log onto SWIFT – we’re making that into a cloud product. With Alliance Lite 2, a hosted version of our Alliance product, we are actually introducing cloud services to our own software. We’re taking advantage of these technologies and working with it.

ED: Coming back to the way in which the regulators are playing, the whole idea of a shared infrastructure for payments and transactions – greater regionalisation is creating a need for integration at a regional level. So you’ve got to play at a global level and set standards, which don’t exist in large countries like China, India and regions such as Asia and Africa. That brings us back to the localisation agenda.

At the same time, there will be regulators even in Europe today who set their own standards, and you have to go chasing after that to make sure there’s harmonisation.

GL: It’s not just for us. The biggest challenge is for the banks. Banks are faced with all these different standards and the challenge is to make them interoperable and be able to operate on a global level. The opportunity for us is to help harmonise these standards, describe them, as we’re trying to do with my standards – and make them interoperable. Regionalisation is an interesting point. There are a few regions, and Europe is the clearest example of extreme regionalisation. In Asia, we will see a very different level compared to Europe. The one lesson I’ve learned about Asia is that you can’t treat Asia like you treat Europe.

ED: The way in which you’re handling India, is that a model that would work for you in China?

GL: It’s yet to be seen. It’s an innovation which we’re trying. If it works, we may apply it elsewhere. But I think the Indian market is very different from the Chinese market, so it may or may not work in China.

ED: Looks like you’ve got your job set out for you. At the end of your career as SWIFT CEO, when you look back, what is the one big thing that you’d like to achieve and be remembered for?

GL: The biggest challenge for us will be to keep pace with the enormous pace of technology change. From cloud technology to mash technology, I can just list a number of things that are profoundly changing the world of telecommunications and IT. Those are challenges and opportunities for us, and I would like to at least take SWIFT over that wave and keep us relevant for the banking community and its core mission.


 


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