A force for change

The financial crisis forced international banks to re-think they way they have functioned for decades and to face new levels of scrutiny and regulatory compliance. But, says Gary Greenwald, Chief Innovation Officer of Citigroup, it has also ushered in a new era of forward thinking when it comes to technology. He tells Business Management why.

How did the financial crisis change the way banks use technology to drive business?
Gary Greenwald. I think last year and the crisis we've faced has brought to the surface some inherent challenges around how technology is impacting or has impacted our ability to respond to the crisis. If you look at how banks are organised, particularly global banks like Citi, disparate systems and platforms in many countries have to come together to make the payments and transactions banking system work.  When you have an event like the Lehman bankruptcy, being able to show where the exposure is and where the unsettled trades are, ends up being very complex.

What did the crisis highlight as the most important technology requirements in banking?
GG. It brought to the surface several technology imperatives. One is the ability to track the flow of data in the same way that say, FedEx can track the delivery of a package. We have to have more activity monitoring software in order to do that. Another technology imperative it has brought to the surface is the need for standardised data. If someone asks the question, 'what is my exposure to Counterparty X?' we have to have common identifiers and data nomenclature so that we can put that information together. And without that you're flying blind and you can't react to those events or really understand the risks you face.

How do you think regulatory compliance in the wake of the financial crisis will affect banks' spending and regulatory compliance?
GG. I think there are opportunities to do regulatory spending in a smarter way. Perhaps banks could share the costs of that regulatory spend with other like-minded institutions. Maybe banks could do it once then share the investment because my view of regulatory spend is that it is not a competitive differentiator. The goal should be to do it to meet whatever requirement is on the table, but to do it cost effectively and hence free up capex and investment bandwidth for things that do drive business such as new markets and differentiation with clients.  We've been lucky at Citi to have an investment budget that has obviously accommodated the regulatory requirements. But given the importance of transaction banking, people are innovating and getting to spend on building things over and above just the regulatory things. So I think this has been a good year, and a surprising year for innovation.

How would you say the economic downturn has affected the management of business both globally and locally and how has it changed the way banks approach innovation?
GG. I think it was a Stamford professor who coined the phrase 'crisis is a terrible thing to waste'. This has shown up a lot this last year. I don't think we wasted this year, in terms of innovation. I think we've actually found the real pain points of clients, corporates and counterparties and have worked with them to find solutions, many based on technology crisis. We're doing work around online analytics and digital signatures. The need has been there, even with this economic crisis, to do that innovation. In terms of the global versus local markets, it's always a balance of how you run a global market and respond to local nuances market by market, yet get scale. I think what the crisis may have forced is a little more discipline. I see these discussions going on within Citi and also in other banks around how to innovate with scale, allowing last mile customisation input from people on the ground. But doing it on a global platform with a common infrastructure because otherwise you have a thousand flowers blooming. That's a very expensive non-scalable way to do innovation.

What's been learned from the financial crisis in terms of risk management?
GG. One of the issues that I like to talk about regarding banks repositioning comes back to digital identity. Think about the growth in the world of credentialing people for online healthcare records access or access to ecommerce sites. That's a core competency of banks. We are trusted third parties, we know your customer-type processes and we know about the safe and regulated storage of information. I think banks pushing out in that space is a way, in the minds of consumers or businesses, to retake or make sure we properly claim ground that is a core competency of banks. I think if you're a student of that space you'll see more and more activity by banks in this world of digital identities and online credentialing.

How do you think the globalisation of financial services will evolve in the next decade?
GG. As an innovation guy with a technology and analytical bent, the last thing I want to do is be the crystal ball predictor of what governments will do. Clearly the crisis of the last year has pointed out the interdependency across financial markets. And the need for transparency and importance of governments allowing trade to flow. If I were a wishful thinker, I would say we would like to see that continue. The cost of doing business where there are hundreds of disparate regulations as opposed to fewer that are homogenised, clearly makes sense for many parties, like banks.

What particular areas of innovation are you focussing on at Citi at present?
GG. One of the interesting statistics at Citi is that year-over-year in our transaction banking business our investment in new technology is up significantly. We have just announced the launch of a new online banking platform for corporates called CitiDirect BE for Banking Evolution, which brings together input from our clients on the pain points they have in running their treasuries. It uses visibility, control, working capital efficiency, process simplification and new technologies to create a next generation online experience that really tackles the next set of problems in an open architecture way. It operates with an open portal connected to SWIFT, messaging and mobiles. We see this as core to Citi's continued innovation in the transaction banking market.

Currently around six out of seven payments in Euros are made using cash. How important is it to focus on epayments and mobile payments instead?
GG. I think it's very important. It's at the stage where there have been lots of controlled experiments, pilots and discussions with partners. I think the relationship between mobile technologies, mobile capabilities and banking is there to stay. What need to change are the use cases, value propositions and business models around those. That's going to take a little time as banks, mobile network operators, handset manufacturers and other players in the ecosystem get together to work out how we can deliver value to the different constituencies. As a bank we need to be very much involved in and at the forefront of innovations in mobile banking. It is going to be part of a critical reinvention of core aspects of banking, both on the consumer and institutional side.

Do you think non-banking companies will use mobile banking technology to challenge banks with new payment service businesses?
GG. Banks have to be paranoid in thinking through threats to business models. We need to be forward thinking, forward looking and at the same time work backwards from where value can be created and turn that into a business model. So I think mobile and other technology is bringing in a broader set of players to the payments industry but that does not mean there's no role for banks. What it means is that we have to be very creative and innovative in terms of technology but also business models.

Is there a danger that the banking industry could become over regulated, hence risk averse?
GG. I think that in the transaction banking industry, the risks are both well understood and reasonably well managed. The crisis in the last year was not in transaction banking. I spend a lot of time with our regulators and they like that we're innovating. Because where we've innovating it's tied to the re-engineering of processes that result in control and efficiency in the whole financial supply chain. The regulators are supportive of innovation and they understand that it's critical to the business model of a transaction services business.

Transaction banking has been the most resilient area of banking during the financial crisis. Would you put this down to innovation?
GG. I put it down to a number of things. Clearly innovation has been very much part of transaction banking over the years as technology has allowed things to be done that couldn't be done in the past, as regulations have changed to allow globalisation. And client requirements have evolved to more sophisticated management of liquidity and working capital. So I think part of it is tied to innovation and another part is tied to the business model of what transaction banking is about as a collector of liabilities. As a collector of fees in a very predictable way, that's in contrast to other businesses that have a little bit more volatility. Having a transaction and services business at the core of a bank is a very important thing. Citi, with its renewed focus, understands that. One of our aspirations is to build up payments and transaction banking to be an even more important core of the company.

Citigroup is one of the world's biggest financial services institutions with 350,000 employees worldwide and 20 million customer accounts based across over 100 countries. It is made up of 15 different brands, including Citibank, CitiFinancial, Citi Institutional Clients Group and Citi Private Bank. It is organised into two main segments into which the different brands fall; Citicorp and Citi Holdings.  The organisation originated in 1812 when Citibank was first set up.