Tuesday, October 27, 2009

More corporates are joining SWIFT, but some warn it could become an inflexible "monolith"

As corporates, particularly those that are multibanked, spend considerable time and money trying to integrate their systems with the multitude of proprietary banking platforms that are out there, Eurofinance's organisers felt it pertinent to ask whether banks should have developed a common non-proprietary solution.

Unsurprisingly 75% of corporates surveyed at the Eurofinance conference in Copenhagen last week favoured a common banking platform, while just over 50% of banks favoured a collective solution.  The truth is that banks continue to see their proprietary treasury management platforms as a key differentiator and continue to invest millions in these platforms.

Two good examples of this is Citi with its recent announcement at Sibos in Hong Kong of its next gen treasury management platform, CitiDirect Banking Evolution, and Bank of America Merrill Lynch's CashPro Online. Bothleverage Web 2.0 technologies and aim to set the standard for other banks to follow when it comes to the next generation of treasury management applications.

Both banks invested substantial sums in these solutions, so corporates telling them that they would prefer a common solution across all banks is not what the banks really want to hear, although they maintain that these platforms are where they can truly differentiate their service offerings in terms of delivering value-added services and that they can collaborate in other areas such as standards, electronic bank account management and SWIFT connectivity for corporates.

Marilyn Spearing, managing director, global head of trade finance and cash management, corporates, Deutsche Bank, believes banks need to do a lot more on SWIFT if they want to ease the complexities for their corporate customers.

However, Catherine Bessant, president, Global Corporate Banking, Bank of America Merrill Lynch USA, does not believe SWIFT is the be all and end all and warned of the problems that can stem from creating "monoliths" that are inflexible, not that innovative and have too much power. "I am a fan of what SWIFT has done," but she says we should not presume that SWIFT is the best collective solution.

Spearing, who is on the board of SWIFT, leapt to the banking network's defence, saying that it it is not a monolith as it would only be used for messaging and connectivity amongst corporates.

Historically, however, connecting to SWIFT has been the preserve of large Fortune 500 companies that have the patience, financial wherewithal and inhouse IT infrastructure to support such a mammoth undertaking. Yet, more recently SWIFT has targeted smaller companies that do not have the transaction or messaging volumes of the larger players but still want the STP benefits of connecting to SWIFT with its "SWIFT-on-a-USB-stick" solution.

Cash may be king, but it won't all be plain sailing for transaction banks

"Payment systems did not slip up at any time during the [recent financial] crisis. Payment systems were resilient and strong." This is a common refrain you will hear from global transaction banks who appear to have absolved themselves of any responsibility for the financial crisis.

While it is true to say that the recent credit crunch and liquidity crisis did not stem from the transaction banking side of the business but from the more nefarious side of the business where mortgages  were bundled into complex securitiized products that were resold, global transaction banks cannot completely absolve themselves of any wrongdoing throughout the crisis.

The crisis may not have stemmed from the activities that underpin global transaction banking; namely faciliating cross-border payments, cash management and trade finance and the safekeeping of securities, to some extent; however the behaviour of transaction banks, which provide credit or financing to corporates and other banks based around the provision of other transactional services and processing capabilities, has been called into question throughout the crisis.

Corporate treasurers in particular appeared to have lost faith in their transaction banks, who have reduced credit lines or increased margins making it more expensive to obtain credit. At Eurofinance in Copenhagen last week, approximately 60% of corporates at one of the sessions said banks were not delivering acceptable lending terms. Unsurprisingly, 84% of bankers maintained that they had not used the crisis to unfairly set higher prices.

There appears to be a collective denial among most transaction banks, even those that have had to scale down their global ambitions in light of opting for a substantial chunk of taxpayers' money, when it comes to acknowledging that corporates have lost of faith in them as a result of their behaviour post-crisis.

Most transaction banks at Eurofinance were keen to point out that the infrastructure did not at any point fail throughout the crisis; payments continued to be made and processed. While corporates acknowledge this what they are alluding to is perhaps a breakdown in the relationship a lot of them have spent years building with some of their major transaction providers in Europe or the US.

And while corporates were eager to make banks more accountable with 58% of those companies surveyed at Eurofinance saying the G20 should be concerned about bankers’ bonuses, bankers did not see bonuses or even deposit protection as the real issue, despite the fact that during the height of the crisis there must have been quite a few treasurers worryingly scratching their heads worrying about substantial sums of money they may have deposited with a bank that was teetering on the brink of failure.

Marilyn Spearing, managing director, global head of trade finance and cash management, corporates, Deutsche Bank, said she worried about more regulation creating excess costs, which inevitably will be passed on to corporates. Yet, while the transaction banking business in general may escape the mightly flourish of the regulatory pen, corporates are going to demand greater levels of transparency and accountability from their transaction banks, particularly in terms of assessing counterparty risk based on CDS spreads and banks' Tier 1 capital ratios.

If cash is truly king as everyone keeps saying, corporates are also going to demand morereal-time information pertaining to payment flows into and out of accounts from their banks and the ability to track payments from initiation through to delivery into the receipient's bank account in real time. Those transaction banks that do not have the wherewithal to deliver these kinds of services are likely to find themselves at the bottom of the pile.

While transaction bankers may be smiling given that most of their businesses continued to deliver double digit percentage growth throughout the crisis, they cannot and should not rest on their laurels. There is still considerable work to be done to ease the concerns of corporate treasurers, who are going to find it easier to switch banking relationships in future given that more and more are communicating with multiple banks via SWIFT or SWIFT service bureaux and standards for automating Electronic Bank Account Management, which will reduce the time taken to open new bank accounts, become more widely implemented.