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1 ICBI Operational Excellence What do Banks Really Need to do to Address the Issues of Business and Operational Excellence? How will the Long Arm of Regulation.

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Presentation on theme: "1 ICBI Operational Excellence What do Banks Really Need to do to Address the Issues of Business and Operational Excellence? How will the Long Arm of Regulation."— Presentation transcript:

1 1 ICBI Operational Excellence What do Banks Really Need to do to Address the Issues of Business and Operational Excellence? How will the Long Arm of Regulation Continue to Impact Banking Operations? September 2010 BOB LYDDON – IBOS ASSOCIATION

2 2 The Payments business is not on a convergence trend Harmonisation within the EU / EEA has hit the buffers Politicians stated aim Status Cut 2% GDP off cost of payments Direct Payments Fewer Interbank events Layered Market Only 4% migration to SEPA instead of the critical mass that should, by end of 2010, have made migration irreversible (SEPA Roadmap 2004) XML no longer integral to ISO20022 or SEPA More room for national flavours Maxi-SEPA, universal usage of XML are not just around the corner….

3 3 Reg 924/2009- partial abolition of CBR - reachability for SEPA Core Direct Debit - no MBPs after 2012 PSD- float income reduction - increased responsibilities and risk - new entrants with passports SMED- mandatory adoption of SEPA schemes - but with many safety valves - national variations/niche schemes More complexity Lower price Impact of latest regulations

4 4 SWIFT- standards co-existence - no retirements dates for MT - E&I and n92, 95, 96 co-exist beyond 2012 SEPA- SEPA does not mean XML any longer - essential requirements discussion - permits national variations/data formats - Credeuro (XCT) is SEPA-compliant - niche schemes formally excluded (RIBA) Standards convergence no longer on the agenda Proliferation and complexity Very low migration to SEPA instruments so far (see Appendix with STEP2 statistics including for Credeuro) Latest Industry developments

5 5 EU Vision for future market structure: away from Vertical to Horizontal Integration HORIZONTAL Direct SWIFT Access Bank-owned Channels MobileSocial Networks Activities requiring Banking Licence or Payment Institution Licence Processors of non-licensed activities VERTICAL = BANK Customer Access Systems Operations and data centres Own backbone Shareholdings Direct memberships Sub-memberships Correspondents SWIFT ISPs BT Radianz PEACHes ACHs Net Settlement Systems Banks Final Settlement activities: Direct RTGS membership Banks Acquisition Processing Communications Clearing & Settlement Only two areas of activity are the unalterable preserve of Banks: Activities requiring a full Banking License (as opposed to a PI or eMI) RTGS clearing membership

6 6 EPC Design Model for Card Schemes ( Source EPC ) Cards market model is already layered EPC design encapsulates this

7 7 EPC Design Model for Payments ( Source EPC ) Layered – big change from status quo More layers and more complex than for Cards In principle a lot of space for non-bank horizontal players

8 8 Cards vs Payments CardsPayments SchemesConcentration of volume on Visa and Mastercard Distribution over many CSMs to avoid duopoly StandardsRigid definitions from the centre Space for community-defined variations in the form of Additional Optional Services and Value-Added Services PerformanceHigh speed, high volume, interoperable Message size x line capacity x routing facilities >> quick response time Bigger message size (XML) and usage of SWIFT (which runs on the lines of Equant etc) could compete with public internet usage

9 9 SWIFT Standards Co-Existence IR 535 IR 535 approved at SWIFTs June Board Meeting is a major change of position: Migration to XML is non-mandatory: no end dates for MT ISO20022 does not automatically imply XML as the physical layer The UML level (actors, data, process) is the fulcrum By extension any Scheme that fulfils the EPC Rulebooks and the UML models can be SEPA-compliant – it does not have to use XML

10 10 Layered market should create many opportunities for industry utilities For activities not needing a banking licence Should banks lead this? What is the track record in collaborative, self-regulatory ventures? What activities and tasks could be delegated to industry utilities? What would be the hand-offs to them as Inputs to their Processes, and how would their Process Outputs be re-integrated into the banks processing flow? Industry Utilities

11 11 Simple Outsourcing Model ( Source PW ) CriticalNon-critical CoreDo-It-YourselfVolume processer: Cheaper if output is commoditised Non-CoreProfessional service expert: more expensive Dont do it at all So which actions in the payment processing flow can be outsourced and who to? Complicated in banking by the banking licence issue + VAT + no proof that the service itself is becoming harmonised.

12 12 Linear & Sequential Process - Amazon Enquiry Stock Check Order Payment Warehouse Carrier Fulfilment Fedex Logistics Company Acquirer End of core activities Payment and Logistics are Non-Core but Critical. What about Fedex? Is there room here for a cheap volume processor?

13 13 Payment Process Sporadic Core and Critical actions all the way along PSP must retain decisions on credit, routing and liquidity. Outsource does the legwork that does not require a banking licence. Multiple hand-offs during the flow Outsourced work is VAT-able towards the PSP: can the PSP reclaim it? PSP activities Outsource Activities Communications & Security Data & Content Validation Banking Controls Prepare accounting entries Choice of routing Queue Cash / Collateral position information Release Correspondent / Clearing

14 14 ACH models – direct + indirect submission Vocalink acts as an effective outsource for UK banks It prepares files of accounting entries There is no choice of routing for UK Credit Transfers and Direct Debits as Vocalink is the sole system Banking controls are done upfront by the posting of credit limits by system members for corporates + other FIs (who are not direct members) Those other FIs in turn post limits for their customers Three rings: not equal access for all, as required by PSD Title 2

15 15 ACH Payments – Credits and Debits: Submission direct to clearing Account- holding bank Clearing System File upload into EB Client Accounting system DR/CR ACCOUNT BENEFICIARIES/DEBIT PARTIES ACCOUNTS OTHER BANKS

16 16 ACH Payments – Credits and Debits: Submission model through the bank Account - holding bank Clearing System File upload into EB Client Accounting system OTHER BANKS DR/CR ACCOUNT BENEFICIARIES/DEBIT PARTIES ACCOUNTS

17 17 Is Cloud Computing the answer? Is this the way the hand-off to Outsourcers is effected? What is the certainty that the computing resources at the Outsource remain superior to in-house ones? How nimble is this set-up when requirements change and what are the costs of change? Cloud computing is internet- based computing, whereby shared resources, software and information are provided to computers and other devices

18 18 What about Blade Computing? Massive increase in power and flexibility. Enables datacentre consolidation and shrinkage. Game-changer – allows processes to be run in much smaller scale without normal penalty of poor scale economics. A blade server: houses multiple server modules ("blades") in a single chassis (rectangular, usually steel frame). Used in datacenters to save space and improve system management.

19 19 Whats the environment we are going into? Proliferation of processes defying achievement of scale economics Variations in data and service level Learning from other industries: o Banking processes are not linear and can be hard to fully automate o Activity has to be strictly standardised with rigorous data and banking checks applied upfront o The Cards business and a utility model like Vocalink for UK BACS follow this line o That is not the SEPA environment as it appears to be unfolding

20 20 SEPA environment unlikely to be 6σ compliant Bank B Bank A STEP 2 SEPA Compliant ACH PEACH Too many players Too many routing choices Expandable data requirements (VAS, AOS..) May work in small volumes to begin with As more players come on and more volumes, standard deviation moves away from the mean over time Many instances then fall outside Upper/Lower Specification Limits which are only 2σ away from the mean Not 3.4 Defects Per Million Opportunities (6σ) but 000s of DPMO non-STP rate in 15-20% range Account Blocked SCT R-message

21 21 Curve is same shape but μ moves by 1.5σ Hardly any instances below LSL LSLUSL +1σ +2σ +3σ μ μ -3σ -2σ -1σ But huge numbers – 45% - fall outside USL Non-compliance / not STP Proliferation of official Schemes (Core, B2B..) Annual Scheme upgrades AOS What happens when more volume is brought onto SCT and the normal assumed movement of 1.5 occurs in or over time? μ moves by 1.5σ because μ itself moves or σ widens

22 22 Conclusions The emerging environment is one of divergence, not convergence Detailed management of inputs and outputs becomes a Core and Critical function of a Transaction Bank That means do it in-house Whether the IT configuration can include Cloud will depend on line capacity and contention with public internet usage Blade seems to be a better bet: higher power in one place and more flexibility >> lower costs and a change of scale economies

23 23 Appendix EBA STEP2 Volumes as a proxy for SEPA migration: STEP2 frequently used a bridge between other CSMs Credeuro (XCT) statistics are steady SEPA Credit Transfer (SCT) statistics show steady increase: o Higher average value than XCT o Higher average value than national payments Volumes are therefore: o Cross-border payments o Corporate payments Virtually no Direct Debit volumes migrated to the SDD yet – key date is 30 th November when all Euro-in banks must be reachable

24 24 APPENDIX: STEP2 SCT Average daily volumeAverage daily value July , bio. euro June , bio. euro May , bio. euro April , bio. euro March , bio. euro February , bio. euro

25 25 APPENDIX: STEP2 XCT Average daily volumeAverage daily value July , mio. euro June , mio. euro May , mio. euro April , mio. euro March , mio. euro February , mio. euro

26 26 APPENDIX: COMBINED STEP2 SCT & XCT Average daily volume: XCT + SCT Average daily value: XCT + SCT July , bio. euro June , bio. euro May , bio. euro April , bio. euro March , bio. euro February , bio. euro

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