Changing tack
12 October 2016
The winds of change are upon us. Attendees at Sibos 2016 heard how banks may have to embrace a new way of thinking if they’re to thrive in the new world
Image: Shutterstock
Sibos 2016 focused firmly on the future of financial services and the risks, opportunities and vast unknowns that lie ahead. The week’s closing plenary may have struck an unlikely chord with the post-conference crowd, as Bertrand Piccard, the Swiss adventurer who circumnavigated the earth once in a hot air balloon and again in a solar-powered plane, spoke of the challenges of innovation and the importance of ‘changing altitude’ to move in a different direction.
Any innovator requires criticism in order to find the best solution or strategy, Piccard said. “If you want innovation you have to go outside of the system.”
Speakers at the conference were generally in agreement that change in the industry is imminent, from one angle or another. In his opening speech, SWIFT CEO Gottfried Leibbrandt named the key topics of the event as security, financial crime compliance and global payments.
Focusing on the former, he argued that banks should not see cybercrime as a reason to shy away from innovation, but as an incentive to develop financial technology further.
Leibbrandt said it is no coincidence that this threat has increased at the same time as major innovation in the industry. The so-called ‘internet of things’ has led to a “breeding ground” for cybercrime, including fraud and espionage, he said.
However, Leibbrandt described this threat as a ‘disease’ comparable to those that emerged, and quickly spread, when humans first settled in cities en masse. Early city dwellers “changed an existential threat into a manageable nuisance”, he said, and banks must treat cybercrime in the same way, stepping up innovation in order to protect themselves and the industry.
Leibbrandt outlined a three-part plan to minimising the threat. First, banks need to make sure their own environment is secure, maintaining “basic hygiene” of secure passwords and up-to-date virus protection software.
Second, he warned that when dealing with counterparties these basic steps are important but not sufficient, and banks must be prepared to manage those relationships with maximum transparency.
Finally, the community as a whole must “share and prepare” to make information available to others within the global business to ensure that all entities can prepare for similar style attacks.
Stressing that “we have to move forwards” rather than turn back the clock on innovation, Leibbrandt noted that fintech is transforming the landscape, and technology is also being developed for combatting cybercrime.
Another conference speaker, professor Marco Gercke, director of the Cybercrime Research Institute, suggested that developments in artificial intelligence and machine learning are also increasing the threat of financial cybercrime. He stressed that the financial services industry must be prepared in case of an attack.
Gercke noted that, while humans are still superior in making emotional decisions, rationally, robots are ahead.
In certain situations, “artificial intelligence can substitute negotiators”, he said, adding that in the future, more dependencies on those machines will emerge.
The main issue with this, Gercke said, is that “machines will suggest solutions that are based on analysis so complex that we won’t be able to go through it in a lifetime”.
Without the ability to verify these analyses, there will be little choice but to trust the machines. As we become more dependent on them, “attacks become more severe”.
The financial services industry is increasingly dependent on its systems and on financial technology, and, Gercke said, criminals are not going to attack servers. Instead, they will manipulate financial documents, make data inaccurate, and then hold institutions to ransom. He warned attendees: “Your whole industry is based on trust and confidentiality.”
In order to protect against this, institutions must consider their individual risk assessments, considering what a data breach could mean for the business, how clients would react to their financial data being leaked, and how employees would react to personal details, or contract details, being made public.
Cognitive technology, however, could give financial services firms a competitive advantage, as long as they seize the opportunity now, according to Ginni Rometty, chair, president and CEO of IBM.
Rometty noted that the vast majority of financial service providers are already ‘digital’, however she said: “Digital is the foundation, but I don’t think it’s the destination.”
Cognitive business represents “another shift right in front of you that is actually going to be more transformative and more disruptive”, she said.
Rometty’s argument was that taking a digital business and adding digital intelligence creates a cognitive business—making it both a business model and a technology model, which can mean the “ultimate competitive advantage”.
The huge amounts of data available to institutions can create a competitive advantage, but they need a cognitive technology to understand the insights in the data, and to extract them.
This is “far more than artificial intelligence”, Rometty said, adding that it can “interact in natural language”, that it has domain knowledge, and extensive knowledge of various areas.
She added: “I don’t think of them as artificial intelligence, I think of them as augmented intelligence and, therefore, these systems learn.”
She suggested that this will be an “era of systems that understand—they reason and they learn”, and that we need such systems, as “the challenges are too big otherwise”.
Citing the success of the financial services industry in leading the innovation charge in the past, she suggested that it could now pioneer new technologies that can be applied in other industries. She said: “Financial services can and will lead the world into this era.”
Technological development must, however, operate within the existing regulatory framework, according to a panel discussion, during which developing workable standards also emerged as an important issue.
David Geale, director of policy at the UK’s Financial Conduct Authority (FCA), said that the regulator is focused on trying to make markets work as well as possible, while protecting consumers and market integrity, and that part of this is promoting competition in the interest of consumers.
He suggested that innovation, while it brings an element of risk, also brings about “positive disruption”. However, with regards to regulating new technologies, there is a balance to be struck.
Too much regulation could potentially “stifle things that can be good for consumers”, but regulators must not allow potentially risky technologies to be “left unchecked”.
Peter Randall, CEO of blockchain-based payment and settlement infrastructure SETL, suggested that now is the time to bring 21st century distributed ledger technology into the post-trade space.
He outlined five key things the technology must be able to achieve in order to be successful.
Randall argued that distributed ledger technology must be able to “operate at real world speed” and at “real world capacity”, capable of processing thousands of transactions per second, and potentially billions per day.
It will also have to have know-your-client and anti-money laundering compliance capabilities “as native”, and must be able to move “real world assets”—those that affect asset finality, rather than purely digital assets.
Finally, and most importantly according to Randall, it is unlikely that there is going to be one “big pan-galactic blockchain”, but there will be many chains, even within one institution, and these must be able to communicate.
Another speaker, Chris Church of Digital Asset, added to this, saying that open-source technology will be a large part of the strategy and that those who embrace this “will be the winners in this race”.
Regarding standards as a remaining issue for the development of blockchain, Randall said: “The great thing about them is that there is plenty to choose from.”
He expressed concern over the idea that there will be a lot of institutions trying to create standards, and that the industry will end up working to the lowest common denominator.
Suggesting that distributed ledger will do to the finance and payments industry “what the shipping container did to world trade”, Randall noted that when the size and shape of the container is standardised, many containers can be much easier to manage.
In this industry, this represents dematerialising of assets, Randall said. If one container holds $1 million, and another holds a bond worth $1 million, rather than swapping the contents, parties would simply have to swap keys.
In a later session, panellists sugested that, in the relatively short term—between now and 2020—the biggest changes to the financial services industry will be cultural.
Eileen Burbidge, partner at Passion Capital and special envoy for fintech for the UK Treasury, suggested that if financial institutions do not react quickly enough to innovation and technology change, “they will risk obsolescence”.
This threat does not necessarily come from fintech companies, she said, but from large technology players that will venture into the financial services space.
Burbidge noted that technology is in a steady state, “in that it continues to accelerate”, and continues to have an impact on the industry.
But, she also reflected on “how people’s expectations are changing and also how financial services institutions think about delivering to those expectations”.
She argued that this will include the regulators, and urged them follow the example of the FCA in the UK, which is “increasing innovation and competition and not simply about protecting incumbent industries”.
Closing the conference, habitual risk-taker Piccard educated attendees on the intricacies of balloon navigation, encouraging them to ‘drop weight’ in order to reach new heights and track a new course for the industry.
In life and in business, Piccard mused, certitudes and limitations are the ballast that weighs down the balloon and prevents change.
These limitations can stifle imagination, and we can only move forward once they’re cut loose. Encouraging them to look beyond what they know, Piccard left attendees with the message: “Innovation and progress is not a new idea we have, it’s an old belief we leave behind.”
Any innovator requires criticism in order to find the best solution or strategy, Piccard said. “If you want innovation you have to go outside of the system.”
Speakers at the conference were generally in agreement that change in the industry is imminent, from one angle or another. In his opening speech, SWIFT CEO Gottfried Leibbrandt named the key topics of the event as security, financial crime compliance and global payments.
Focusing on the former, he argued that banks should not see cybercrime as a reason to shy away from innovation, but as an incentive to develop financial technology further.
Leibbrandt said it is no coincidence that this threat has increased at the same time as major innovation in the industry. The so-called ‘internet of things’ has led to a “breeding ground” for cybercrime, including fraud and espionage, he said.
However, Leibbrandt described this threat as a ‘disease’ comparable to those that emerged, and quickly spread, when humans first settled in cities en masse. Early city dwellers “changed an existential threat into a manageable nuisance”, he said, and banks must treat cybercrime in the same way, stepping up innovation in order to protect themselves and the industry.
Leibbrandt outlined a three-part plan to minimising the threat. First, banks need to make sure their own environment is secure, maintaining “basic hygiene” of secure passwords and up-to-date virus protection software.
Second, he warned that when dealing with counterparties these basic steps are important but not sufficient, and banks must be prepared to manage those relationships with maximum transparency.
Finally, the community as a whole must “share and prepare” to make information available to others within the global business to ensure that all entities can prepare for similar style attacks.
Stressing that “we have to move forwards” rather than turn back the clock on innovation, Leibbrandt noted that fintech is transforming the landscape, and technology is also being developed for combatting cybercrime.
Another conference speaker, professor Marco Gercke, director of the Cybercrime Research Institute, suggested that developments in artificial intelligence and machine learning are also increasing the threat of financial cybercrime. He stressed that the financial services industry must be prepared in case of an attack.
Gercke noted that, while humans are still superior in making emotional decisions, rationally, robots are ahead.
In certain situations, “artificial intelligence can substitute negotiators”, he said, adding that in the future, more dependencies on those machines will emerge.
The main issue with this, Gercke said, is that “machines will suggest solutions that are based on analysis so complex that we won’t be able to go through it in a lifetime”.
Without the ability to verify these analyses, there will be little choice but to trust the machines. As we become more dependent on them, “attacks become more severe”.
The financial services industry is increasingly dependent on its systems and on financial technology, and, Gercke said, criminals are not going to attack servers. Instead, they will manipulate financial documents, make data inaccurate, and then hold institutions to ransom. He warned attendees: “Your whole industry is based on trust and confidentiality.”
In order to protect against this, institutions must consider their individual risk assessments, considering what a data breach could mean for the business, how clients would react to their financial data being leaked, and how employees would react to personal details, or contract details, being made public.
Cognitive technology, however, could give financial services firms a competitive advantage, as long as they seize the opportunity now, according to Ginni Rometty, chair, president and CEO of IBM.
Rometty noted that the vast majority of financial service providers are already ‘digital’, however she said: “Digital is the foundation, but I don’t think it’s the destination.”
Cognitive business represents “another shift right in front of you that is actually going to be more transformative and more disruptive”, she said.
Rometty’s argument was that taking a digital business and adding digital intelligence creates a cognitive business—making it both a business model and a technology model, which can mean the “ultimate competitive advantage”.
The huge amounts of data available to institutions can create a competitive advantage, but they need a cognitive technology to understand the insights in the data, and to extract them.
This is “far more than artificial intelligence”, Rometty said, adding that it can “interact in natural language”, that it has domain knowledge, and extensive knowledge of various areas.
She added: “I don’t think of them as artificial intelligence, I think of them as augmented intelligence and, therefore, these systems learn.”
She suggested that this will be an “era of systems that understand—they reason and they learn”, and that we need such systems, as “the challenges are too big otherwise”.
Citing the success of the financial services industry in leading the innovation charge in the past, she suggested that it could now pioneer new technologies that can be applied in other industries. She said: “Financial services can and will lead the world into this era.”
Technological development must, however, operate within the existing regulatory framework, according to a panel discussion, during which developing workable standards also emerged as an important issue.
David Geale, director of policy at the UK’s Financial Conduct Authority (FCA), said that the regulator is focused on trying to make markets work as well as possible, while protecting consumers and market integrity, and that part of this is promoting competition in the interest of consumers.
He suggested that innovation, while it brings an element of risk, also brings about “positive disruption”. However, with regards to regulating new technologies, there is a balance to be struck.
Too much regulation could potentially “stifle things that can be good for consumers”, but regulators must not allow potentially risky technologies to be “left unchecked”.
Peter Randall, CEO of blockchain-based payment and settlement infrastructure SETL, suggested that now is the time to bring 21st century distributed ledger technology into the post-trade space.
He outlined five key things the technology must be able to achieve in order to be successful.
Randall argued that distributed ledger technology must be able to “operate at real world speed” and at “real world capacity”, capable of processing thousands of transactions per second, and potentially billions per day.
It will also have to have know-your-client and anti-money laundering compliance capabilities “as native”, and must be able to move “real world assets”—those that affect asset finality, rather than purely digital assets.
Finally, and most importantly according to Randall, it is unlikely that there is going to be one “big pan-galactic blockchain”, but there will be many chains, even within one institution, and these must be able to communicate.
Another speaker, Chris Church of Digital Asset, added to this, saying that open-source technology will be a large part of the strategy and that those who embrace this “will be the winners in this race”.
Regarding standards as a remaining issue for the development of blockchain, Randall said: “The great thing about them is that there is plenty to choose from.”
He expressed concern over the idea that there will be a lot of institutions trying to create standards, and that the industry will end up working to the lowest common denominator.
Suggesting that distributed ledger will do to the finance and payments industry “what the shipping container did to world trade”, Randall noted that when the size and shape of the container is standardised, many containers can be much easier to manage.
In this industry, this represents dematerialising of assets, Randall said. If one container holds $1 million, and another holds a bond worth $1 million, rather than swapping the contents, parties would simply have to swap keys.
In a later session, panellists sugested that, in the relatively short term—between now and 2020—the biggest changes to the financial services industry will be cultural.
Eileen Burbidge, partner at Passion Capital and special envoy for fintech for the UK Treasury, suggested that if financial institutions do not react quickly enough to innovation and technology change, “they will risk obsolescence”.
This threat does not necessarily come from fintech companies, she said, but from large technology players that will venture into the financial services space.
Burbidge noted that technology is in a steady state, “in that it continues to accelerate”, and continues to have an impact on the industry.
But, she also reflected on “how people’s expectations are changing and also how financial services institutions think about delivering to those expectations”.
She argued that this will include the regulators, and urged them follow the example of the FCA in the UK, which is “increasing innovation and competition and not simply about protecting incumbent industries”.
Closing the conference, habitual risk-taker Piccard educated attendees on the intricacies of balloon navigation, encouraging them to ‘drop weight’ in order to reach new heights and track a new course for the industry.
In life and in business, Piccard mused, certitudes and limitations are the ballast that weighs down the balloon and prevents change.
These limitations can stifle imagination, and we can only move forward once they’re cut loose. Encouraging them to look beyond what they know, Piccard left attendees with the message: “Innovation and progress is not a new idea we have, it’s an old belief we leave behind.”
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