Published: June 01, 2011
by Tino Kam, Head of Direct Channels for Global Transaction Services, The Royal Bank of ScotlandOnce the preserve of large multinational corporations, SWIFT connectivity has become a viable option for corporate treasuries that are seeking to improve working capital management and reduce costs.
An increased awareness of counterparty risk and continuing efforts to improve working capital efficiency in order to reduce costs are combining to push SWIFT connectivity higher up the corporate treasurer’s agenda. At the same time, moves are being made by SWIFT and its member banks to open up the SWIFT network to a wider range of corporates.
The traditional obstacle to SWIFT use for all but the largest multinational corporations was cost – not only of joining the network but also of the messaging itself. However, innovations such as SWIFT’s entry-level Alliance Lite solution and free on-boarding options provided by service bureaux, such as that operated by RBS, have helped to substantially reduce the economic impact of SWIFT participation. The result is that today, around 30% of RBS’s host-to-host implementations are based on SWIFT’s FileAct and many more are in the pipeline. Moreover, many RFPs and RFIs submitted to financial institutions from the corporate sector are specifying SWIFT connectivity as a requirement.
In providing a highly secure, robust and standardised single channel into multiple banks, SWIFT is an ideal solution for any corporate that is looking to improve the visibility of its funds globally or eliminate multiple proprietary electronic banking systems. These are key aims of corporate treasurers as they strive to improve working capital efficiency in order to free up funds that can be deployed in a more timely manner where and when needed across their operations.
Research conducted last year by CFO Research Services on behalf of RBS revealed that effective management of working capital has assumed greater urgency, particularly in Europe, as market demand has been slow to return and short-term credit remains both difficult to access and expensive.
Of the 207 senior finance executives surveyed, only half or fewer said they were using many of the automated cash-management techniques available such as automated direct debit, e-billing, direct SWIFT connectivity and intra-day sweeping. This suggests a significant opportunity to increase the use of such methods, given that most respondents said they were now considering adopting these tools to improve working capital performance.
The highest level of SWIFT adoption was in the professional and financial services sectors, where 41% of respondents said they had adopted SWIFT connectivity, a result that reflects the use in these sectors of sophisticated information systems and a greater understanding of automated cash management techniques.
Corporates that use SWIFT have a significant advantage in terms of funds visibility. Using SWIFT messages, data is more easily aggregated than at a treasury that has to pull in data from a series of electronic banking systems. Feedback has shown that clients are able to allocate funds, move investments and offset debits in a significantly more efficient manner.
The multibank element of SWIFT meets an increasing desire among corporates for bank-agnostic connectivity. The financial crisis of 2008 cast a spotlight on counterparty risk and slowed the trend of corporates to concentrate their banking relationships to fewer banks. Instead, corporate treasuries have sought to spread counterparty risk by doing business with more banks.
However, implementing multiple proprietary electronic banking systems is inefficient and does not deliver the visibility of and control over funds treasuries are also seeking. Connectivity is an important element in these risk mitigation efforts and the ability to connect to multiple financial institutions using standard messages via SWIFT’s network is proving to be an attractive proposition as demonstrated in figure 1.[[[PAGE]]]
The business case for SWIFT is clear – corporates can obtain a wide range of financial services such as payments, treasury, securities services and reporting through a single channel. In the current cash- and credit-constrained environment, however, the initial cost of SWIFT connectivity has been an obstacle.
The CFO Research Services survey found that respondents from the smallest companies (€400-€800m annual turnover) expressed the most interest in installing SWIFT connectivity to speed transaction processing and increase security. But doing so requires the modification of existing information systems or investment in new capabilities. The survey found that many of these companies were taking a ‘wait and see’ approach.
There are three options for SWIFT participation: direct connectivity via an Alliance workstation (this is an option favoured by large multinational companies that are not looking to outsource technology or major components); service bureaux that are operated by third-party providers; and Alliance Lite, an entry-level ‘plug-and-play’ solution for corporates with low message volumes.
At face value the set-up costs for SWIFT for some corporates can be daunting. Many treasurers have indicated that while they can justify the running costs of SWIFT connectivity via the improved cash visibility and reduction in FTE (full-time employees), getting sign-off for the initial investment of around £20,000 can be a challenge. These concerns are being met via Alliance Lite and also by other moves such as RBS’s decision to offer free on-boarding to SWIFT via the RBS Swift Service Bureau.
Running costs, particularly for corporate treasuries with multiple bank relationships, are more attractive when using the various SWIFT options. For example, one RBS customer that operates nine separate electronic banking systems is spending £50,000 per year; by migrating to RBS’s SWIFT Service Bureau that spend will be decreased by 30%.
The combination of lower pricing and rapidly expanding functionality is enhancing the SWIFT business care.
Across all three options SWIFT has been reducing its traffic pricing. In September last year, the co-operative announced a reduction of 20% in its core FIN service, representing a combined saving of €70m for its customers in 2011. SWIFT’s strategy is to reduce traffic prices by 50% over five years to 2015.
Alliance Lite has been instrumental in changing the perception among corporates that SWIFT is viable only for the very largest companies. The service can provide an initial taste of SWIFT for corporates, leading the way to deeper involvement in SWIFT use via a service bureau, which can offer more value added services than Alliance Lite. For example, RBS’s SWIFT Service Bureau provides message transformation services, enabling corporates to submit messages in legacy formats that are converted into ISO 20022 formats. Any subsequent reports can be translated back into the corporate’s preferred format, providing the client with a single snapshot of the data in a consolidated report.
Other initiatives are also breaking down the barriers to SWIFT involvement. In February 2011, SWIFT launched a Bank Readiness Certification Programme that aims to identify which banks can support corporates in their move on to the SWIFT network. Under the programme, banks will demonstrate an appropriate level of operational and commercial readiness for the Swift for Corporates initiative. The programme is being rolled out during 2011 and 2012.
Many corporates that have joined SWIFT quickly find that the advantages are not restricted to payments messaging. SWIFT and its member banks have been working on various initiatives to extend the use of the SWIFT channel.
The Common Global Implementation (CGI) initiative, for example, which is supported by SWIFT, large corporates, ERP and TMS vendors and the world’s major banks, is enabling corporates to standardise message formats in order to achieve truly bank-agnostic file formats.
As more communication flows between banks and their corporate clients are based on XML formats, corporates can further leverage the investment they have made in SWIFT connectivity. For example, SWIFT has developed a proof of concept for a central utility to route and validate electronic bank account management (EBAM) messages. EBAM is based on ISO 20022 standards and via SWIFT enables banks and corporates to streamline the process of bank account management including account opening, closing, maintenance and reporting.[[[PAGE]]]
The combination of lower pricing and rapidly expanding functionality is enhancing the SWIFT business case. SWIFT connectivity enables the corporate treasury to work smarter and faster.
Bank-agnostic connectivity is a key trend and SWIFT and its member banks have made significant advances in opening up the network to more than just a handful of the world’s largest corporations. As a global, scalable solution, SWIFT provides a future-proof approach for corporates as they continue their quest to improve working capital efficiency.
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