IPS 2014 Roundup

IPS 2014 Roundup
So you’ll have gathered from recent blog posts that it’s conference season. This is the first of a few posts rounding up some of my recent events. This post is about International Payments Summit (IPS) which took place last month. Jacob mentioned in his Finovate post that he ensures that he attends as many sessions as possible – IPS is very much turning into my equivalent. I wrote last year about my return to the event after a long absence. This year didn’t disappoint either. For me, there is a great mixture of depth but also variety, with many speakers I’d not seen before. It’s not a cheap show, but content wise, worthwhile. If I had to make some suggestions, I’d suggest perhaps fewer 20min presentations. Whilst I can think of one speaker where that was probably 18m too long, there were some others who deserved longer. Lots of notes and things to follow-up on, but two themes really stood out. 1)      Innovation. Some great presentations, some challenging ideas. For me, the most provocative was from Mark Stevenson, of Flow Associates. The famous baseball player Yogi Berra once famously said “The future ain’t what it used to be”. Mark left me feeling somewhat like that! I can’t do his presentation justice here, but from the advent of cheap solar power to impact of 3D printers, the picture of the world that Mark painted was necessarily, radically different than the world of today. But effectively the punch line to the presentation was that this future was not 50 years away, but only 5. Scary, scary thoughts ensued as we thought this through! 2)      Regulation. The second day of the conference fell the night after the second draft of the PSD2 was voted upon in Brussels. The speaker had attended the session, and then hot-footed it to London – content can’t get much fresher! But across the conference, there were some very deep, technical discussions, which even I struggled with at times. Regulation seems to be getting ever more complex and specialised. The conference closed with the panel that I sat on, where we summarised the key points of the conference. My take away was labelled “Mind the gap”. I was particularly struck about how little overlap there was between the innovation and regulation discussions, and noticeably, how they were moving further apart. It would seem, considering the sheer volume of regulation that banks face, an obvious place for innovation to take place.

Better SEPA Late Than Never

Better SEPA Late Than Never
The news on January 15th that the SEPA deadline would be extended came as both a shock, but at the same time, not a surprise. The regulator, based on the levels of migration (available here ), has proposed a 6 month grace period. At the heart of the problem are the low levels of SEPA take-up ahead of the “immoveable” deadline of Feb 1st 2014. Corporates have complained that the deadline was too soon. The original announcement of the deadline came in December 2011, after many corporates had already finalised their budgets for the following financial year, leaving effectively 13 months for compliance. Furthermore, survey after survey have shown a distinct lack of knowledge of SEPA, let alone preparation for it, particularly amongst SME’s. This move seems to show desperation from the regulator and perhaps a lack of understanding. The migration numbers show volumes from those companies that have migrated; it doesn’t show those who *could* migrate, but who have chosen not to do so yet. At least one large biller has claimed that their SEPA transaction pricing would be higher than their current pricing. As a result, they have stated that they aim to migrate at the last possible moment. Equally, those corporates who have embraced the vision of SEPA may have consolidated their volumes to a payments factory, with the net result that some countries volumes will increase (theoretically at least, and possibly pushing low cost countries to over 100% migration!), whilst others will decrease. Regardless of the actual impact, the numbers are only an indicator, and not a measure, which is how the regulator has used them. Indeed, for a change of this size, there seems to be a distinct lack of real measures that we in the real world have to apply to any project we do!.  This seems to have been borne out by the latest figures. As corporates thought the deadline was Feb 1st, Decembers figures for direct debit saw a 60% increase. Did the regulator blink too soon? They can’t know as they weren’t actually using the right measures. The regulator also seems to have not understood the implications of their statement. In conversations so far, the market is not grateful but angry. It has created confusion and complication, rather than helped the situation. Firstly, it’s sent the wrong message to the corporates. As one corporate has said: we were in a standoff, but the regulator blinked first; therefore we believe that a minimum that they might blink again, so perhaps we should just sit tight and not migrate at all? Secondly, when is a deadline, not a deadline? Or rather, when is an extension, not an extension? When it’s no longer yours to extend. The competent authorities in each country are the enforcers of compliance. One thing many have missed is that this is a proposal, not a legal change to the regulation. The release calls on the competent authorities to adopt the proposal and contains phrases such as:

  “….should the proposal still be in process of adoption on 1 February 2014….”

Fine. But how should a bank compliance officer react in that instance? A small poll, but so far, the belief amongst those I have spoken to is they have to work on the assumption that Feb 1st is the deadline, not August 1st. For example, does it require every authority to agree to the proposal or is it on a country by country basis? How long will that process take? By the time there is absolute clarity, the 2nd deadline is likely to have passed! Furthermore initial indications suggest that some countries, because of the progress to date, may decide to press ahead with the original deadline. Whilst admirable on one level, equally it does potentially cause complications by creating a multi-deadline deadline! It’s early days as to the actual impact. For most, this announcement came out of the blue. But, just as the boy who cried wolf was eventually ignored, the regulator who cried “No plan B!” may find that they have now created a series of problems for themselves.    

6 degrees of separation – from reality

6 degrees of separation – from reality
Many of us will have heard the theory of 6 degrees of separation. This suggests that anyone could be introduced to anyone else on the planet in 6 steps or less. This has in turn spawned a version called 6 degrees of Kevin Bacon, where any actor can be linked to Kevin Bacon – try typing Bacon’s Number into Google with an actor’s name and it will show you the number and connection route. In the payments industry, that separation is probably closer to 2 than 6. It’s inevitable that most of us who have worked in the UK will know someone close to the recent Payments Council Roadmap. When I say how thorough and well written it is, this isn’t out of politeness however. The Payments Council find themselves somewhat between a rock and a hard place, with the regulator seeming set on radical change come what may, rather than based on any tangible or rationale reason. Hence the terrible play on words in the title – the 6 outcomes set out by the roadmap suffer from 6 degrees of separation from reality. To be fair, the paper does not purport to be doing anything other than set out the options. But the danger is that the politicians will see these as possible solutions, rather than the setting out a set of theoretical options. The single largest barrier for many of the options is that significant investments have already been made in the banks payment systems and infrastructure, and often at the behest of the regulator. For instance, do a simple sum of the costs of the following initiatives:
  • the upgrade of VocaLink to the new processing platform;
  • adoption of SEPA standards;
  • the cost of implementing Faster Payments;
  • and the investments made in banks new payment platforms to respond to these changes
Even using conservative estimates, this must be an investment in excess of $500m at least for the largest 5 banks, and quite possibly double that. Yet, one proposal on the table would seem to be to scrap all of that investment, and create a central platform that everyone would use. That might make sense if the market was new or immature, but not now, where we find ourselves today. A further suggestion was even more radical, and suggested centralising the core banking platforms as well.   Many of you may know that in recent articles and presentations, I’ve been calling on banks to think more radically. (A later blog post will talk about some of these discussions). This is to try and push banks to think more about what is they want to achieve, rather than to start with what they believe the answer does (or doesn’t) look like. But equally, that thinking has to be grounded in a clear set of objectives and realities. That’s the next stage for the politicians. The industry needs some objectives from the politicians. Those objectives need also to be prioritised, as some of the statements to date would seem to include objectives that are mutually exclusive, contradictory, or not bound in fact but in misplaced belief. The politicians need to understand that the changes that they are proposing equally have risks and costs associated with them. There is a real danger that, instead of creating competition, they actually limit it, and that London could very well cease to be such a vital and vibrant financial services centre, and in a very short period of time.