The standardization group for all of the banks in the world (SWIFT) was kind enough to invite me to speak at the world’s premier banking conference about the Web Payments work at the W3C. The conference, called SIBOS, happened last week and brings together 7,000+ people from banks and financial institutions around the world. The event was being held in Dubai this year. They wanted me to present on the new Web Payments work being done at the World Wide Web Consortium (W3C) including the work we’re doing with PaySwarm, Mozilla, the Bitcoin community, and Ripple Labs.
If you’ve never been to Dubai, I highly recommend visiting. It is a city of extremes. It contains the highest density of stunningly award-winning sky scrapers while the largest expanses of desert loom just outside of the city. Man-made islands dot the coastline, willed into shapes like that of a multi-mile wide palm tree or massive lumps of stone, sand, steel and glass resembling all of the countries of the world. I saw the largest in-mall aquarium in the world and ice skated in 105 degree weather. Poverty lines the outskirts of Dubai while ATMs that vend gold can be found throughout the city. Lamborghinis, Ferraris, Maybachs, and Porsches roared down the densely packed highways while plants struggled to survive in the oppressive heat and humidity.
The extravagances nestle closely to the other extremes of Dubai: a history of indentured servitude, women’s rights issues, zero-tolerance drug possession laws, and political self-censorship of the media. In a way, it was the perfect location for the worlds premier banking conference. The capital it took to achieve everything that Dubai had to offer flowed through the banks represented at the conference at some point in time.
The Structure of the Conference
The conference was broken into two distinct areas. The more traditional banking side was on the conference floor and resembled what you’d expect of a well-established trade show. It was large, roughly the size of four football fields. Innotribe, the less-traditional and much hipper innovation track, was outside of the conference hall and focused on cutting edge thinking, design, new technologies. The banks are late to the technology game, but that’s to be expected in any industry that has a history that can be measured in centuries. Innotribe is trying to fix the problem of innovation in banking.
One of the most surprising things that I learned during the conference was the different classes of customers a bank has and which class of customers are most profitable to the banks. Many people are under the false impression that the most valuable customer a bank can have is the one that walks into one of their branches and opens an account. In general, the technology industry tends to value the individual customer as the primary motivator for everything that it does. This impression, with respect to the banking industry, was shattered when I heard the head of an international bank utter the following with respect to banking branches: “80% of our customers add nothing but sand to our bottom line.” The banker was alluding to the perception that the most significant thing that customers bring into the banking branch is the sand on the bottom of their shoes. The implication is that most customers are not very profitable to banks and are thus not a top priority. This summarizes the general tone of the conference with respect to customers when it came to the managers of these financial institutions.
Fundamentally, a bank’s motives are not aligned with most of their customer’s needs because that’s not where they make the majority of their money. Most of a bank’s revenue comes from activities like short-term lending, utilizing leverage against deposits, float-based leveraging, high-frequency trading, derivatives trading, and other financial exercises that are far removed with what most people in the world think of when they think of the type of activities one does at a bank.
For example, it has been possible to do realtime payments over the current banking network for a while now. The standards and technology exists to do so within the vast majority of the bank systems in use today. In fact, enabling this has been put to a vote for the last five years in a row. Every time it has been up for a vote, the banks have voted against it. The banks make money on the day-to-day float against the transfers, so the longer it takes to complete a transfer, the more money the banks make.
I did hear a number of bankers state publicly that they cared about the customer experience and wanted to improve upon it. However, those statements rang pretty hollow when it came to the product focus on the show floor, which revolved around B2B software, high-frequency trading protocols, high net-value transactions, etc. There were a few customer-focused companies, but they were dwarfed by the size of the major banks and financial institutions in attendance at the conference.
The Standards Team
I was invited to the conference by two business units within SWIFT. The first was the innovation group inside of SWIFT, called Innotribe. The second was the core standards group at SWIFT. There are over 6,900 banks that participate in the SWIFT network. Their standards team is very big, many times larger than the W3C, and extremely well funded. The primary job of the standards team at SWIFT is to create standards that help their member companies exchange financial information with the minimum amount of friction. Their flagship product is a standard called ISO 20022, which is a 3,463 page document that outlines every sort of financial message that the SWIFT network supports today.
The SWIFT standards team are a very helpful group of people that are trying their hardest to pull their membership into the future. They fundamentally understand the work that we’re doing in the Web Payments group and are interested in participating more deeply. They know that technology is going to eventually disrupt their membership and they want to make sure that there is a transition path for their membership, even if their membership would like to view these new technologies, like Bitcoin, PaySwarm, and Ripple as interesting corner cases.
In general, the banks don’t view technical excellence as a fundamental part of their success. Most view personal relationships as the fundamental thing that keeps their industry ticking. Most bankers come from an accounting background of some kind and don’t think of technology as something that can replace the sort of work that they do. This means that standards and new technologies almost always take a back seat to other more profitable endeavors such as implementing proprietary high frequency trading and derivatives trading platforms (as opposed to customer-facing systems like PaySwarm).
SWIFT’s primary customers are the banks, not the bank’s customers. Compare this with the primary customer of most Web-based organizations and the W3C, which is the individual. Since SWIFT is primarily designed to serve the banks, and banks make most of their money doing things like derivatives and high-frequency trading, there really is no champion for the customer in the banking organizations. This is why using your bank is a fairly awful experience. Speaking from a purely capitalistic standpoint, individuals that have less than a million dollars in deposits are not a priority.
Hobbled by Complexity
I met with over 30 large banks while I was at SIBOS and had a number of low-level discussions with their technology teams. The banking industry seems to be crippled by the complexity of their current systems. Minor upgrades cost millions of dollars due to the requirement to keep backwards compatibility. For example, at one point during the conference, it was explained that there was a proposal to make the last digit in an IBAN number a particular value if the organization was not a bank. The amount of push-back on the proposal was so great that it was never implemented since it would cost thousands of banks several million dollars each to implement the feature. Many of the banks are still running systems as part of their core infrastructure that were created in the 1980s, written in COBOL or Fortran, and well past their initial intended lifecycles.
A bank’s legacy systems mean that they have a very hard time innovating on top of their current architecture, and it could be that launching a parallel financial systems architecture would be preferable to broadly interfacing with the banking systems in use today. Startups launching new core financial services are at a great advantage as long as they limit the number of places that they interface with these old technology infrastructures.
Commitment to Research and Development
The technology utilized in the banking industry is, from a technology industry point of view, archaic. For example, many of the high-frequency trading messages are short ASCII text strings that look like this:
Imagine anything like that being accepted as a core part of the Web. Messages are kept to very short sequences because they must be processed in less than 5 microseconds. There is no standard binary protocol, even for high-frequency trading. Many of the systems that are core to a bank’s infrastructure pre-date the Web, sometimes by more than a decade or two. At most major banking institutions, there is very little R&D investment into new models of value transfer like PaySwarm, Bitcoin, or Ripple. In a room of roughly 100 bank technology executives, when asked how many of them had an R&D or innovation team, only around 5% of the people in the room raised their hands.
Compare this with the technology industry, which devotes a significant portion of their revenue to R&D activities and tries to continually disrupt their industry through the creation of new technologies.
No Shared Infrastructure
The technology utilized in the banking industry is typically created and managed in-house. It is also highly fractured; the banks share the messaging data model, but that’s about it. The SWIFT data model is implemented over and over again by thousands of banks. There is no set of popular open source software that one can use to do banking, which means that almost every major bank writes their own software. There is a high degree of waste when it comes to technology re-use in the banking industry.
Compare this with how much of the technology industry shares in the development of core infrastructure like operating systems, Web servers, browsers, and open source software libraries. This sort of shared development model does not exist in the banking world and the negative effects of this lack of shared architecture are evident in almost every area of technology associated with the banking world.
Fear of Technology Companies
The banks are terrified of the thought of Google, Apple, or Amazon getting into the banking business. These technology companies have hundreds of millions of customers, deep brand trust, and have shown that they can build systems to handle complexity with relative ease. At one point it was said that if Apple, Google, or Amazon wanted to buy Visa, they could. Then in one fell swoop, one of these technology companies could remove one of the largest networks that banks rely on to move money in the retail space.
While all of the banks seemed to be terrified of being disrupted, there seemed to be very little interest in doing any sort of drastic change to their infrastructure. In many cases, the banks are just not equipped to deal with the Web. They tend to want to build everything internally and rarely acquire technology companies to improve their technology departments.
There was also a relative lack of executives at banks that I spoke with that were able to carry on a fairly high-level conversation about things like Web technology. It demonstrated that it is going to still be some time until the financial industry can understand the sort of disruption that things like PaySwarm, Bitcoin, and Ripple could trigger. Many know that there are going to be a large chunk of jobs that are going to be going away, but those same individuals do not have the skill set to react to the change, or are too busy with paying customers to focus on the coming disruption.
A Passing Interest in Disruptive Technologies
There was a tremendous amount of interest in Bitcoin, PaySwarm, Ripple and how it could disrupt banking. However, much like the music industry, all but a few of the banks seemed to want to learn how they could adopt or use the technology. Many of the conversations ended with a general malaise related to technological disruption with no real motivation to dig deeper lest they find something truly frightening. Most executives would express how nervous they were about competition from technology companies, but were not willing to make any deep technological changes that would undermine their current revenue streams. There were parallels between many bank executives I spoke with, the innovators dilemma, and how many of the music industry executives I had been involved with in the early 2000s reacted to the rise of Napster, peer-to-peer file trading networks, and digital music.
Many higher-level executives were dismissive about the sorts of lasting changes Web technologies could have on their core business, often to the point of being condescending when they spoke about technologies like Bitcoin, PaySwarm, and Ripple. Most arguments boiled down to the customer needing to trust some financial institution to carry out the transaction, demonstrating that they did not fundamentally understand the direction that technologies like Bitcoin and Ripple are headed.
We were able to get the message out about the sort of work that we’re doing at W3C when it comes to Web Payments and it was well received. I have already been asked to present at next year’s conference. There is a tremendous opportunity here for the technology sector to either help the banks move into the future, or to disrupt many of the services that have been seen as belonging to the more traditional financial institutions. There is also a big opportunity for the banks to seize the work that is being done in Web Payments, Bitcoin, and Ripple, and apply it to a number of the problems that they have today.
The trip was a big success in that the Web Payments group now has very deep ties into SWIFT, major banks, and other financial institutions. Many of the institutions expressed a strong desire to collaborate with them on future Web Payments work. The financial institutions we spoke with thought that many of these technologies were 10 years away from affecting them, so there was no real sense of urgency to integrate the technology. I’d put the timeline closer to 3-4 years than 10 years. That said, there was general agreement that these technologies mattered. The lines of communication are now more open than they used to be between the traditional financial industry and the Web Payments group at W3C. That’s a big step in the right direction.
Interested in becoming a part of the Web Payments work, or just peeking in from time to time? It’s open to the public. Join here.