Trends in Corporate Connectivity

by Cédric Dumont, SWIFTNet Product Manager, ING

The last two or three years have seen some of the most important changes and advances in the way that corporates connect with their banks since electronic banking systems were first introduced in the early 1990s. While considerable achievements have been made, such as the SWIFT network being made available to corporates and the launch of SEPA, these are only the first steps in a path of evolution which could transform the way that corporates connect with their banks in the coming years.

Corporate treasurers and finance managers are demanding more from their banks: more flexible standardised connectivity, richer information and greater security. Banks which are at the forefront of current developments in corporate-to-bank connectivity are actively supporting their corporate customers to achieve these objectives. In this article, we will look at some of the current trends and initiatives in this area and how corporates can benefit.

Current trends

SWIFT corporate access

Until 2001, SWIFT was the network through which banks communicated between themselves. Since then, corporates have also been able to connect to their banking counterparties via SWIFT, enabling corporates to exchange financial messages securely with its financial counterparties through a single channel as opposed to requiring individual connections to each counterparty bank. The first few years saw only a limited number of large companies taking advantage of this opportunity, but new initiatives such as SCORE (Standardised CORporate Environment) launched in 2007 and ‘Lite’ due later this year extend the viability of SWIFTNet access to a wider range of companies. Furthermore, the development of service bureaus and member/concentrators enable corporates to connect to SWIFT without the need to invest significantly in technology, therefore being able to maintain a focus on core activities.

Launch of SEPA

One of the drivers for many corporate treasurers to consider new ways of managing pan-European liquidity, payments and collections is SEPA (Single Euro Payments Area) which was introduced in January 2008. One of the outcomes of SEPA is the ability to use common payment methods across the Eurozone (both credit transfers and direct debits) with all European payments being treated as domestic payments, whatever the source or destination country. While there is still some way to go before SEPA is fully adopted and the SEPA payment products fully replace existing domestic payment methods, there are already substantial benefits which companies can gain, particularly those operating on a pan-European basis with a material volume of cross-border euro payments.

Whenever there are new opportunities for delivering sensitive information such as payments, innovations in functionality and automation need to be matched with comparable developments in security.

Personal digital signatures

Whenever there are new opportunities for delivering sensitive information such as payments, innovations in functionality and automation need to be matched with comparable developments in security. We are all accustomed to providing proof of identity when we travel overseas, make a payment or take out cash from our bank account. Conducting these tasks electronically, at a corporate level, also requires validation that the source and destination of a transaction are valid, and as the value of transactions and impact of any losses is substantially greater, security is a primary consideration. Furthermore, Sarbanes-Oxley and anti-money laundering legislation requires individuals to be identified at an individual level together with their roles and responsibilities. Consequently, while the banks, software providers and industry bodies work towards enhanced standardisation and automation in the way that financial messages are exchanged, validation of transactions using a personal digital signature is a vital aspect of the work which is taking place.

Who benefits?

We will not go into detail about SWIFT corporate access and the benefits as this is covered in detail earlier in this Guide. However, until recently, highly automated, efficient connectivity with banking counterparties for payments, retrieving bank statements and confirmations has been the domain of the largest corporates with the greatest resources, infrastructure and leverage with their banks. Today, we see a far wider range of organisations seeking to automate their workflow and connectivity to achieve improved straight-through-processing, efficiency and cost effectiveness, ultimately with a view to enhancing competitive advantage. [[[PAGE]]]

Large domestic companies. Larger organisations which operate primarily in their domestic market, such as pension schemes, often have very high volumes of payments with a high total value, but require a more limited range of financial products. These organisations can benefit from establishing a ‘payments hub’ or ‘payments factory’ to standardise the payments workflow and then connect to their banks through SWIFT due to its high volume capability, security and reliability as a communication channel.

As part of a payments optimisation project, SWIFT connectivity can result in more cost-effective amd efficient payment processing, greater security and the flexibility to select banking partners based on the quality of services as opposed to connectivity considerations.

Pan-European companies. Many companies which work on a pan-European basis will already be accustomed to using multi-bank communication channels, such as Isabel, ETEBAC, as well as bank-proprietary payment methods. However, these multi-bank initiatives are primarily domestic in their scope and have never gained substantial support outside their home markets. While some of these are gradually being technologically outdated, companies which are seeking to leverage the benefits of SEPA and/or find a pan-European alternative to their existing communication channels are looking towards SWIFT as a potential solution. This includes both low value, high volume payments, such as supplier payments, and high value, low volume payments such as treasury payments. As part of a payments optimisation project, SWIFT connectivity can result in more cost-effective and efficient payment processing, greater security and the flexibility to select banking partners based on the quality of services as opposed to connectivity considerations.

Smaller companies. The ability to connect to SWIFT through service bureaus and member/concentrators, simplified pricing structures and the pending ‘Lite’ solution all result in SWIFT connectivity becoming a more viable means of bank communication for companies which need to connect with multiple banks or even to one bank via different methods. The ‘Lite’ solution, for example, will be a fully web-based tool including both payment routing and input tools.

Impact of SEPA

Over the coming years, SEPA will affect every individual and every company, of every size, operating in the Eurozone. With SEPA credit transfers now available, some companies are starting to look ahead at how they can benefit from SEPA and how it will impact on payments, collections and liquidity management. However, while there is interest amongst corporates, most are still hesitant about actively implementing the new SEPA credit transfers. There are a variety of reasons for this, not least the delay to SEPA direct debits, which are due to be launched in November 2009, and the lack of a common legal framework for payments currently, which will be addressed with the Payments Services Directive, also in November 2009.

There are still some challenges to address surrounding SWIFT and SEPA. XML is the standard format for SEPA payments which is actively sponsored by SWIFT. However, there will still be different variants of XML, so the major banks are working together actively to ensure harmonisation in the XML guidelines and promote uniformity and interoperability.

But interest in SEPA is gradually increasing, and will continue to do so in the next one to two years. Companies which take the opportunities which SEPA provides before peer organisations will inevitably gain competitive advantage. In most cases, migrating to SEPA payments will be part of a wider liquidity management initiative, to enhance the visibility of cash and ability to manage it centrally. SWIFT connectivity can play a significant role in this, so we expect to see even greater interest in SWIFT as companies increasingly look towards SEPA

Security

As I mentioned earlier, innovation in functionality needs to go hand-in-hand with comparable initiatives in security. Personal digital signatures have been discussed for a number of years and adopted by a number of organisations; however, there needs to be uniformity and common agreement. Demand for digital signatures on payments originated two to three years ago in France, as companies were already accustomed to this with ETEBAC, the French market standard for corporate-to-bank connectivity. A quick solution was initially put together based on the existing French market standard to satisfy the needs of these companies; however, as a wider spectrum of companies and their banks have sought more integrated communication methods (including SWIFT) there was an urgent need for a harmonised approach across all countries and market players as opposed to each country developing its own solutions to the problem of payment validation. [[[PAGE]]]

As the central channel through which banks - and now their corporate customers - communicate, it made sense for SWIFT to co-ordinate a harmonised security standard, and the necessary knowledge and expertise for providing best-in-class security across large numbers of transactions and financial parties. This is known as SWIFTNet PKI. It will enable personal authentication across the SWIFT Network and as those security standards are universally accepted, will also have more broader and generic application for corporate-to-bank connectivity.

Conclusion

Although SWIFT has been available for corporates for a few years, it is only recently that interest has heightened, not only amongst the largest ‘early adopter’ firms but a broadening range of organisations. SWIFT‘s ‘Lite’ solution and initiatives amongst service bureaus and member concentrators are also likely to expand the number of companies which opt for SWIFT as their connectivity method for communicating with their banks. Furthermore, wider industry initiatives such as SEPA are likely to act as a further catalyst as firms in Europe review their liquidity management requirements and solutions. Working with the right banking partner, with expertise in liquidity management and connectivity, can help substantially in identifying the right solution for your organisation, allowing you to increase efficiency, deploy resources in value-added areas and create competitive advantage.