Features : Clear Path

Afew years ago, many companies had probably never heard of, let alone cared about, SWIFT (Society for Worldwide Interbank Financial Telecommunication), based in La Hulpe, Belgium. SWIFT is the back-office plumbing that carries millions of financial messages pertaining to payments and securities transactions between global clearing banks.

SWIFT was established in 1973 by a group of 240 banks in 15 countries as a means of automating financial messaging between banks using telexes. Telexes have since been replaced by SWIFTs IP-based network, SWIFTNet, and SWIFT itself has grown into a global banking network representing approximately 8,000 of the worlds largest clearing banks. Wall Street heavyweights such as Citi are among SWIFTs largest volume users in terms of messaging traffic, but for the first time in the banking cooperatives more than 30-year history, its user base is diversifying.

While banks are still the main users of SWIFT and its related services, there are now 250 non-banks that are directly or indirectly connected to SWIFTNet, and 33% of SWIFTs bulk payment file traffic comes from these very same companies, a Whos Who of corporate America, including names such as Microsoft, General Electric and IBM. SWIFTs annual user conference, Sibos, which was held in Boston in early October, reflected the seismic shift that is taking place among the banking networks user base. The number of multinational companies attending100 representatives from 65 companiesfar outweighed the number of investment managers, which was surprising given that SWIFT has tried for decades to connect asset managers to its network to facilitate higher levels of straight-through processing.

In an effort to make SWIFT less mysterious and more appealing to its growing corporate user base, the networks recently appointed CEO, Lzaro Campos, spoke about a new, lighter version of SWIFT that is as easy to use and connect to as a button on a fax machine and a SWIFT that more readily appeals to different customer types and does not require users to be fluent in SWIFT speak.

To multinationals like GE and Microsoft, which use multiple banks and have struggled to integrate their back-office treasury management and ERP systems with the proprietary systems of their banking providers, SWIFT constitutes a single window through which they can communicate with all their banks. Point-to-point connectivity with banks was not scalable, so we started looking for a single pipe that was secure and resilient. We found that on SWIFT, says Ed Barrie, who is responsible for treasury operations and product management at Microsoft.

Establishing the Business Case

In 1998 SWIFT took its first step toward direct corporate connectivity with the creation of the Treasury Counterparty membership category, which enabled companies to exchange FX confirmations via SWIFT. SWIFT ramped up its pursuit of corporates in 2001 with the creation of member administered closed user groups (MA-CUGs), which allows companies to connect to SWIFT for commercial payments and collections, cash and liquidity management via a bank-operated and -sponsored CUG. Companies such as Eskom and Johnson & Johnson were early adopters of MA-CUGs. For these companies, MA-CUGs replaced the costly proprietary banking connections they maintained globally and enabled them to achieve greater visibility and control over their cash balances and payments.

In an effort to increase the visibility and velocity of cash moving through its systems, software giant Microsoft, which maintains 1,000 bank accounts with 100 banking partners globally, receives intraday and end-of-day transaction reports via SWIFTNet. We need to act quickly on our cash movements and balances, Barrie of Microsoft explains. If you cant see it, you cant measure it, and if you cant measure it, you cant manage it. Microsoft is currently connected to 14 of its banks via SWIFT and plans to extend that to 40 banks representing 95% of its total bank accounts.

Dirk Feisel, head of cash management and in-house banking at German consumer goods company Henkel, uses SWIFT for high- and low-value payments. It is currently live with one bank on SWIFTNet and hopes to roll out mass payments and account statements with another three banks on SWIFT. The information Henkel receives via SWIFTNet provides it with real-time visibility into its cash and transactions. SWIFT is known for its high security, says Feisel, alluding to the fact that SWIFTNet has never been compromised by outside attacks or system failures.

Yet connecting to SWIFT presents its own set of challenges and is not as simple as plug and play. Under the MA-CUG model, companies have to establish multiple CUGs to communicate with multiple banks, which can be time consuming and costly. Barrie also highlights the lack of standardization in terms of how banks populate SWIFT messaging standards and the time taken to establish service level agreements (SLAs). SLAs range in size from two pages to 144 pages, which can take up to six months to get internal legal approval, he says.

Not for the Faint-Hearted

In an effort to simplify SWIFT connectivity, in May last year SWIFTs board, which comprises large-volume user banks and regional representatives, voted unanimously to support the rollout of a new corporate access model, SCOREthe Standardized Corporate Environment. Instead of having to set up multiple MA-CUGs, SCORE allows corporates to join a single CUG to communicate with their banking partners. And in an effort to standardize messaging and SLAs, SCORE is administered by SWIFT.

SCORE requires true standardization in the way SWIFT messages are used, says Susan Feinberg, research director for wholesale banking at Boston-based research firm TowerGroup. The new model makes sure banks implement messaging standards in such a way that corporates dont come running and saying, Banks are using these messages in different ways. There are approximately 40 corporates using SCORE, although Feisel says that some banks are not ready for SCORE, which is disappointing.

SWIFT infrastructure is not for the faint-hearted, Feisel continues, explaining that Henkel did not want to build its own infrastructure for connecting to SWIFT in-house so it chose a third-party provider, often referred to as a SWIFT service bureau, which establishes and maintains SWIFT connectivity on a companys behalf. SWIFT service bureaus and member/concentrators (which also take care of SWIFT administration and the transformation of transactions into SWIFT messages) are helping make SWIFT connectivity easier for those companies that do not want to learn the SWIFT vocabulary.

The new realm of SWIFT corporate connectivity has also given rise to a cottage industry among banks, vendors and systems integrators. Leading cash management banks such as Citi and Deutsche Bank actively promote their expertise in the area of SWIFT corporate access as well as their support for the new SCORE model. And for those companies that complain about the need for tighter integration between ERP systems and SWIFTNet, vendors like SAP have announced solutions that provide the glue for integrating ERP systems with SWIFT.

Not everyone is convinced that the benefits of SWIFT connectivity outweigh the costs. Alex Harris, group treasurer at Virgin Atlantic airline, believes SWIFT connectivity is priced to appeal to the large Fortune 100 companies. Although Virgin Atlantic plans to implement SWIFT to reduce the number of proprietary banking platforms it works with, Harris said it initially perceived SWIFT connectivity to be costly and complex. He also has reservations about the new SCORE model, which is available only to companies listed on regulated exchanges in countries that are members of the Financial Action Task Force. SCORE favors large multinational companies that act like banks, says Harris. This means medium-size companies that are not public companies must continue to use the more cumbersome and time-consuming MA-CUG model. SWIFT is only viable for large corporates with deep pockets. The rest have no real choice in how to connect to SWIFT.

That fact is reflected in the numbers of users: Just 250 corporates are connected. Harris would like to see SCORE open to all corporates, but SWIFT has stated that it is interested in going after only the biggest 200 multinationals that are multi-banked.

There is also some resistance from banks to corporates joining SWIFT. As much as I would like to think that everybody is on board, and there is universal acceptance for corporates, that is not true, says Feinberg of TowerGroup. There are still some banks that are a little nervous. With only 220 out of SWIFTs 8,000 member banks offering SWIFT corporate access, and a much smaller number actively promoting it as a standard delivery channel, Feinberg sees a disconnect between the public and private views of SWIFT corporate access.

Some banks fear corporates will disintermediate them as they adopt a single interface for communicating with all their banks. SWIFT has tried to counter that perception by limiting its network to corporate-to-bank connectivity. Corporate-to-corporate connectivity via SWIFT is not permitted. During the opening plenary at Sibos in Boston, Yawar Shah, SWIFTs chairman, tried to reassure the banks that, despite its expanding remit, SWIFT is a communication entity and will not come between corporates and their banks.

Nevertheless, that does not discount the fact that SWIFT as a bank-owned entity is at an important crossroads. How far should it go in diversifying its user base in order to drive down unit costs, and how are its member banks likely to respond? SWIFT CEO Campos alluded to this when he asked banks in the audience at Sibos, How well [has the SWIFT community] adapted to the increasing diversification of our customer base? And lifting barriers to the use of SWIFT, are banks going to be happy about that? After all, SWIFT can move only as quickly as its member banks will allow it.

Anita Hawser