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Bank connectivity – why it is not a one-size-fits-all issue
04-05-2021 | Luca Crivellari | treasuryXL |
Corporate to bank communication is still a very pressing issue in cash management. There are several alternatives that allow corporates to interface and exchange data with banks, and most of the times it is complex for treasurers to identify the best choice. The consequence of not adopting the best setup might be to receive inadequate or old information, or the inability to have the right level of control over the issue of payments. The aim of the article is to assist treasurers in identifying all the relevant variables, and to take a decision that factors in all the possible impacts of each alternative.
Introduction – Why bank connectivity is still a hot topic?
In 1973, over 200 banks from 15 countries created a cooperative body with the aim of easing the communication among banks. This organization was born under the name of SWIFT, the Society for Worldwide Interbank Financial Telecommunication.
SWIFT enables its customers to automate and standardize the processing of financial transactions, thereby lowering costs, reducing operational risk and eliminating inefficiencies from their operations.
The rise in global trade was the main reason why financial institutions were pressed by defining a common standard for international payments and reporting, and the aim was to avoid lengthy conversions, useless charges and operational inefficiencies that might derive from the use of different standards.
Fast forward to today, SWIFT is the undisputed backbone of financial markets, with over 11,000 financial institutions and corporations in more than 200 countries, processing a record of 46,3 million messages in a single day on the FIN service. SWIFT messages are nowadays used for both bank-to-bank and corporate-to-bank communication, and the organization has developed dedicated categories for messages that are related to payments, cash management, foreign exchange, trade finance, treasury markets, and securities.
Overtime, several other organizations with a similar aim were created, at national or international level. It is worth to mention the CBI (Customer to Business Interaction, former Corporate Banking Interbancario) consortium in Italy, and the EBICS (Electronic Banking Internet Communication Standard) protocol in Germany.
We still live in a world of different standards and practices, where corporates often struggle in navigating among the different options they have when it comes to issue a payment or to receive a piece of account statement. This article is meant to be a guide for corporate treasurers on how to select the right connectivity setup, because there is no such a thing as a universal optimum, and every alternative has its own advantages and its own shortcomings.
From the experience I gathered during the last years of conversations with several corporates based throughout Europe, one of their most relevant priorities is to consolidate an accurate picture of the liquidity available in the company bank accounts, on a daily basis. Too many organizations, including some with a relevant experience in international business and with a very important turnover, are still relying on Excel files shared on a monthly basis, in order to get the information of the balance that is sitting in a certain bank. In a world where business is changing rapidly, this can be an issue.
Moreover, the ever-changing technology landscape is adding complexity to the issue. New trends as the API-based connectivity can definitely allow a more efficient exchange of information, shortening the gap to a real time treasury, while the migration from MT to MX messaging standard is going to heavily impact how payments are going to be settled in the near future.
In conclusion, bank connectivity is still a hot topic because it is yet perceived as being a complicated issue by many corporates, and there is a clear need for treasurers to figure out all the relevant variables before choosing the most valid option for their company.
The alternatives on the market
Years of innovation and progress in information technology and financial markets have developed a wide array of possible bank connectivity services. In order for a treasurer to take the most educated choice, it is essential to list and examine all the options available. The list goes from the simplest to the most complex.
Additional features that an e-banking platform might have are, for example, the possibility to manage direct debit mandates, or to place FX dealing orders to the bank.
Most of the e-banking solution in the market are endowed with a scheduler function that allows to exchange files with external systems such as the Enterprise Resource Provider or the Treasury Management System.
Companies that are relying on an e-banking platform for bank communications should carefully examine the range of functionalities that are included in the solution, when looking for a bank to work with. Corporate e-banking platforms developed by international banks might be more adequate for companies with international business, while domestic banks might develop functionalities that are more fit to the domestic market.
Another variable to consider is the technology that runs behind the platform. Most banks are nowadays offering web-based solutions that are more flexible and easier to maintain than hosted solutions.
The main advantage of relying on e-banking connectivity is the fact that it requires virtually no effort for the channel to be available, especially if it is a web-based service.
Although it is a very practical solution, companies that have multiple banking relationship will need to activate multiple e-banking platform to issue transactions from these bank accounts. Another shortcoming is that the availability and the security of each e-banking platform relies on the systems of the bank who is providing the service, and this can be a potential risk if the financial institution is not disciplined enough to run a highly secure infrastructure.
This possibility is often developed by multinational banking groups, that might allow to reach bank accounts within the same banking group via a single e-banking solution.
Alternatively, some banking communities have developed country-wide standards that allow the possibility to manage all the bank accounts that a company has in the country with a single e-banking channel. This is the case of Italy with the CBI service.
Technical advantages and disadvantages of this solution are essentially the same of the e-banking connectivity that was described in the previous point.
It is important to bear in mind that a dedicated host to host connection can be a resource intensive solution to maintain, therefore it is key to agree with the partner bank who is responsible in the maintenance of the service, and which is the minimum uptime contractually agreed.
Having a host to host connection with a specific bank means that the company is clearly trusting the security protocol of the financial institution. Connections of this kind are normally secured by an encryption protocol, and this makes a host-to-host connection generally more secure than an e-banking connection.
Being part of the SWIFT network means for a company to be identified with a specific SWIFT code, the same identifier that is normally used by banks.
It also means that a company can securely exchange files with several banking partners from a single channel, and for this reason a SWIFT connection is the preferred option for companies that have implemented a central payment factory.
Two separate services are used within the SWIFT network: the FIN service is used to exchange single MT messages to banks connected to the network. This service is normally used to receive account statements such as MT940/2.
The second service used is called FileAct, and it is the service used to exchange any kind of file to banks. This service is mostly used for bulk payment files such as XML.
Joining the SWIFT network as a mean to consolidate payment operations in the company headquarter or in a shared service center can definitely bring efficiencies, but at the same time it makes sense to go through this road only if the company has the necessary resources to maintain a SWIFT connection overtime, or if it is willing to outsource the maintenance of the connection to a service bureau.
Although it is a very interesting concept, most of the players in the financial industry still have to develop an adequate IT infrastructure in order to get the benefits of this new protocol.
An important role can be played by software vendors that are offering Enterprise Resource Providers or Treasury Management Systems, since they have a strong incentive to differentiate their offer by develop APIs that would connect their solution to the largest possible number of banks.
Who should manage your SWIFT connection, and why should it be FIS?
Every company that wishes to connect to the SWIFT network should ask itself which configuration is the best for them. The main question to consider for a company is if it has the adequate resources to manage and run a SWIFT connection, or if they want to leverage on a service bureau.
Companies that wish to setup and maintain their SWIFT connection should plan the IT resources required to host the SWIFT software, and the personnel that will be dedicated to fulfill all the functional and technical duties required by SWIFT or by the banks.
Because of the effort that is required to setup and maintain a SWIFT connection, a company might decide to outsource those tasks. A SWIFT service bureau can help companies to establish and ensure the availability of the SWIFT network overtime.
Via the Managed Bank Connectivity service, FIS offers its capabilities as one of the largest SWIFT service bureaus in the world, being a key partner for more than 350 groups of banks and corporates, spread in over 35 countries. As part of the Service Level Agreement that FIS has with its clients, service availability is set for a minimum of 99,5%, although the average uptime for 2020 was 99,99%.
Companies that choose to leverage on a service bureau are either those with a very limited staff within the treasury department, or those that have a very complex cash management infrastructure.
The cost of connecting to the SWIFT network via a service bureau can be quite relevant, therefore companies that are evaluating this kind of solution should create a comprehensive and accurate business case that includes both direct and indirect expenses for both alternatives.
Which variables should be considered?
A company should consider several variables when evaluating which is the most adequate connectivity setup.
Whatever process should the company have in place, it should anyway explore a way to consolidate the account statements of all the subsidiary at headquarter level, in order for the holding company to have complete information on the liquidity situation at group level, and to make sure that liquidity is used in the best possible way.
How to choose the best connectivity solution?
If there is one thing that I have learned by talking to corporate treasurers overtime, it is that no treasury is alike, and every treasury has its own peculiarities.
Given the vast array of bank connectivity options, I will define a few examples of treasury infrastructure, and I will pair them to my recommended choice of connectivity.
Case
Recommended solution
Company Alfa
Alfa has two bank accounts, with two English cooperative banks.
Company Beta
The group has relationships with around 30 banks, counting more than 600 bank accounts.
Given the large number of bank relationship, my advice would be to setup a SWIFT connection.
Company Gamma
Payments are quite limited in number.
By having one main bank, Gamma will easily orchestrate a cash pooling from its headquarter, and it will be easy for the group treasurer to control the payments that are performed by the local staff.
The most efficient connectivity scenario is a host-to-host connection (or a connection via API if available), with the main banking partner, while payments from minor bank accounts will be done via the e-banking.
Company Delta
The company needs to offer the widest range of payment options, therefore it needs to have relevant banking relationships in many countries.
Given the very complex cash management setup and the large number of banks involved, it will be essential to have the infrastructure served by a service bureau.
Company Epsilon
The company needs to maintain a wide range of banking relationship due to the complex financing plans in place.
The treasury department employs a single person, and there is no plan for the company to hire more treasury staff.
As highlighted in the box, it would be extremely hard for a single person to handle the requirements coming from SWIFT and the banks, therefore my suggestion is to adopt a Service Bureau
Conclusion – a complex matter requires a complex answer
As I do with most of the complex questions I receive, when asked which is the ideal connectivity setup for my company, my natural answer is: “it depends”.
The aim of this article was to communicate how sophisticated it can be to identify the best possible way to connect a corporate to a bank, or to several banks. My wish is for every treasurer out there to carefully balance all the options, and to include all the relevant items into a specific business case, in order to have a functioning and sustainable infrastructure.
More about the author, who is Luca Crivellari?
Thank you for reading!
ECB and a Digital euro: positive consultation results
03-05-2021 | Carlo de Meijer | treasuryXL
Last year I wrote a blog on the ECB plans to investigate if one should introduce a Digital euro. They announced to launch a public consultation on the desirability of such a central bank digital currency for the euro zone.
Now we are a half year later and in a comprehensive analysis of the results of this consultation the ECB published the findings of this inquiry that mirrored a rather positive attitude. The report thereby provides important input into the ECB’s analytical and experimental work and into the upcoming decision of the Governing Council on whether (or not) to launch a formal investigation phase in view of the possible issuance of a digital euro as a payment instrument. So nothing has been decided so far!
Why a digital euro?
In that same blog I mentioned the various reasons why central banks all over the world, including the ECB, are investigating the need and viability of central bank digital currencies (CBDCs). Such as the further digitalisation in the payments world and the continued trend towards a more cashless society. And China’s advancements with their own digital Yuan and the fear that it would become a dominant currency eroding other international used currencies like the dollar and the euro. But also Facebook’s plan to launch its stable coin named Diem that could be used globally and the big interest of private people and companies to invest in cryptocurrencies such as Bitcoin and Ether with the danger of crowding out fiat currencies.
According to the ECB these developments may undermine central bank’s control over monetary policy and endanger financial and monetary stability in the EU. So in fact the launch of a Digital euro is increasingly becoming a strategic issue for Europe. EU members like France but also the Netherlands have recently begun experimenting with a Digital euro. But any decision would require intensive cooperation between member states.
ECB Digital euro consultation
The ECB recently released its report on the consultation on a digital euro. The consultation that was launched in October last year, received over 8200 responses. The large majority of respondents were private citizens (94%), of which mostly men between 35 and 54 years old, while the other participants were professionals, including banks, payment service providers, merchants and tech companies. Most responses came from Germany (47%), Italy (15%) and France (11%).
Main findings
The consultation report shows that Europe’s citizens are in favour of a digital euro, but under a number of conditions.
The results show that citizens as well as professionals (esp. merchants and other companies) are in favour of such a development, provided that the Digital euro respects privacy (43%) and confidentiality of transactions and that it is sufficiently secure (18%) to prevent fraud. They also support requirements to avoid illicit activities with fewer than one in ten responses from members of the public showing support for full anonymity.
According to the document, two in five respondents thought that “Digital euro transactions should be visible to either intermediaries or the central bank, which would effectively allow the application of anti-money laundering and combating the financing of terrorism (AML/CFT) requirements.” Additionally, one out of ten respondents believes that transfers under a certain threshold should remain private.
The respondents also want a Digital euro that is easy to use, without additional costs (9%), and that allows for fast and reliable payments via payment cards and iPhones (8%).
More than two-thirds acknowledge the importance of intermediaries providing innovative services that allow access to a digital euro and indicate that it should be integrated into existing banking and payment systems. They would like additional services provided on top of basic digital euro payments.
Around a quarter of the respondents take the view that a Digital euro should make cross-border payment faster and cheaper. They also want to be able to use the digital euro outside the Eurozone, though with limits.
Next steps
The feedback is now to be communicated to the European Parliament as well as the Commission and the Council. And it is up to the Euro system – which includes the ECB and central banks of countries that have adopted the euro – to decide whether the project should be launched.
Following the findings of the consultation, the ECB is set to take a decision on starting formal investigation on a Digital euro on whether to commence central bank digital currency trials by the middle of 2021, before a further six months to one year practical trial of the technology.
And if this decision will be a positive and the green light is given, the Digital euro, a complement (not a replacement) to banknotes and coins, could see the light of day in four years from now, according to ECB president Lagarde. She indicated it may be 2025 before any digital currency would be ready.
The ultimate design of the digital euro lies with the ECB that will take the public consultation into consideration and look into various possibilities, including use of distributed ledger, definition of spending limits, use of a device for transfers and payments, online/offline capabilities, or availability of cross-border transactions outside Europe.
The Dutch positive stands towards the Digital euro
In narrow cooperation with the ECB and the other national banks in the Eurozone, the DNB is also exploring the possibility of issuing a Digital euro in addition to euro banknotes and coins.
In a recently published report, the Dutch Central Bank said it was ‘ready to play a leading role’ with research and development into its own digital currency as well as a Europe-wide digital currency. The Netherlands would be a suitable testing ground, according to the report, being well placed to develop and trial a Digital euro. The Netherlands is the country where the move out of cash is the largest in Europe. Nearly two thirds of all payments in the country are digital.
The main findings of the report
In this report the DNB researched the satisfaction with the current payment system and the willingness to hold a Digital euro account among a representative group of Dutch citizens. The findings are broadly in line with those of the ECBs public consultation.
While citizens are very satisfied with the current payment options, half of the Dutch population would be interested in opening a current account for Digital euros, an electronic form of central bank money that is available for all citizens and businesses – similar to banknotes and coins, but exclusively in digital form. Relating top the amount they would be willing to deposit into a digital euro account, most of the, opted for €101-500.
Main condition is that privacy is well protected, security features should be adequately safeguarded if people want to open such an account and the risk of theft and fraud of their assets is minimized.
Familiarity with the concept of a Digital euro increases people’s willingness to use it as a means of payment. Almost half of Dutch citizens are familiar with the concept, although most people indicated they did not knew exactly what it entails. 53% said they had never heard of it, 33%had heard about it but do not know what it means while 13% knows exactly what it means.
The most frequently cited reason why the Dutch public believe a Digital euro would be useful and could be a reliable complement to cash and existing electronic payment instruments, is that central banks, unlike commercial banks, do not operate on a for-profit base.
Balancing act
While earlier discussions on CBDC were mostly academic, the focus has increasingly turned to the technical aspects and financial and monetary issues. The ECB received many technical suggestions from the respondents. According to a quarter of individual respondents, end-user solutions comprising (smart) cards or a secure element in smartphones would be preferred to facilitate cash-like features. Building a Digital euro for retail payments may require an infrastructure that is interoperable with existing point of sale terminals or with digital platforms
What may it bring?
A Digital euro could bring many benefits to the population as it would grant greater usability, speed and safer payments transactions while it could leverage technology. It could also enhance digital inclusion, facilitate monetary policy implementation, and help protect against frauds and thefts. Being issued by the ECB and supposed to be not more expensive than the use of cash, it would be a cost-efficient payment solution for individuals and businesses with limited interchange fees, if any.
What about the future of commercial banks?
A digital euro however could pose a number of problems in a number of areas. These should be attention points in the further discussion that should be addressed before the release of the Digital euro to ensure the stability of the financial and monetary system.
First of all for banks, what will be there future? What about the already identifying competition by fin techs and big techs using crypto currencies?
Lagarde raised that certain intermediaries – that is, banks – are apprehensive about what the issuance of this Digital euro may mean for them, noting that they should not be concerned.
But in an increasingly digitised world banks may increasingly have to ask themselves how they may serve their customers’ future needs and how they can distinct themselves from their competitors.
And what about financial and monetary stability?
And how to avoid in times of financial crisis that a digital euro will “blow a hole” in commercial bank’s balance sheet. Especially in the event that savers would massively transform their deposits in banks into central bank money, in case of economic or financial crisis. This bank run could increase the cost of financing for banks, and in turn the interest rates on bank loans.
Almost half of the respondents of the ECB Consultation mention a need for holding limits, tired remuneration, penalty rates to excess balances or a combination of the two, to manage/control the amount of digital euro in circulation and prevent a massive flight to digital euros in times of a financial crisis. A similar share of professional respondents agree.
Competition or cooperation?
Another issue is: will CBDCs trigger competition between central banks or cooperation? With the exception of China, most central banks are looking for (some sort of) cooperation. Under the auspices of the Bank for International Settlements (BIS), the ECB is part of a core group of central banks including the Bank of Canada, Riksbank, the Bank of Japan, the Swiss National Bank, Bank of England (BoE) and the Fed, who are jointly exploring CBDC.
The way forward
The topic of a Digital euro has gained much more public attention in the Netherlands and that is not strange as a much higher proportion of their payments is digital compared to other countries in the Eurozone. But for a Digital euro to get more footing in Europe, what is required is a more in-depth policy debate to be held more broadly across the euro area. This given that it is the Euro system that will decide on the potential introduction of a Digital euro.
If the decision should be taken within the Euro system to experiment with some more concrete type of digital euro the Netherlands said it is ready to play a leading role!
Carlo de Meijer
Economist and researcher
Source
Choosing the right international business payments provider: what should you check for?
29-04-2020 | treasuryXL | XE |
Once you’ve ascertained what you need from a provider, the next step is shopping around to select the best provider for your business.
Working with a foreign exchange (FX) specialist can greatly help your business to navigate the currency markets and protect your bottom line from potential market volatility. However, not all providers are the same because not all businesses are the same. Each business has its own currency needs and risk exposures dependent on its size, operations, and planned payments.
We recently offered a guide on understanding what you need from an international payments provider. We encouraged you to consider:
Overhead visibility of your FX requirements
How you prefer to conduct business
The simplicity (or complexity) or your FX requirements
The payments your business makes or will make.
All of these factors can greatly impact what you’ll need from an FX provider to suit your business.
Once you’ve ascertained what you need from a provider, the next step is shopping around to select the best provider for you. In addition to considering whether they can meet your needs, be discerning about each provider and whether they should be trusted with your business’s international payments.
Do your due dilligence
As with any financial services company, do your research and use your best judgment. If something feels off, it very well could be. If the rate looks too good to be true, it probably is. There are some other questions that you should ask yourself as you research each provider:
Are they registered? Companies that provide money transfer services in the UK, for example, have to be registered with the Financial Conduct Authority (FCA). You can check which ones are authorised on their site. If you deal with a firm that is authorised or regulated by the FCA, you will be covered by the Financial Ombudsman Service if something goes wrong. Confirm that the provider is registered with your country’s authority.
Are they authorised? Larger companies are called an “authorised payment institution” while smaller ones are listed as “small payment institutions”. All authorised payment institutions must meet obligations that include providing certain information to customers before they commit to using the service. This includes whether they safeguard client money, what exchange rate they will provide and whether there will be any additional charges, how the transaction will be carried out, how long the money will take to arrive, how long they will take to correct a transaction in the event of a mistake and your rights to cancel a transaction.
How does their site look? You can also take a look at the company website to see if there are any additional security measures in place. Looking at their site will also give you a quick snapshot of the business. If their site is outdated or poorly-run, it could reflect poorly on their business practices.
Can you call? Sometimes, the quickest way to get a feel for a provider is to speak with them directly. Giving the company a quick call is another way to check you are comfortable trusting them with your money and to get answers to any questions you might still have about their service. This call will also give you an idea of whether you would be able to speak to someone if you do encounter any issues with your transfer.
What should you check before deciding which provider to use?
How strong is the company’s balance sheet? If they don’t have full accounts on their website, you can check at Companies House. Xe, for example, is owned by NASDAQ-listed global payments processing company Euronet Worldwide Inc.
How big are they and how long have they been in business? A large, established company with experience in the markets will likely be better-equipped. At Xe, we’ve been in the business for almost 30 years now with offices around the world to serve our customers.
How good is their payment processing? Are they audited by reputable auditors? Can they send payments quickly and securely?
How many other businesses trust them with their international payments needs? Judge them by the company they keep. Do they work with any other reputable businesses? Do they have experience working with businesses like yours? Xe for example, serves over 13,000 businesses of all sizes across 100 industry sectors.
What online security measures do they have in place to keep your funds safe? Look out for well-known online security ‘trust marks’ such as Norton online security. For example, if the site URL begins with “https”, that makes it a secure site. A URL beginning with “http” is a warning sign of an insecure site, which you should not give your sensitive information to.
What should your business know about Xe?
At Xe, we know the currency markets. With nearly 30 years in the business, we are the world’s trusted authority with the knowledge and experience to help businesses navigate the currency business and their international payments. Today, over 13,000 businesses across 100 industry sectors look to Xe for:
Fast, secure and simple international payments
Tools and solutions to manage their currency needs
Expert FX risk management guidance
Get in touch with XE.com
About XE.com
XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.
Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.
Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.
Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.
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