The story of SWIFT’s growing global coverage
Bank connectivity can be problematic for organizations, particularly when they have to deal with complex, bank-specific solutions that are labor-intensive, prone to operational issues and don’t always meet control and audit requirements.
In the past, SWIFT was always seen as an option for big corporates with bank relations in Europe and the US, but this is changing: we look at how SWIFT is becoming increasingly accessible to a broad range of smaller corporates.
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was established in the 1970s to create a common platform for exchanging financial messages and to define the message standards. Since then, SWIFT has become the backbone of the international banking system. Originally the services were offered to financial institutions only but, since 1998, corporates have been able to exchange treasury confirmation messages via the SWIFT network. The true adoption of the network took off following the introduction of the standard corporate environment, known as SCORE, where corporates use a standardized framework to interact with financial institutions.
Achieving treasury maturity
Many corporate treasuries are on a journey to centralize some or all of their functions. Zanders developed the Zanders Treasury & Risk Maturity Model to determine a corporate’s maturity level and to create a roadmap to grow to the level that the corporate wishes to achieve.
The maturity model covers organizational aspects, as well as processes and technology. We consider standardized bank connectivity as a requirement to achieve an enhanced (level 4) or optimized (level 5) state.
How does SWIFT fit in this strategy?
There is a strong correlation between the size and geographical footprint of a corporate and the number of banking partners that it uses. This can be due to wallet sizing, where the corporate wants to split the cash management business between a number of its core banks. It can also be due to geographical complexity which requires banks in certain regions and countries. Even corporates that fully standardized and centralized their accounts payable (A/P), accounts receivable (A/R), treasury and cash management functions still need to work with multiple banks.
The maintenance and administrative costs, the lack of control and lack of visibility of connecting to and working with multiple banking partners are key drivers for corporates to look for a single gateway to connect to their banks. Dealing with numerous banking relationships and local payment systems mean that corporate must use a wide range of file formats for payment instructions and, to a lesser extent, bank statements. To counter some of this complexity, SWIFT started the Common Global Initiative (CGI) in which banks, corporates and system vendors discuss and agree on country-specific standards for payment files, status messages and bank statements using the ISO20022 XML standard.
Today the vast majority of global and regional cash management banks accept this format, which reduced the complexity of payment formats. However, differences between banks, countries and payment methods still exist, which means that some corporates must still consider unique payment formats.
To achieve treasury maturity, corporates first review their organization and processes to identify opportunities for centralization. This is followed by reviewing the systems that support the treasury activities to evaluate how to integrate and optimize these systems.
Recent SWIFT figures show that 71 per cent of corporates on the SWIFT network exchange messages with five banking partners or more (see figure 1). Prior to using SWIFT, these banks connected through proprietary connections (host-tohost) or via an online platform. The implementation of SWIFT reduced the need to support these bankspecific connections.
The added value of the SWIFT network does not stop with the exchange of cash management-related messages. A very common scenario is the exchange of confirmation messages for FX and money market transactions via the MT300 and MT320 format.
More recently, the SWIFT network is also used as the integration platform for other applications. Messages related to electronic Bank Account Management (eBAM) and EMIR reporting can be exchanged via SWIFT.
It’s a clear trend that corporates today are looking for centralization and standardization. And this is exactly what SWIFT offers: a reliable, central gateway that is unmatched in terms of how many banks a corporate can connect with. In addition, SWIFT reduces the complexity of file formatting.
Historically, corporate SWIFT connectivity was established by large corporates with an international footprint. Today, more than 45 per cent of the Fortune 500 companies connect to SWIFT. But in recent years, smaller corporates adopted SWIFT through a number of new solutions.
Figure 2 shows that more corporates based in Asia-Pacific are now joining SWIFT because of the regional bank capabilities and the adoption of SWIFT for corporates by banks. Initially, the global cash management banks were the frontrunners to offer this service. Pushed by the Single Euro Payments Area (SEPA) initiative, local banks in Europe have followed. Recently, banks in the Asia- Pacific region also started to offer connectivity via SWIFT, which explains the larger uptake of corporates joining SWIFT in this region.
It has to be noted that the maturity of your banking partner in terms of SWIFT connectivity has a great impact on the lead time of implementing connectivity to this bank. We observe materially longer lead times with banks that are relatively new to the SWIFT arena. In some projects, it was even necessary for the corporate to guide and advise the bank on the implementation.
SWIFT connectivity options
When SWIFT opened up its network for corporates in the late 1990s, the only way for corporates to connect to SWIFT was by building and maintaining the SWIFT connection in-house. Given the technical complexity, strict security standards and audit requirements from SWIFT, this option was very expensive and only implemented by corporates with very high payment volumes and banking complexity.
Since the mid-2000s, SWIFT also allowed corporates to connect to SWIFT using dedicated SWIFT Service Bureaus. These bureaus host the actual connection to the SWIFT network, providing a cost-efficient connectivity solution. In recent years, these bureaus also offered additional services to corporates, such as payment file formatting, payment approval and monitoring, and sanction screening.
While it is true that the SWIFT service bureaus had a massive impact on the corporate uptake of SWIFT, this uptake was still heavily skewed towards the larger multinationals. This left a large group of corporates with significant banking complexity but no bank connectivity solution. To fill this gap SWIFT introduced Alliance Lite in 2008, quickly followed by Alliance Lite2 in 2012.
These are the different connectivity options, ranked by their complexity and total cost of ownership for an organization:
In-House – SAG
Swift Alliance Gateway is the standard connection that SWIFT has offered to corporates. It has been implemented by a limited number of corporates which are very large in terms of geographical scope and turnover. The set-up and maintenance of this option includes hosting hardware internally and requires the corporate to have very specific knowledge of SWIFT protocols. Today, SWIFT actively discourages corporates from using this infrastructure.
Outsourced – SSB
SWIFT Service Bureaus (SSB) remove the complexities of establishing the connection to the SWIFT network. SSBs certified by SWIFT manage the hardware and access configuration. The corporate establishes a connection to the SSB via a standard protocol that fits within the company’s capabilities. The larger SSBs offer additional services ranging from compliance filtering to a complete payment factory setup. Nowadays approximately 50% of all corporates access SWIFT through a SSB.
In-House – Alliance Lite2
Even though the SSBs greatly reduce the complexity of connecting to SWIFT, the total cost of ownership is still quite high. SWIFT introduced Alliance Lite2 to enable smaller corporates to connect to the network. SWIFT proprietary software, installed locally, in combination with a hard token, transfers messages to the SWIFT network. Since each transmission requires an approval, this option is not fit for corporates with high payment volumes/STP-rates.
Outsourced – Alliance Lite2 for Business
Applications (L2BA) Since 2012, SWIFT has offered Alliance Lite2 including business applications for treasury management systems, bank connectivity providers and in-house banking/payment factory providers. Even though this option is relatively new, it gained popularity very quickly. It reduces complexity for the corporate, and integrates the bank connectivity with the application that requires this connectivity. However, it is difficult to integrate different message flows and types through a single application because the bank connectivity is integrated in one specific business application. Similar to Alliance Lite2, L2BA doesn’t suit corporates with higher volumes that require high STP rates.
Figure 5 shows how the different connectivity options have been used across the SWIFT joiners since 2015. The relatively large share of Lite2 and L2BA fits with the trend of smaller corporates adopting SWIFT.
SWIFT is no longer the exclusive domain of banks and Fortune 500 companies. With global coverage of institutions supporting SWIFT and the availability of a standard describing local requirements, the SWIFT service will support further centralization and standardization of the treasury function.