“It’s all down to data”

Today’s financial services ecosystem often seems like the stuff of science fiction, with its focus on artificial intelligence (AI), cryptocurrencies, robotics, and thwarting cyber-threats. But the opening plenary speaker at Sibos 2017 in Toronto reinforced the vital role of banks by harking back to a simpler time, as represented in the 1946 movie, ‘It’s a Wonderful Life’.

“What Jimmy Stewart knows is that there are three fundamental parts to banking: we move money, we store and invest it, and if we get to store it, then we have something to lend,” said Royal Bank of Canada (RBC) president and CEO Dave McKay.

But while Stewart’s protagonist, George Bailey, could wait for the customer to come to him to discuss financial needs, observed McKay, the emergence of new technologies and public social networks has changed this dynamic. Today’s banks, he said, “will have to decide how they are going to compete to either bring clients into their existing channels or serve them in new channels. This may require a rethink of their core value strategies”.

It is these evolving business models that more than 8,000 delegates from nearly 150 countries came to Canada to discuss throughout Sibos week, as banks grapple with unprecedented geopolitical and regulatory uncertainty, coupled with the intense pace of innovation as the practical applications of disruptive technologies come into clearer focus.

Data differentiator

While all aspects of banking are undergoing significant shifts, McKay identified the money-moving space as having experienced the most rapid change in recent years, both in terms of heightened competition and an increasingly fragmented landscape. So what will be the differentiator of the future?

“For banks, like every other business, the battleground will be data,” McKay said. “Whereas in the past banks needed economic scale to succeed, in the future they will also need data scale.” Strategic partnerships are one way to build this scale, but maintaining the trust and security of client data should remain paramount.

This is already an area of expertise for banks, McKay suggested, and as such they can maintain an advantage over ‘BigTech’ technology platforms as ‘coopetition’ and the sharing of data with other industries continues. “Every forward-thinking business today knows that future success will rely on its ability to collect data, to transform it into knowledge and, from there, into value,” McKay said. “Banks have a tremendously powerful opportunity to help their clients – from personal customers and small and medium enterprises to large corporates – to collect, understand and gain value from their data.”

According to McKay, RBC is already using insights from data analysis to drive projects in which clients are invited to collaborate on product development. “We have this unique opportunity, as an industry, for the first time, to build our business from the customer in, versus the financial institution out,” he said.

Excited by potential

McKay also urged banks to embrace so-called disruptive technologies, such as AI and blockchain, noting the rapid progress from business case toward practical use.

“Blockchain could have an important role to play and could be the technology that transforms money moving and money storing. We are realistic that the technology is still in its infancy, but are excited by its potential,” he said. “The opportunity to decentralise our record-keeping and remove third parties could significantly reduce friction, lower cost and increase the cadence at which we operate.”

RBC is exploring the technology’s potential via a number of initiatives spanning its personal, commercial and capital markets businesses. A blockchain-based shadow ledger for cross-border payments between the US and Canada launched recently, and on the first day of Sibos RBC announced the co-launch of a pilot programme with JP Morgan and ANZ Banking Group, which deploys blockchain for global payments.

“We are watching the performance of all our blockchain pilots very carefully and are aware of the need to clarify legal, regulatory and security questions, including around the enforceability and reversibility of transactions,” McKay said.

What blockchain can do for money moving and storing, AI is well on its way to achieving in the lending and investing landscape, according to McKay. AI is something of a homegrown industry in Canada dating back to the early 1980s, thanks to computer scientist and cognitive psychologist Geoffrey Hinton’s work on neural networks at the University of Toronto.

“[Hinton] led a whole generation of Canadian-based AI pioneers who are at the cutting edge of research today,” McKay said. “RBC is helping to further develop this position with the recent establishment of the RBC Research Institute, which is aimed at creating a place where PhD students can focus on world-class AI research into areas as diverse as healthcare, global warming and of course financial services.” Such initiatives will benefit Canada’s entire financial ecosystem, help to retain local talent and maintain Canada’s trail-blazer role, McKay predicted.

In the nearer term, AI is currently being deployed in fraud prediction and asset management at the bank, and RBC has launched innovation labs in Toronto, Orlando and in Silicon Valley. The bank recently partnered with Israeli FinTech firm Personetics on an AI-enabled cash flow and savings management product.

AI really does help break down bias in many of the successful systems and processes we build,” McKay explained. “AI’s ability to look for patterns in large datasets means that it does not have the bias that even the most experienced investment manager has and, in this way, it can look for patterns that the star manager might not have seen and, ultimately, drive a new source of value.”

The new normal

Such partnerships with technology innovators are illustrative of a new normal, not just for RBC, but for the entire financial services landscape. More collaboration, he suggested, is changing the culture of banking. “The days when banks and FinTechs looked at each other suspiciously as rivals are long gone,” he asserted. “The relationship today is far more collaborative. More than ever we are using small, diverse teams and agile principles in our product development, often working directly with our clients. This approach encourages non-conventional thinking and has diversity and inclusion right at its centre. It is faster, more productive and in the end game you get what you are looking for.”

This change of pace is essential, even for an industry not previously known for its agility, due to the nature of the shifts being experienced in the wider economy and society. “One of the largest jobs for a CEO is to make sure you understand both the cadence of change outside your organisation and the cadence of change inside your organisation and adjust,” said McKay. “I am personally passionate about encouraging an organisational culture at RBC that is increasingly fast-paced, nimble and client focused. How we work is increasingly as important as what we achieve.

“In a world where barriers between industries are breaking down like never before, we have to learn from, act like and, increasingly, partner with other sectors and we will have to think about the value and the value chains that we build for customers as distinct from what we do today and what we have done in the past,” he added. “The competitor landscape may be far fiercer and more varied, but the opportunities, I really believe, are greater than ever before.”

The next ten years

While McKay noted that this year’s Sibos in Toronto marked a decade since the 2007 credit crisis, it was also worth reflecting on “the most disruptive and creative period ever seen in our industry”. Nascent technologies from ten years ago – such as the iPhone, cloud computing, and mobile Google Maps – are now baked into the fabric of our daily lives. This “digitisation of our physical world”, McKay observed, has radically changed client expectations – and it is up to the financial services industry to rise to the challenge with innovative, but secure solutions for the next ten years and beyond

It was a sentiment echoed by SWIFT chairman Yawar Shah and CEO Gottfried Leibbrandt who took to the stage after McKay to welcome delegates to Sibos 2017 and, in Shah’s words, “take a look at how SWIFT is critical and relevant in this dynamic world of FinTech and rapid evolution”.

Shah flagged a range of initiatives to underline SWIFT’s ability to respond rapidly to client need, including its global payments innovation (gpi) service, designed to improve the speed, traceability and transparency of cross-border payments. But he also emphasised the need for agility and innovation to go hand in hand with resilience and security, noting the timely roll-out of SWIFT’s Customer Security Programme. “SWIFT protects its own infrastructure from the threat of cyber and helps you protect yours with common standards, critical information and effective tools,” he said, adding: “SWIFT has scale and reach. It connects the industry in a way no other organisation can.”

Taking up McKay’s train of thought, Leibbrandt pointed out that much can change in even six years. As Uber was establishing itself in San Francisco and the value of a bitcoin ranged between one and five US dollars, SWIFT had yet to launch either its sanctions screening service or its KYC Registry, but just these two initiatives – part of an expanding compliance suite – have attracted almost 5,000 institutions to date.

The concept of real-time payments was largely unfamiliar in 2011, but a pioneering new instant payments platform – underpinned by SWIFT technology – is scheduled to go live in Australia in mere months. Similarly, TARGET2-Securities, the single pan-European platform for securities settlement in central bank money, was still in its nascent stages six years ago. It is now live and SWIFT carries 95% of all its message traffic.

“The financial industry has been evolving, adapting, changing and innovating at breakneck speed and we, at SWIFT, have tried to play our part,” concluded Leibbrandt.