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19 June 2019

Identity crisis (and the SWIFT way out?)

Head of Trade, Treasury and Risk
Just who are you? TXF contemplates trust in trade and the bumblebee in KYC. Some commercial KYC solutions are struggling, but SWIFT is coming into the game for corporate KYC alongside its bank registry. If banks and corporates are going to trust SWIFT for the KYC Registry, why would they need to embrace other technologies such as blockchain for trade?

Ecce homo. This simple Latin phrase sums up 2000 years of identity. Who is he? Ecce homo had an identity crisis when an 81-year old amateur tried to restore the 19th Century Spanish fresco of that name, and she inadvertently changed the image into a more famous meme. And it is how Nanni Moretti characterised a bunch of Italian students coming to terms with revolution and love and betrayal in his satirical comedy Ecce Bombo. Behold the bumblebee.

TXF takes it inspiration from many sources. I was introduced to Ecce Bombo in Rome in 1996 by the lugubrious press secretary of the former Governor of the Bank of Italy, Antonio Fazio, as I was waiting to have an interview with the man himself.

Today we have identity politics, but our business is identity economics. Know your customer. And the huge warehouses of data which simultaneously know too much and know too little. Who are you? It is certainly a question that preoccupies banks and corporate treasurers and procurement professionals alike and goes to the heart of trust in trade. One of the biggest gripes in the post global financial crisis environment for banks – and one of the reasons banks have cited for derisking of correspondent relationships, and in not lending to certain corporates, has been the lack of ability easily to know with whom they are dealing. Trusting the one asking you for your identity is proving equally challenging.

Trust has acronyms attached to it nowadays, KYC, know your client (or customer) is one, but it’s created an entire industry in the wake of the crisis, driven by regulation post Basel II/III and payment services directives, that crave automation to verify identities of counterparties.

And, of course, if banks are having headaches with the (many would say necessary) evils of KYC, they certainly are passing on a lot of the pain to corporate clients. In March, consultancy firm Neu Group estimated corporate treasurers at MNCs were spending 25 hours a week on KYC-related activities.

The messy ups and downs of commercial KYC

Commercial KYC solutions have proliferated, but they are not cheap to run and are tougher still to scale. Indeed, few have met with success, and the last few months have proved that it’s messy out there. In April, Bloomberg announced it was exiting its KYC business, which includes Entity Exchange and Entity Intelligence. The Bloomberg products had some of Citi’s biggest clients, including Coca Cola, Merck and Cargill reported to be using them. KYC and anti-money laundering (AML) are, by nature, often linked. Meanwhile, Citi has just launched an AML compliance product with EY and SAS (NextGen).

Thomson Reuters Financial & Risk recently rebadged its offering (which included KYC) as Refinitiv and on 4 June, it announced a partnership with Trulioo to deploy advanced digital identity verification and biometric technology. More quietly, though, in mid-June Refinitiv announced it was also set to drop its KYC as a service product later this year.

There is also a confusing glut of AI-enhanced AML tools under the badge of RegTech (regulatory technology), from players such as IBM Watson (and Promontory, which it acquired in 2017). IBM Watson piloted a KYC blockchain proof of concept back in 2017 (with HSBC, Deutsche Bank, MUFG and commodity trader Cargill, among others), things have gone a bit quiet publicly. Thomson Reuters is also partnering with IBM on regulatory compliance for FIs (announced on 1 May). IHS Markit (which partnered with robotic process organisation, encompass, in March) is also still in the KYC market.

Trusting third parties: SWIFT KYC Registry puts corporates in the mix

If commercial KYC operations are sometimes struggling to get critical mass, back in February, SWIFT announced it was joining the fray by allowing its 2000 SWIFT-enabled corporates to join its KYC Registry online portal from July. They will be able to upload, maintain and share their KYC information with the 5100 banks already on the KYC Registry in a standardised and secure way.

In a press release at the time John Colleemallay, senior director group treasury and financing at Dassault Systèmes, expressed his relief. “KYC for corporates is a dream come true for all treasurers, considering the heavy workload involved in providing the same documentation several times in multiple formats to our banking partners. We look forward to having a secured shared registry where we can more easily and rapidly complete the KYC processes.”

If the number of MNCs attending the pilot sessions on KYC at the SWIFT for corporates user conference in London in mid-May is anything to go by, many SWIFT-enabled corporates are going to be eager to reduce the amount of time they spend on KYC. It will be interesting to see corporates’ responses as the project develops.

Talking to TXF at a SWIFT hosted trade roundtable at the corporate user conference (which will feature in TXF shortly), Anne-Claire Gorge, global head of product management & innovation, trade services and finance at Societe Generale goes to the heard of the matter on distributed ledger technologies (DLT) and trade.

“It's useful to look at why we need DLT,” Gorge says. “The benefit of DLT is mainly on security and trust. Probably the reason there are so many DLT projects in trade finance is that SWIFT was not very involved in the future of trade finance. We can see with the KYC SWIFT Registry for Corporates that nobody really minds about the fact that it would be a centralised database repository run by SWIFT. Why? Because everybody trusts SWIFT in terms of IT security and in terms of being a third party provider. When we are outside of SWIFT, the story is different.”

What is that story?  “We want to make sure that we share the right level of data: we share what we want to share and we don't share what we don't want to share,” says Gorge. “This is especially true when it comes to sharing data between different industries, for instance with transport and the physical supply chain world where there is no trust at all. And that's the reason why we need DLT for now. The benefits of DLT projects such as komgo and we.trade are that they have given birth to something really new and innovative not only from a technology point of view but also from a solution product management point of view. We are delivering a brand new solution to clients, especially SMEs who can access a sufficient guarantee of payment and to get finance in a few clicks.”

Indeed, adds Gorge: “The future of DLT platforms for trade in my view will depend on whether or not SWIFT enters the space, and how they would do it.”

Flight of the bumblebee

Going down the chain and more effectively identifying smaller suppliers is important. In a study released last week, the Asian Development Bank (ADB) is holding up the Legal Entity Identifier (LEI) as one, relatively cheap, identification solution to promote financing trade from companies in developing markets. Could SWIFT move further into helping KYC for SMEs?

“There is a big issue regarding KYC for small suppliers in SCF, and for SMEs in general. That's where the SWIFT KYC Registry is really attractive. If in the future, thanks to the fact SWIFT is not there to make money with KYC, it becomes the place where we can easily get access to KYC elements for a huge number of companies including SMEs, then the cost of KYC could go down dramatically. It would be positive for sustainability and inclusion as it would make SME financing easier,” says Gorge.

But it will take time before we can get excited about the idea of SMEs gaining from KYC and will have to involve everyone in the process – banks, corporates, fintechs and regulators. If SWIFT can help with standardising underlying data and creating transparency and trust, that can only be a good thing for the market in general.

It remains early days for corporates on KYC Registry, after all, it doesn’t even properly start until later in the summer. SWIFT will have to heed the actual needs of the corporate end users. It’s certainly going to be a long project if it ever wants to get smaller corporates onto the KYC Registry and have an impact on a global scale.

The bumbling little bee, the bombo, gets things right. It has an elaborate dance to identify itself (and its colleagues) and where the flowers are. Until not that long ago, a lot of available data (its weight, its wing span and interpretations using fixed wing aircraft) said it shouldn’t be able to fly. But it does. Why? Nobody had properly analysed its wings. Behold the bumblebee.


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