PP008 - Interview with Robert Heisterborg, ING Wholesale Bank
Participants: Robert Heisterborg, Global Head of Payments and Cash Management, Wholesale Banking, ING Bank and Peter Scott of Sun Microsystems.
Peter Scott: Robert, we’re here today to talk about the business of banking and the business of running a Payments and Cash business. What I’m keen to do in this podcast is to get your opinion as someone who is responsible for running a business, for the costs of that business, the revenues and the margin, and the way in which you within ING, look into grow that business and capitalise on the opportunities that SEPA presents to you. So that’s the starting point, the overview of the questions that we’re going to ask.
The first question that I’d like to touch on is that we know the way the market is going to go, the whole product set of payments is driving towards commodity, so the pricing is coming down. Recently over the course of the last few weeks, we’ve heard announcements of certain banks offering zero-based pricing options to certain communities for payment transactions. What I’m keen to understand is that in order to stay in the business it’s going to be essential to win volume, win additional volume and that’s going to be one of the drivers for success, and that’s going to mean in-sourcing or encouraging other institutions who don’t have your economies of scale to take your services. Could you tell us a little bit about your views as to the time plan over which those volumes will begin to move to the larger players and what sort of service features and capabilities do you think will be attractive to those who will want to outsource to you?
Robert Heisterborg: First of all, I think outsourcing or in-sourcing is not new in this business. It has been around for many years and I think the new thing of SEPA will drive this process into a higher speed. SEPA means a lot of investments from a bank perspective, with not all cases a clear, positive business case. For a big chunk, the SEPA investments is about infrastructure, and let’s face it, there’s hardly any case for investing in infrastructures, so that’s where we have to deal with. And what we see is at all type of banks, small, mid-sized, European, Euro banks and non-Euro banks, have a keen interest in avoiding these type of investments. And that is the first main driver for those banks to have a new look at sourcing opportunities. So this is from a client perspective. At the other hand you have the in-sourcing parties, banks who think they have a position, that they are entitled to play the game, that they could be one of the winners in this consolidation or sourcing game, and that’s interesting because there are more banks thinking that they can play this game, make a sound business case out of it, then there is volume or value in the business.
PS: Yes, I’ve noticed that.
RH: And that would be interesting how it is going to evolve in the upcoming years.
Yes, I call it the National Airline Syndrome. Every country says “We must have a national airline”, in the same way that when you talk to financial institutions they say “Well, of course, we must hold on to our payments business.”
That’s for sure. And in a market practice, we see a lot of outsourcing activities in the security business, in the trade business, but I think the payments business is closer to the heart of a bank. It’s also closer to the client intimacy; every client has more or less a payments relation with a bank, either wholesale, retail, SMEs or mid-sized corporates, and that’s one of the big differentiators if you compare. The sourcing developments in payments, if you compare those developments with processes like trade and security services.
Right. So is it reasonable to suppose then that we’re going to go through a cycle whereby some of the smaller players, who desperately want to stay in the game, are going to make some early investments, in order to get through the first stage, but then as they begin to work through, they’ll realise actually, it’s non-economic, and in a year or two’s time, that’s when you may see a greater development of the business?
Yes, you already see the smart parties thinking right now, but other parties are still playing the volume game and building huge overcapacity in Europe, in the payments processing environment, which could lead to, what I call “irrational pricing behaviour”, giving services or products away for free, and that’s not sustainable in the economic model we’ve got; there’s no free lunch. In the end if you deliver a service, you want to be paid for it otherwise your business is not sustainable. That could be a driver for a shakeout which is negatively formulated or a more positive way, a business driven consolidation in this world or in this payments world.
Yes, and I guess we’re going to see the same sort of shakeout in the market infrastructures. I mean, there’s something like 31 different ACHs out there at the moment, those too assumedly are going to consolidate.
Yes. Who needs 31 ACHs in the SEPA world? Even in a non-SEPA world one could argue, do you need 31 ACHs? And the 31, it’s even driven by the way how you define ACHs, because there are a lot of technical facilitators around these type of ACHs.
Yes, I mean payments processing is payments processing, when you come down to it.
Yes.
And I think some of the distinctions between card processing and low value and high value are beginning to perhaps blur it and becoming somewhat commoditised.
It’s definitely going to be commoditised and within ING we have the statement, well, “we don’t make our own electricity”, so why should we invest a lot of money and effort in developing non-differentiating activities, which electricity is for us, it has to be there. If you can’t differentiate on that, you have to do it in a smart way, either you have the scale and the capabilities to be one of the consolidators, but in the end, even as a consolidator, you have certain areas within your value chain which are not differentiating, and then mostly into infrastructure. And that is really from an intellectual perspective one of my challenges, when do we label it infrastructure or which type of services or part of the value chain will move into the infrastructural domain and which part of the value chain is going to be one of the differentiating activities? And the differentiating activity doesn’t mean that it has to be a value added service all the time, you can differentiate yourself in this market by being an excellent provider of just functionality, high quality, robustness and quick and predictable implementation of your services and product.
Now that takes us into the next area which is really, from the corporate domain and corporate payments and the way that those will be differentiated by propositions that ING has. I’d like to get your views on how institutions generally, and perhaps ING specifically, is looking to differentiate its services first of all, and then really talk a little bit about the appreciation of those attributes by the corporate market because I think my sense is, is that the awareness of bank’s differential propositions is relatively low within the corporate sector at the moment, relative to SEPA, and in fact some of them are beyond the obvious consolidation of banking relationships, some of them are really unclear as to what the benefits might be.
I think that the benefits from a corporate perspective are driven to a large extent how a corporate is organised today or is going to organise herself in the near future. You have corporates with a very decentralised business model, and where proximity to the local client base is of huge importance. They will have another view on SEPA related services than corporates, who have a very centralised approach, either in the processing, marketing or treasury activities. The more centralised or “going to be centralised” type of corporates can get benefits out of SEPA, and perhaps even pretty soon and soon is not on the European Commission’s timeline scale, so SEPA is going to be a reality in 2012. I’m more thinking of the mid-term, five to ten years time they’re really going to get benefits out of SEPA. And how to survive as a bank in this market is, first of all, know your business, that’s an obvious one, and it’s a differentiating factor in this complex environment, be able to invest as a bank, be able to invest and keep up with all the regulator requirements, robustness and that sort of,activities. And be able to create value added services. And value added services doesn’t mean that we can say big bills towards our clients, but that we sort out problems for our clients. And one obvious and discussed at many occasions is the higher STP, straight through processing from end to end. We all know the statistics that in a bank to bank environment, the STP is above the 90%, and a corporate to bank, bank to bank, bank to corporate area, below 40. And those parties were able to solve that problem, or deal with that challenge from a corporate perspective. They can get benefits out of this development. But bear in mind this was an already existing development or an existing risk at the corporate end. SEPA has nothing to do with it. SEPA could be an enabler to get to a higher level.
It’s a catalyst, which is accelerating the process.
A catalyst to accelerate this process, but it was not easy in the past to get a high end to end STP, due to a lack of standardisation or a common view of the solution. And SEPA, well, the common solution doesn’t drop out of the air with SEPA. It’s still complex and is an end to end process.
Well, I agree with you and I think that then you start thinking about well, the adoption of SEPA and that increase in STP is only going to happen when accounting systems, the SAPs, the ERP systems around the world actually adopt the XML standards necessary to get the benefit of the new SEPA services. So, I’m wondering to what extent do you see it as the bank’s role to help with that standards adoption, that integration? I mean, one of the things that’s always struck me about banks is that banks tend to say “Here are our services, you can have this, you know, black, blue, green, red and orange” and you offer them off a tray. You don’t actually go in and say “Look, let’s have a look at how we can help you run your business better”, which might lead you into a dialogue about how they could optimise on standards in order to accelerate processes, gain efficiencies, etc.
Well, banks or people who run banks, they grew up in the so-called four corner model. And the four corner model, if you want to standardise something, it’s from client to bank, from bank to bank, from bank to client, that’s how I define the four corner model. In one way or another, as an industry, or as a total value chain we haven’t been that successful in that area. Either not talking or listening to ERP providers, either not talking or listening to clients, and just a bit inward looking. And, of course, I’m going to say that ING it’s completely different now…
[Laughs].
…[laughs], but if we put our money on banks to get the high STP in the end to end, I think we’re doing the wrong things. Indeed, you have to have an open dialogue with ERP providers based on a core standardisation of what you call XML type of developments, but one way – that’s not a line of defence what I’m going to say now, but if you want to have a high standardisation in the whole value chain, corporate to corporate, with the banks in the middle, also corporates have to do their homework, because you can say “Okay, there’s a Banking Industry, but is there a Corporate Industry?” You’ve got the constructors, you’ve got the car manufacturers…
You’ve got vertical industry groups…
…you’ve got oils, you’ve got airlines, and they all have their own ideas about how to standardise, and this is one of the reasons that the EDIFACT experiment failed.
Yes. Well, too many implementation guidelines.
Yes.
So you had one standard with too many implementation guidelines. But now they’re saying the same thing about ISO 20022.
Yes.
They’re saying exactly the same thing.
Are we learning?
[Laughs].
Are we improving? I don’t know. But don’t put the burden on banks only. It’s an industry issue, and I think a few banks, at least ING, we are more and more aware of this challenge or opportunity and we’re actively partnering with other type of companies to develop services, in the area of electronic bill presentment, in online payments, mobile payments, but also in the area of supply chain financing. We can’t invent it ourselves, or perhaps we can invent it ourselves, but we definitely can’t implement it on our own, and we are actively seeking partnerships in this area to deal with these challenges and to be one of the survivors.
Right, that’s interesting and it’s something that one can see – I mean, people like JPMorgan Chase acquired Xign recently, this year, and obviously acquired Vastera some while ago, they’re actually buying it in-house. You can also see amongst some of the payment hub technology providers are now doing deals like ACI acquired Virtual Web and FundTech acquired CashTech, which is a financial supply chain service, so that’s all part of that trend of building it out.
Yes, but I think you also can build out this product and service portfolio with partnership. And partnership doesn’t mean that you always have to buy, whereas nowadays if you see this development you were referring to over the last six to 12 months, there are some resemblance with the internet bubble at the end of the 90s, everyone is seeking for opportunities and especially in the area of E&M payments, bill presentment, the multiples are doing their work again, and it’s the interesting price developments, but we focus on partnerships.
Yes, I think it’s difficult isn’t it, because the standards around invoices, I know the EU has got a working group that’s looking at developing standards for invoicing, not just in terms of XML, but also in terms of the tax treatment of invoices across the EU, which strikes me as being an eminently sensible thing to do and it’s not really until that’s harmonised that you’re really going to have effective Pan-European based solutions.
Yes. But banks or ING wants to be in the middle, and the ideal world is not created in two or three years. In the meantime there is room for a player like ING to consolidate the different solutions in Europe, and in the end offer a workable solution towards our clients. If we all wait for the ideal worked out standard…
It’s too late.
…we’re never going to be there. So we have a very pragmatic approach, part of which specialist in some countries, we are already working in the bill presentment, have an open look on how the standards and the infrastructure is going to evolve and be already part of it today. And we don’t have the ambition or the illusion that we can steer this process; we have to be involved in this process and although we are a big organisation, in this area we have to move and think like a start-up. Which gives challenges for a huge organisation like ING to get the right mindset, the right people, and the right structure incorporated to a standard in your way of working.
Yes. Can we talk a little bit about the competition because one of the things that is envisaged under the PSD and SEPA are these new market payment entities. And you talk about partnering with some of those and moves into the mobility space, certainly that’s something which has got a lot of buzz around it at the moment, in terms of new service adoption. It seems to be, and my perception is that it seems to be quite spotty and patchy, so different institutions are going with different solutions. It’s, dare I say it, a little reminiscent of the world before PayPal in terms of online settlement mechanisms, where individual banks try to come up with solutions and then ultimately a third party market innovator captured the business under the noses of the banks. Do you think that’s a danger that that may happen again in the mobility space?
I think it’s a reality [laughs] and that could be frightening for established parties as banks because they could lose a part of the business or the volume or the client franchise. And one way how banks reacted on this development in the end of the 90s was (and me too) tried to copy it, but you try to copy it in an environment which have much lower release cycles or renewal of herself than the PayPals and Googles, and I think it’s too big of a challenge to change a bank up to the PayPal standard of developing herself, so be smart and partner with a PayPal-like (and PayPal is perhaps not a right example anymore) but with entrepreneurial type of people, enterprises, and try to combine it. But don’t embrace it and make it part of your bank, keep it at a certain arm’s length and how to manage partnership and by doing so, get momentum and get a chunk of the unique assets of those fast developing companies.
Yes, one of the things that we’ve talked about, and I’ve had dialogues with different, people responsible for innovation in different banks, is the way that there’s almost an anti-bank culture out there. What I perceive is that there is almost a failure on the part of banks to bring corporates into a dialogue around their evolving needs and requirements, so every time you see an organisation where banks are involved trying to reach out to corporates, the corporates never seem to engage in the numbers that you would expect. So you have things like TWIST, for instance. Well, if you actually look at that there aren’t too many corporates involved there. The constituency isn’t really that well developed, and it seems to me that the banks have difficulty in actually doing that.
But I think it’s difficult. There is no one, no spokesman for the corporate, yet you have the European Association of Corporate Treasurers and I meet with them quite frequently and we support them in their activities either financially or by knowledge and people, but they are a group of people representing more or less the bigger corporates, and there is no platform where the corporates speak with one voice, and that’s one of the challenges to really get it to a next level, and banks are blamed for that. Banks are blamed for the lack of progress; if you look at the fifth progress report of the ECB and other recent publications, banks or the EPC, the European Payments Council is criticised because there’s a lack of progress and a lack of interest at the corporate end.
Do you think that SWIFT could actually do more? I mean, one of the prime concerns of the banks has been that from a governance perspective, they want to keep that secure in terms of the banks controlling it and there are a lot of good, regulatory sound reasons for that, but do you think that the role of the corporates somewhere within that governance model a role could be carved out whereby they could be represented because, after all, what we’ve been talking about in terms of the banks delivering benefits is really based around the adoption of standards and one of the things that was great about SWIFT, and why SWIFT was successful in the first place was that it didn’t have these different EDIFACT implementation guidelines. There was a SWIFT standard, that’s it, and the network kicked out transactions that were not compliant. Might that type of system also benefit the corporates in driving the same adoption of standards?
I fully agree with you on the capability of SWIFT, it’s the security and the standardisation, that’s what differentiates SWIFT from a lot of other things, their robustness, security and standardisation. So the skill set of SWIFT, especially on the standardisation, it would be a waste not to use this in this game.
Yes.
The second part of your question was what should be the role of SWIFT in implementing this? And I personally would like to have SWIFT on the standardisation part. They’re good at it, so stay with it. And it’s up to banks and corporates, because that’s the client franchise of banks, to implement standards and make it work. I think it makes sense that SWIFT is listening in to the voice of corporates, to work on those standards, to make those standards more successful, and banks should be involved in this dialogue, but that’s something else than have corporates influence on the governance and the daily operations of SWIFT. That’s quite another topic, and people are mixing it up, corporates who’d have influence on SWIFT know they should be involved in the standard setting at SWIFT, that’s something else thann running SWIFT.
And there’s another issue in there as well that I think is part of the conundrum, which is that SWIFT has always traditionally been very network-centric, they tend to get involved in things which will drive up volume on their network and I often wonder whether, and I’d like your opinion on this, whether there is more that SWIFT could do to the collective benefit of the banks around the world which doesn’t necessarily lead to a direct impact on its network traffic? Do you think that’s one of the things that could be inhibiting them in this respect, because after all, if it developed bank to corporate network standards, would that de facto mean that those messages could only be switched over the SWIFT network?
This has an impact on SWIFT as a company, but until now, SWIFT is owned by banks and I think banks perhaps could have more benefits of the end to end standardisation, and the higher use of standards in the whole process, which could lead to more benefit for the industry than a drop in volume at the SWIFT end. So there could be a different interest between the interest of SWIFT as a company and the shareholders of that company. But this is a Catch 22 for banks, we own the utilities, we govern the utilities and we’re clients of those utilities, and this is a typical way of being cornered as a bank in these three roles.
Yes, that’s true.
You have to think in the interest of the company, but as a shareholder or as a bank, you could have – as a user, you could have another item on your radar screen. And that, for me, it’s a low cost transaction and high level of STP and satisfied clients, and perhaps SWIFT has to pay the price in a lower amount of volume.
I’m not sure that it would necessarily lead to a lower amount of volume, after all, a lot of this bank to corporate messaging is not a business that – I mean, there are only a couple of hundred corporate, I think, connected to SWIFT at the present time, so it’s not a big slice of the market that is necessarily there.
No, but we’re leveraging the SWIFT standards and not the SWIFT network.
Yes.
That doesn’t mean – and in the past, SWIFT always developed standards to leverage the network capabilities.
Yes, exactly. Exactly.
And so the business decision from a shareholder perspective should be how can we use the SWIFT capabilities, from a standardisation perspective, to make the better marketplace instead of using SWIFT capabilities to increase the volume at SWIFT?
Indeed. A central conundrum there, that remains to be answered.
Yes. And you refer to the corporate directly linked to SWIFT there with the MACUG and the Score initiative. In the long run, when SEPA is going to materialise and we use XML, with the XML standards, banks get more interoperability or less lock-in at bank’s end, the reason why the corporates asked SWIFT to be involved was to get rid of the lock-in, the technical lock-in. And XML is all solving that to a certain extent, it’s more about quality of services and things like that, for a Corporate to select a provider, so in the long run, I’m not too optimistic from a SWIFT perspective in the European environment on MACUG or Score. XML, it was started because clients didn’t want to have a lock-in and SEPA is already loosening that up and combined with the new technology and standards.
So you mean that the playing field is already levelled…
It’s getting better from a client perspective. And if you look at our buying behaviour as a bank nowadays, we behave more and more like a corporate towards the infrastructures. If I have a dialogue with Equens or EBA, I ask them “Use the XML standards, use the EPC standards”, so that I can choose either to send it to Equens or EBA or Bilateral, that’s our business model, so we behave like corporates in that area.
Yes, and I think there’s going to be more and more of that awakening on the part of corporates that will be demanding it.
It’s about switchability, and when you have set up a MACUG you can’t switch, you’ve got a lock-in. Another type of lock-in, it’s not a bank lock-in, it’s another type of lock-in.
Under Score, you can switch between different institutions?
Yes, but it’s still a technical SWIFT lock-in.
[Laughs]. That’s a very interesting point actually, you’re absolutely right, it is, isn’t it?
Yes.
It is a lock-in of sorts.
Yes. And with the XML and the SEPA ambition, and that’s what the ambition of the European Commission to have a more free and open market in this area, the development of XML standards and the end to end standardisation of the whole process, you don’t need SWIFT to be able to switch.
No, and indeed when you’ve got people like Identrust out there, who are catching on to this, who are realising that if the corporates say “Well, actually by using their authentication and encryption capabilities, using Identrust certificates, it means that Treasurers can use any channel they like”, and they can secure it over any channel and they begin to realise in the same way that by corporates adopting XML standards it frees them up to switch by adopting security standards, it gives them the same advantage in terms of channel of delivery.
Yes. And so this is more a technology driven development of the market than a political ambition driven development of the market. And let’s face it, SEPA is a political wish.
It is indeed, it’s a political project rather than something that’s been driven by the banks.
Yes, and the painful part of implementing SEPA, and not only at our end, but I think in the industry and also in a broader range, corporate and corporamental bodies, is that we have to deal with the SEPA investments and those investments are not in line with our natural investment cycles. It’s made it very painful. We knew, the Year2K, way ahead – we could calculate on that. The introduction of the Euro was known for ten years, so we could, one way or another, bring our investment cycles and technology in line with those deadlines. And SEPA is a very tight deadline, without any natural cycle underneath and that’s one of the reasons personally I believe that the adoption of SEPA is going to be much lower than the ambition of the Politicians in Brussels and some of the people in Frankfurt, the ECB.
Right, okay. Well, as a final point, can I just have your personal view perhaps in terms of how successful SEPA will be in achieving the economic aims that it was intended for? I mean do you believe that this will actually lead to an improved efficiency which will have a material impact on the prosperity and the business efficiency of Europe?
Before I answer the broader part of the question, from an ING perspective it has. We are active in 21 countries in Europe and in every country we have to deal with the local specifications. So SEPA, on its own…
Makes you more effective…
…is part of a, what we would call internally, convergence of our Ops and IT environment. There’s never a business case for infrastructure I said in the beginning, so there’s never a business case for a big convergence, but SEPA helps us, that’s ING specific, so we embrace, to a certain extent, SEPA. We don’t like the unnatural cycle of it, but the underlying…
You don’t like the way it’s being done, but you like what it’s doing to you.
…the underlying, that’s an opportunity from an ING perspective, and from a volume and network and client network perspective, we are well established in Europe, so we are entitled to play the consolidation game. In a more broader perspective, I think I’m less enthusiastic or more careful in seeing, in advocating the benefits. My personal behaviour, probably your personal buying behaviour is not going to change because we’ve got SEPA instruments now. That’s…
I don’t have many cross-border subscriptions to publications…
[Laughs].
…put it that way.
Okay, Yes. And perhaps you don’t have too many real estates around Europe, which is one of the drives of private individuals, and our holiday time is limited, so…
[Laughs].
…and we use credit cards all the time, so when we’re travelling for business. So it won’t be a big impact on our end. For some corporates, the other way of the spectrum, it all depends on how they have organised themselves. The really big ones have already implemented their own SEPA.
They’ve got around the inefficiencies already.
They’ve got around the inefficiencies, and perhaps there’s something to gain, but it also has to be done in natural cycles from an investment perspective, so when you’re restructuring your corporate, when you’re restructuring your organisation, are there benefits of SEPA? So not a big bang over there, not a big bang at the private individual part. And as a mid-sized corporate, it all depends on which type of business they’re in. When I was at a Business School someone told me the business case of making washing powder, and Unilever said, “There should be a washing powder factory every thousand miles within Europe, because it doesn’t make sense to ship it on a longer distance.” With SEPA, it won’t change. It’s still washing powder you have to ship, so a lot of the underlying business models won’t change by the introduction of SEPA. But in the end, there are going to be benefits, but it’s not the billion type of benefits Mr McCreevy is promising to the European environment.
[Laughs]. Well, I guess we’re going to have wait and see on that one.
Thank you.
Robert, can I thank you very much indeed for a really enjoyable interview. Thank you.
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