“The real strength here is the diversity of the board and its expertise”

December 2012

Conversation with Yawar Shah, Chairman of SWIFT, on – SWIFT’s governance structure – bringing the world together through SIBOS – keeping cost structure lowbuyouts

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Here is the transcript of the video.

1. Developing SWIFT’s core strengths

Emmanuel Daniel (ED): You’ve now seen three CEOs under your chairmanship. Where are you now in terms of the mandates that have shifted from the time you first became chairman of SWIFT?

Yawar Shah (YS): The mandates of the CEOs have not changed. The mandate has been consistent for the last five to seven years. We have now got a maturity in payments and in securities. We are there to serve the global banks from 200 different countries in a neutral way in secure financial messaging. We believe that the organisation still has a lot of room for growth in our core businesses – securities and payments. Perhaps one new area of exploration is how SWIFT can help banks be more efficient in what they’re doing with regulation and compliance.

ED: SWIFT is a very interesting organisation. It’s a cooperative, it’s got a professional management team, but the board is made up of its user base. You have a “real,” daytime job. At the same time, you put in place the governing structure for the organisation. How would you describe the relationship between the board and the management team at SWIFT?

YS: SWIFT is a very unique company. It was formed by banks originally to automate cross-border telex. It has had huge success in being very securely resilient, and in basically enabling global finance to take place. SWIFT is a bank-owned cooperative. The board are its owners, governors, and, in the end, its own users. Initially, the board was very active in the operational matters of standardisation because they were the pioneers. The board is accountable to the regulators, and, therefore, the governing structure is pretty strict.It’s about making sure that you have the right strategy, audit, finance, and other related structures, and that you also have good business committees to give SWIFT guidance.

ED: How did the company’s culture and mandate evolve over time? Was there a period where the board’s role was far more important because you were more hands-on with setting the necessary structures in place?

YS: I would say it’s less hands-on today, but I wouldn’t call it less important because it is still governing an entity that moves trillions of dollars every day, and it is still being regulated in a very structured way. The board focuses much more on the strategic aspects of SWIFT.

I’ll give you an example – 10 to 15 years ago, SWIFT was exclusively doing payments messaging and related trade finance reporting businesses. Several bankers then said, “We have similar problems in the securities space.” In that evolution, thanks to a cooperative effort, the securities business now comprises half of SWIFT’s business volume. In the world of compliance, the board has been very hands-on with the new sanctions screening service – the testing and design of that service.

ED: What sort of interest do the institutions represented have in Swift, and how have they expressed that interest?

YS: The institutions we represent range from the smallest, regional and local institutions, to global ones. Our board members have day jobs. The institutions want key people who are interested and who have capabilities in governing such entities to be participating. When you come to the board, you are a fiduciary member of the SWIFT board, and you’re basically representing the community of banks that are shareholders of SWIFT.

ED: Over a period of time, the institutions became members of SWIFT in the same manner of the institutions and co-members of CLS. The larger members had a role in that because of the volume they generated and because of their global business models. How has that been democratised over a period of time?

YS: SWIFT has a 40 year history. There is a very interesting structure of governance. Shareholding drives elections to the board, but those elections to the board are through country representations. The six largest shareholders represented by two representatives. As an example, the US has over 20% of SWIFT’s volume, but is represented by two of the 24 or 25 board members.

You need a balance between regions, whether they are represented by large banks or small banks. The real strength lies in the diversity of the board and its expertise and the fact that it’s a very large global company. Once you get onto the board, it’s not the weight of your institution or the weight of the region; it’s the person that matters.

ED: Describe your relationship with the organisation’s CEOs, especially in the context of the shifting objectives of SWIFT? It appears that the previous CEO, Lazaro Campos, brought cost structures down. How has that priority morphed into the next priority, and, in selecting your current CEO, what were the elements that you took into consideration, and what are the priorities that were given to you?

YS: Both Campos and Gottfried have very similar objectives. When I became chairman – it’s a very easy continuity. We don’t do regime changes at SWIFT. The elections are unanimous. One thing both Campos and I agreed on is that we wanted to aggressively bring our unit prices down so that we would be able to be competitive in any of the relevant markets while growing the franchise.

Campos executed that very well. He had been at the company for many years, and he understood the DNA of the company. Gottfried was then hired by SWIFT from McKinsey as the co-head of the McKinsey European payments practice, and Campos promoted him to be his head of strategy. We developed the SWIFT 2015 strategy under Campos’ watch but Gottfried was key to developing that strategy. When we had to elect the next CEO, we chose to promote from within because we have a strong bench. Gottfried obviously came out as the player who could lead the company to the next stage.

ED: Did the potential candidates have to make a presentation to you in terms of the priorities that they saw?

YS: We wanted the team to continue working well together. It’s always tougher when you’re picking someone from the inside to do that. So it was very important to create that process.

ED: How do you deal with the externalities of SWIFT? It’s quite clear that SWIFT has a number of challenges on the external front, with regulators, risks and compliance. Which are the priorities that are non-negotiable and which are the priorities that are prioritisable?

YS: Let’s separate that into two parts – dealing with the regulators and the parties within the board.

Dealing with the regulators is a very structured process. We are overseen by the G-10 central banks, chaired by the National Bank of Belgium because we are headquartered in Belgium. We have a board meeting every three months and meet up with the representatives from the National Bank of Belgium. It’s the accountability of SWIFT’s chairman and the CEO to the regulators.

Then you have the workings of the board. The board has two business committees: banking and payments, and securities. We have an audited finance committee as well as a technology and production committee – the two pillars of control and production.

2. Fostering closer ties with India and China

ED: When a country like India or China come to you and say that they would like a different model by which they work with you, how does the board deal with it?

YS: Firstly, there has to be a commercial reason. What is the value of that model? Does this represent more business with India and China? Secondly, is it globally leverageable?

ED: Is it a no-go situation if there’s a road block in the way? To some extent, large countries, including the US, can dictate what they want as the payment infrastructure for themselves.

YS: SWIFT operates over a hundred market infrastructures across the world. It started off as a European and US initiative but has now deepened its reach. I’m very glad that we have active conversations with Indian banks on a go-local joint venture. SWIFT would not be interoperable and standardising 200 countries if they did things differently in 200 countries. There has to be some balance there.

On the other hand, it’s not a one-size-fits-all solution with these things. Since you mentioned India and China, we have, for the first time, a board member from both India and China. I am looking forward, as they interact with the board, to them helping us think more strategically and challenge how we’ve been approaching things.

ED: But wouldn’t a country like China stay just long enough only in order to have ownership of their payment system?

YS: It’s too early to tell because we’ve only just started talks with Chinese banks.

ED: At which point do you see yourself running SIBOS in China?

YS: I will answer that question, but I want to separate what this company is for 51 weeks of the year versus the one SIBOS week. For 51 weeks of the year, what we worry about as a company, as a board, is how resilient we are, how operationally efficient we are. We are basically under the radar screen. We’re digging –we call it Mike’s bunker. Mike Fish is the CTO of SWIFT. He’s digging a hole in the ground in Switzerland that is going to be very robust. These are professional, highly resilient, capable people that are doing things world-class for 51 weeks of the year. Then for one week of the year, we get thousands of delegates together at the banking conference, and we get conversations going.

To answer your question – who would have thought Sibos would be held in Osaka, Japan? These are natural developments, as cities and countries mature. The relation between SIBOS and SWIFT with the host country – you’re making a very strong connection. SIBOS is actually an event that is all about bringing the world together. There’s a debate as to whether SIBOS is like the World Economic Forum. There’s a debate going on that has people going, “Pick one place, and just hold it there.” Some also say, “We like going to Africa or to Asia, Europe, and America. Pick one or two spots and rotate it.” There’s a third group that says, “Make it a commercial event. This should not be about the world coming together, and it just happens to be in a very interesting place. Make it an event where you’re actually selling to that place.”

There’s a range of opinions, and that’s the beauty of living in a global cooperative. You always have that debate. We’re lining up with the board and telling the executives, “We trust your judgment. You want it to be more efficient. The criteria should be where are there large, secure, easy to get to places where we can all come together in parts of the world. Pick those few cities. You pick the cities. We’ll pick the criteria.” It’s less of a commercial event.

ED: The relationship with your CEO, in terms of the language that you use to communicate with your members, – I notice there’s almost a division of messages. SWIFT’s CEO emphasises on community, while you focus on the organisation’s resilience and operational efficiency.

YS: It’s not that there is a division of responsibilities between the chairman and CEO. I’m accountable as a governing entity, while the CEO is accountable to me, the board and the shareholders. Plus, he manages the company on a full time basis. Those accountabilities and responsibilities are very well laid out, but, typically, our messaging is pretty common. I want my CEO to be able to talk about the community. Imagine if my CEO started talking about “Hey! I love doing joint ventures with everybody, and who cares about the community?” That would be a nightmare. Because SWIFT is a bank-owned cooperative.

ED: It’s becoming very difficult building a community in today’s world, especially a community where there is an agreeable platform that does not get hijacked by any one regulator or any one market. On top of that, the whole messaging industry – there’s a lot more information you’re putting onto the messages that makes it easier for regulators to scrutinise, and regulators are getting the hang of scrutinising more and more messages in that sense.

You’re getting into a situation where you’re becoming very transparent and therefore subject to scrutiny by various regulators. Take Standard Chartered or HSBC’s run-ins with the US regulators. I’m sure that, underlining those messages, was a SWIFT infrastructure.

YS: We’re a messaging provider. We don’t open those messages. We are like a very sophisticated postal company, very secure. We get it from point A to point B.

ED: So the decision to provide SWIFT messaging to a country like Iran or Cuba, for example; do SWIFT members dictate that or is that something you have to be very neutral about?

YS: We have always been neutral and subject to regulation because we abide by all regulations.

ED: Give us a sense of your conversation with the US regulator?

YS: On what topic?

ED: On FATCA, for example.

YS: My conversation, as chairman of the board to the regulators, is a very formal meeting, chaired by the National Bank of Belgium or the G-10 regulators, when we have the Federal Reserve, the Bank of England and the ECB going through a very rigorous set of issues on SWIFT. But FATCA is a US regulation. The banks come to us and say, “Hey, we’ve got these regulations. Could you help us maybe create a repository?” There was a FATCA session about that.

ED: Going forward, is continuous growth and volume a very important component in keeping your cost structure down?

YS: SWIFT experienced double-digit growth until the recent financial crisis. SWIFT has a clear strategy in mind, and I must admit, having been on the board for a while, this is part of what I do. We have to have a virtuous cycle. You have a scale-based business. You price in anticipation of that. You get people to bring volume to you. You can then create more efficiency, and that’s a virtuous cycle. Sometimes you also need to be lucky. We brought our cost structure down, and the financial crisis happened, which had an impact on volume, and so we were very competitive. Over the last five years, SWIFT’s prices have come down by 60%!

We’re an indicator of global commercial activity and a pretty good indicator of that. It’s unlikely for us to see double-digit growth in our traditional areas. The first thing we need to do is to remain vigilant about our cost structure. Secondly – similar cost structure for payments involving securities. Banks are banging on our door for compliance-type services. How can we leverage on that?

ED: In your strategy of going local, do you see that as creating situations which could contradict your global infrastructure because it gives the opportunity for local needs to become more important?

YS: Id’ like to face that problem. Right now, it’s a big global infrastructure with not just message flows across payments and securities, but we operate the communications of many market infrastructures. The conversations with India, China, Norway, and other places make for an interesting thought process. I’d like to be in a position for the board to debate. This will create a challenge just like how the board debated about getting into market infrastructures two decades ago and then securities 15 years ago. Those were good debates.

3. Strategies for the road ahead

ED: What’s the next phase on the horizon for SWIFT in your view as chairman?

YS: We are best when we are serving our banks in an area where they need clear cooperation that is not a competitive space. The banks have been very loud to us that increased regulation is creating significant cost structures, and we could help them create services that would lower that. But there are two or three conditions that we have to make. Firstly, SWIFT will not get in between the banks and its regulator. Secondly SWIFT is an operating company, not a lobbying group. We will not lobby to change regulation. Thirdly, whatever SWIFT does has to be global, universal and scalable.

With that in mind, we’ve started with a sanctions-creating service that is gaining traction. Banks have been telling us, “Look! We’d like to have a set of standards – standards that you put in place for payments and securities. Help us standardise stuff with regulation, reporting and sanctions.” We’re taking baby steps. I have a feeling that’s the next frontier, but time will tell.

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