Published: October 01, 2009
“While we are postponing, life speeds by” (Seneca 5BC – 65AD). Project Seneca’s comment two thousand years forward, and many sage commentators (mainly journalists and my father) are still shaking their heads and bemoaning the pace of life. But with the aftershocks (we hope!) of the financial crisis still shaking many firms, budgets and resource constraints are still obvious reasons – or perhaps excuses - for postponing projects that could bring advantage to the organisation.
One of the projects which is, by its nature, messy and complicated, is to review and enhance bank connectivity. Although the opportunities for corporates to connect with their banks through SWIFT are developing, with steady growth in corporate take-up, should we be seeing greater interest bearing in mind the potential advantages of SWIFT connectivity? In this third edition of TMI’s SWIFT Connectivity Guide, we bring you case studies from new and familiar companies which illustrate the benefits, but also the challenges, of a SWIFT strategy for corporate-to-bank communication.
Looking at most of the data on SWIFT connectivity for corporates, treasurers interested in SWIFT are often regaled with statistics about the number of corporates connected, the regions in which they are headquartered etc. Bob Blair, Head of Channel Management, Asia, J.P. Morgan, summarises,
“There is evidence that SWIFT is now becoming more attractive to smaller companies. The giants such as Microsoft and GE were the early adopters. Furthermore, we see increased prevalence of SWIFT in Asia Pacific, with many existing SWIFT users in the region taking greater advantage of the opportunities it presents. What characterises these organisations is that they are generally large multinational corporations with a global footprint and are seeking to achieve global cash visibility. It is misleading to talk about SWIFT adoption in regional terms as its value proposition is in its global applicability.”
With corporate forum now an integral part of Sibos, the huge conference hosted by SWIFT each year, and a gradually increasing list of blue-chip client names, what is the attraction of SWIFT for corporate treasuries and payment factories? The first is security, with SWIFT providing undoubtedly the most secure, reliable messaging network in the industry. Second, and perhaps the most obvious advantage for corporates is the ability to replace multiple banking connections with a single channel. As Andy Mellor, Manager, Product Management, Fiserv explains,
“Many corporations have multiple banking relationships, and therefore multiple proprietary banking solutions, with a replication of hardware, software, disaster recovery procedures, audit and security policies etc. The cost of connecting to each bank mounts up, so standardised communications look increasingly attractive.”
There are two elements to this: firstly, the channel through which financial messages are passed; and secondly, the format in which these are presented. With SWIFTNet now providing a single channel for corporate communication with their banks, and ISO 20022 standards for financial messaging enabling greater consistency of formatting, it appears that the tools for addressing communication challenges are available to corporates. We’ll come back to standardisation, but looking firstly at the SWIFT channel, the value proposition does not extend only to large corporates. As Andy Mellor, Fiserv explains, smaller organisations too can have complex connectivity needs,
“Despite efforts to rationalise the number of banks, even moderate-sized companies frequently need to maintain complex banking arrangements, particularly in the case of direct sourcing and increasingly intricate physical supply chains. This is driving greater interest in SWIFT, although there is still a great deal of untapped potential.”
Kurt Vandebroek, Product Manager, Connectivity, SunGard AvantGard also emphasises the diverse benefits of SWIFT connectivity for different types of corporates, particularly when using a a service bureau that provides a managed service,
“Centralised, managed connectivity benefits corporations in different ways, whether a large multinational organisation or a smaller company. When it comes to large multinationals, many still face enormous connectivity challenges with multiple access points with their banks. In contrast, smaller firms have different drivers, particularly the cost and resourcing required for connectivity. ASP solutions and managed services enable connectivity to be outsourced and by consuming software as a service, the cost structure is lowered.” [[[PAGE]]]
Bank independence is a theme often discussed in relation to SWIFT corporate access i.e. by using a single, non-proprietary banking channel, it is easier to switch or add banks without the need to implement a new communication infrastructure. As Andy Mellor, Fiserv explains,
“Corporates will typically re-evaluate their banking relationships every three to five years. Having proprietary connectivity helps ‘stickiness’ but with SWIFT in place this is diminished and companies can more easily evaluate banks based on the services they provide. The dynamic of the relationship leans further in the customer’s favour.”
However, until the financial crisis, and indeed potentially beyond, bank independence has perhaps not been a priority, as evidenced by a variety of surveys on SWIFT connectivity. Furthermore, despite good intentions, research projects such as the Treasurers’ Benchmark have illustrated that many treasuries review their banking partners far less frequently than good practice would dictate. The crisis may be changing these attitudes, with treasurers and finance managers seeking to manage their banking risk more effectively, such as ensuring that they can access an alternative way of making payments if necessary. However, with banks increasingly seeking to launch their own service bureaus for SWIFT connectivity, it will be interesting to see whether companies opt for an independent managed service rather than one managed by a bank.
The benefits of SWIFT connectivity are not only technology-related, as figure 1 illustrates.
However, although there are now over 400 non-financial corporations connected to SWIFT, this is still a small proportion of the total corporate population that could take advantage of it. So what is preventing companies from taking advantage of SWIFT? [[[PAGE]]]
As I mentioned previously, an optimal connectivity strategy includes both the communication channel and the way that data is presented. Although there have been a host of standards initiatives in the financial industry over recent years, ISO 20022 financial messaging standards, based on XML, is now leading the field, particularly as SEPA payment messages use the standard. As Bob Blair, JPM outlines,
“XML ISO 20022 is the next generation of messaging standards, and the industry as a whole is investing in solutions to the challenges which exist in the current standards, such as consistency, transparency, granularity of data and quality of coding. Standards are also about application, and there is an increasing focus on this. The market appetite for better presentation and quality of data is developing, and there is more buying behaviour around this.”
Kurt Vandebroek, SunGard outlines the opportunities that ISO 20022 already presents,
“There is a significant trend towards the use of ISO 20022 for both payments and statements. This is being driven by banks, vendors and corporations. For example, one customer recently rolled out SWIFT connectivity for treasury and third-party high value payments across three treasury centres. The project started with MT101 messages for payments but during the project, ISO 20022 was adopted as it was the only standard available to cover all regions in a consistent way. ISO 20022 is, in reality, the only route available to global firms looking for message standardisation.”
However, although banks and vendors are virtually universal in their support of ISO 20022 (partly from necessity, due to SEPA, in addition to greater recognition of the benefits of standardisation) treasurers who are expecting to see a rapid shift towards ISO 20022 will be disappointed. As both Microsoft and Chevron illustrate in the case studies in the Guide, ISO 20022 is still very much work in progress and it will take time for the benefits to be fully realised.
However, the progress which is still to be made in ISO 20022 standards is rarely, if ever, the reason why many companies have yet to embrace SWIFT. After all, in most cases, companies choose to implement SWIFT using the existing formats, and then migrating to enhanced formats as a second phase. Fundamentally, SWIFT often seems too difficult, and despite some of the evidence to the contrary, there is still the perception that it is primarily for the largest, most complex organisations. Alliance Lite was launched last year, to provide a web-based SWIFT connection for smaller firms with less complex requirements. Andy Mellor, Fiserv explains,
“Alliance Lite lowers the threshold for organisations to join the SWIFT community, and can reduce duplication of both hardware and software elements by standardising on the SWIFT infrastructure.”
As Bob Blair, J.P. Morgan describes, however,
“Alliance Lite makes SWIFT more accessible to corporate users and addresses some of the access issues in certain markets, offering basic features in these regions responding to both corporate and bank connectivity challenges. However, although we have seen initial interest, there is not yet evidence of dramatic up-take.”
So why is the take-up of SWIFT still relatively modest? In the case of Alliance Lite, there is not necessarily yet widespread familiarity with what is provided; furthermore, some organisations will consider that the functionality is not yet equivalent to their existing banking systems, and banks are still finding it difficult, in many cases, to place Alliance Lite within their portfolio of connectivity offerings. However, more widely than Alliance Lite, there are various obstacles in SWIFT adoption: [[[PAGE]]]
Perceived complexity
The opportunities for corporates to connect to their banks through SWIFT have evolved over recent years, and with each evolution, the complexity reduces. Until 2007, corporates had to join the member-administered closed user groups (MA-CUGs) for each one of their banking partners. In 2007, SCORE was launched, that enabled corporates to connect to just one. This makes the joining process much easier, but private companies and those headquartered in various parts of the world, such as in Asia and South America, were not eligible for SCORE. This year, the eligibility criteria have been extended, so virtually every corporate is now able to join through SCORE; however, treasurers and finance managers are frequently still confused about the various models. Fundamentally, SCORE is now the access model for SWIFT, and although not every bank yet supports SCORE, this will change over time.
The quantity and complexity of documentation required by each bank is a frustration for many corporates who have implemented SWIFT, but many of their larger banks have rationalised their documentation requirements. In time, it seems likely that SWIFT connectivity will be incorporated into banks’ standard connectivity agreement, so a separate agreement may not be necessary; however, treasurers who are hoping for a single agreement that can be applied across all banks are likely to be disappointed.
Direct access to SWIFT is undoubtedly complex, resource-intensive and difficult to justify for even the largest organisations. Firstly, there is a substantial investment required in hardware etc, and secondly, specialist skills are required to establish and maintain the SWIFT infrastructure. For the first corporate adopters, there was little option. Today, most corporates choose to connect to SWIFT through a service bureau or member/concentrator. Some service bureaus provide a wider range of services than others, so many companies will find that the process of implementing SWIFT becomes quite straightforward.
As an example, Kurt Vandebroek, SunGard discusses,
“When setting up a payments factory, many corporates need some help in defining the services they need through SWIFT. For example, rather than retrieving MT 940 (bank statements) through FIN, it can be more efficient to use FileAct and compress the file, ultimately reducing costs and enhancing reconciliation of account statements to the General Ledger. The use of domestic formats for both payments and statements is becoming common practice so companies often need some assistance in assessing the available options and their technical consequences.”
Perceived cost
Every technology project requires investment, and SWIFT connectivity is no exception. However, the cost of implementation and ongoing messaging/file transfer fees needs to be balanced against current connectivity costs. According to SAP, the cost of maintaining each bank’s proprietary interface is around $50,000, which reflects a substantial overhead, even for companies with two or three connections.
Budget constraints
Linked to the above, with downward pressure on budgets in all organisations, it would not necessarily seem to be business-critical to replace existing proprietary systems, which probably operate satisfactorily, with SWIFT. However, the benefits of increased access to liquidity, improved reconciliation (and therefore working capital) and risk mitigation would seem to be factors that should encourage adoption, even when budgets are tight. Bob Blair, J.P. Morgan, recommends that SWIFT connectivity can be integrated within a wider project,
“While the financial crisis has impacted capital spend, there is still interest in SWIFT and expenditure on SWIFT projects. Most investment takes place when there are other factors involved, such as the implementation of a new TMS or ERP, or a new banking relationship.” [[[PAGE]]]
SWIFT connectivity is not simply a one-off project, however. With new products and services being made available, the value proposition is progressive for many firms. For example, some of the new opportunities using SWIFT are actually proving some of the most compelling. The Trade Services Utility (TSU) enables corporates to integrate their trade flows and processes through the same channel as cash transactions, enabling greater cohesion in the financial supply chain as well as greater efficiency in trade finance. EBAM (electronic bank account management) which enables bank accounts to be opened, closed and mandates administered through SWIFT is also gaining significant interest despite being in pilot phase, and has been initiated by corporate users. Bob Blair, J.P. Morgan explains,
“It is perhaps surprising how much interest there is in related SWIFT initiatives such as Exceptions & Investigations, and eBAM. Exceptions & Investigation was originally developed both by, and for banks, to enhance bank STP. There is now growing interest amongst corporates who are seeking the same advantage as the banks in STP, standardisation and reach.”
Looking ahead, these types of initiative that have direct, tangible value to corporates will expand the value of SWIFT connectivity substantially and are likely to be drivers for greater adoption. There are three additional areas which I would see as being important to ensuring ongoing support and accelerated take-up of SWIFT connectivity amongst corporates.
Firstly, standardisation will need to develop further, with ISO 20022 gaining further traction. This is anticipated by most banks and vendors, and is being increasingly recognised as being beneficial to the industry as a whole. Bob Blair, J.P. Morgan predicts,
“In ten years’ time, we would expect to see a new degree of interoperability across all channels, with common presentation and functional capabilities.”
Secondly, complexity needs to be reduced further, primarily through the development of packaged connectivity solutions that allow rapid adoption by corporate users without the need to develop specialist knowledge or technical skills in SWIFT. Kurt Vandebroek envisages,
“In the future, we see SWIFT connectivity increasingly being packaged for ease of use, so that companies have a single vendor for all aspects of their payments and connectivity requirements. The first generation of SWIFT corporate users connected directly to SWIFT; the second generation, which is where we are now, prefer service bureaus. The third generation will make use of a fully integrated service from end-to-end, working with a single vendor. This is where SunGard is positioning its solutions, enabling clients take advantage of SWIFT connectivity without complications or inconvenience.”
Finally, while the political obstacles are huge, corporate-to-bank connectivity through SWIFT is not sufficient to provide the degree of automation across the financial supply chain that corporates require. EBilling solutions, supplier and vendor networks etc. are evolving at a rapid pace, which in time will create challenges, with companies interacting through multiple commercial networks. By enabling corporate-to-corporate connectivity through SWIFT, the opportunities for financial supply chain optimisation could be transformational.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
