Interview:

Leonard Schrank - Swift

1 November 2003

The past five years for the technology industry have been turbulent to say the least. The bubble has burst and in its place is a climate of reduced investment in IT where firms need a compelling business case and clear ROI before committing to even the smallest project.

Against this backdrop of uncertainty, industry-owned messaging service Swift has focused, and refocused, its efforts on e-enabling its own products and services, while at the same time heavily influencing the finance industry's straight-through processing aspirations.

It was exactly five years ago, with the technology boom in full swing, when the Society for Worldwide Interbank Financial Transactions (Swift) announced a wave of new initiatives aimed at taking full advantage of Internet Protocol - based technology to provide its member institutions with a 'single window' for financial messaging. It marked the beginning of a new era for Swift that would impact 7,000 financial institutions in almost 200 countries. The person responsible was Leonard Schrank.

Schrank joined Swift as CEO in 1992, after a ten-year stint in London heading the international activities of Chase/Interactive Data Corporation. Prior to that, he had founded his own software company with four partners from MIT, which was acquired by Chase/IDC in 1977. Passionate about Swift and its role in the financial community, Schrank has seen much progress in his ten-year tenure. "Ten years ago we were only really responsible for payments traffic and completing about two million messages a day. Today, we've completely diversified and are managing over eight million messages every day."

Swift now provides end-to-end automated messaging services and interface software for over 7,000 members, including banks, broker/dealers and investment managers, as well as to market infrastructures in payments, treasury, derivatives, securities and trade services. This diversification has seen Swift transform itself from what was essentially an ambition to automate the telex, carrying 300,000 messages a day when it was conceived in 1977, to a messaging service that carries an average of US$6 trillion payment messages per day over its networks.

tough at the top But it hasn't been an easy ride for Schrank. The early part of the 1990's saw Swift embroiled in a seemingly self-destructive argument on whether or not it should allow securities participants onto the network.

In hindsight, the decision to accept securities participants was the right one, says Schrank: "So we diversified to securities and now 20 per cent of our total business concerns market infrastructures for clearing and settlement, whether it's payment systems or securities systems. It has made a huge difference. When I first arrived at Swift we had no securities business, Now fund managers are fully-fledged members of Swift."

The early 1990's also saw disgruntled Swift member institutions question the very future of the messaging service as they complained that a deep chasm had developed between them and Swift, with Swift accused of being less than responsive to their needs. Schrank quickly set about pacifying member institutions and gained their credibility by improving the governance of the company, focusing on service quality and becoming more competitively priced.

"Ten years ago the system could have had improvements operationally, but today it operates at 'five nines' reliability and our customers take that for granted. Also, ten years ago our prices were high, but today the average price for a Swift message is 70 per cent less and continues to be reduced. And in this era of cost control that's very important to our members."

crossing the divide The value of Swift to the financial community should not be measured on price reduction alone, points out Schrank. The company's construction of SwiftNet, an IP-based messaging platform for securing the next generation of transactions is seen as a way for Swift to considerably deepen its contribution to the operational efficiency of its membership.

A major part of this move to SwiftNet involved sub-contracting its network operations to telecommunications services provider Global Crossing in a US$300 million deal during February 2001. This would enable Swift to sharpen its focus on messaging services, transaction processing and standards setting, while at the same time ensuring a more robust offering for its member-customers.

Global Crossing's part of the deal was to manage the development and operation of Swift's Secure IP Network (SIPN) infrastructure, and assume responsibility for maintaining Swift's X.25 network, which over time would be replaced by the SIPN to provide a seamless and unified network to support Swift's global products and services.

But it turned out to be a short-lived partnership. Debt-laden Global Crossing, while still operational, filed for bankruptcy protection in January this year after overcapacity knocked the bottom out of the long-haul optical data transport market. Swift, which had made its commitment to the partnership very clear, suddenly had a crisis on its hands.

"The Global Crossing deal was extremely exciting to us. We negotiated with them the lowest cost, highest technology arrangement on the planet. It was going to be wonderful for Swift going forward as we built the new IP network."

"But we have contingencies for everything. In this case, when Global Crossing had problems and became a single point of corporate failure, we took the decision to implement our contingencies and we backed out of the deal," said Schrank.

These contingencies included buying back the X.25 network and the Secure IP Network, rehiring the employees and moving on to a multi- vendor gateway, Swift-controlled backbone.

"It went very smoothly. Global Crossing acted extremely professionally every step of the way. They were disappointed, but they understood. We still have excellent relations with them. We're going our way and we wish them luck as they come out of bankruptcy. We're getting close to announcing who our multi-vendor gateway providers are, we're in the final stages of the RFP process and we're going to have the most secure, most reliable virtual IP available on the planet."

One of the lessons Schrank learned from this experience is that Swift has to be "lowest risk". "In hindsight," he says, "even though we looked extremely carefully at the deal, we didn't look enough at the risk. And it isn't going to happen again. Fortunately it worked extremely smoothly. Our members were complementing us on our communications. Rather than sweeping the issue under the rug we kept our members informed. We seamlessly exited, we transitioned everybody; we gave them back-up systems in case Global Crossing stopped, which to this day they never have, so it all worked fine and we're on schedule with SwiftNet."

looking through the window The schedule for SwiftNet involves phasing out the X.25 network by the end of 2004 to give members a secure IP-based 'single window' of connectivity. Since its inception in 1977, Swift has served its users through FIN, the store and forward messaging service operated on the X.25 network. Through the SwiftNet initiative, Swift members will also be migrating to SwiftNet FIN, which allows them to have access to even more features through the SwiftNet 'single window'.

"The key to the single window is all about reusability and a common infrastructure that can be used on a banking site, a securities site, globally, with the different market infrastructures," says Schrank.

This single window approach will facilitate the efforts of Swift to support increased STP rates by eliminating the need for 'vertical silos'. "Market infrastructures try to build 'fat applications' by developing their own versions of messaging and a cheap network to connect to customers," remarks Schrank. This results in each market infrastructure having its own set of messaging standards, security standards and technical standards, which presents a major problem for institutions when trying to interface with each one.

"Our proposal is a thin application that 'plugs 'n' plays' into SwiftNet," says Schrank. "We do the store and forward file transfer, interactive, standards, archiving, non-repudiation; the boring stuff that benefits from our economies of scale, and our standards globally, and then all those users only have to have one interface, one set of standards, one security model, one network, one technical connection. It's reliable and competitive and it will work."

"Our vision is to become STP enabling. In other words, we're not going to go into Citibank or Deutsche Bank, for example, and help them with their operations, that's not our business, But with good standards, good education and good tools we can help them raise their STP levels. And that could save them millions and millions of dollars on their bottom line."

To do this Swift has devised ways to calculate the performance of financial institutions and provide them with hard information on their STP rates. "We have a motto at Swift that if you can't measure it, you can't manage it - and we can measure STP. We have a statistical way to look at the traffic coming through our system several times a year," says Schrank. Swift is then able to work with institutions to help them improve their rates.

Schrank also points to a number of studies that show the volume of improvements in STP rates. In securities messaging for example, is worth US$10 million a year to the industry.

partner As well as advancing its SwiftNet initiatives, Swift is actively trying to find further ways into the 'e-area'. This includes fostering key relationships with major IT companies including SunGard, Logica, HP, IBM and Microsoft.

"For example, we use Microsoft enterprise-wide for a lot of our office automation internally and many of our clients use Microsoft applications to interface in to Swift, so it's very important that we have a strong relationship with them. We have a lot of liaisons with Microsoft and we want to do more with them."

"Windows 2000 and .NET is in the space that our members are in. I would predict that over the next few years our relations with Microsoft will get deeper and more important," adds Schrank.

At the Sibos conference in San Francisco, Swift's president Jaap Kamp spoke of the move into e-commerce. Following the Global Crossing saga the goalposts haven't changed, says Schrank, they have become even more focused.

"Swift's view of the world going forward is to become lowest risk with highest resilience. If we are to achieve our goals of low-risk, high- resilience, market infrastructure unifying and STP-enabling then we have to remain viable; we have to be profitable even though we're a cooperative. And the way we do that is to have good competitive prices, keep our costs down and keep getting new business so we can keep growing. If we can pull all that together, we're in good shape for the next ten years."

With the way Swift has been transformed over the past ten years, it would be hard to disagree.

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