Time for Banks to get Off the Fence and Embrace Standards
Real-time provision of payment status information is one of the most important facilities that a bank must offer to its clients. This is not a new idea as many banks have been running such proprietary services for years. The competitive pressure on a bank to provide real-time information has been demonstrated more recently by the significant number that have committed to either the SWIFT Cash Reporting or Cable and Wireless’ Real-Time Nostro services in the past year or so. However, so far there are significantly fewer participants representing the account holding customers otherwise known as users. This is partly due to the fact that Users unlike Providers actually pay to operate the service but this is clearly not the only obstacle they face. The success of these initiatives now depends on being able to convince skeptical users of the benefits of getting down from the fence and implementing a real-time standard service.
Clearly for any new service that requires the exchange of information it is necessary to get the suppliers on side first. This is what both C&W and SWIFT quite rightly have concentrated on first. In this case the chicken does need to come before the egg. The eggs have now hatched but the chicks or user banks seem a bit reluctant to feed. The assumption that once the information was available users would immediately join the club is proving to be a little naïve. Why?
The desperate need for new standards in nostro account information has been known for years. The current ubiquitous standard statement in the form of SWIFT’s MT940 or MT950 message is almost embarrassingly out-of-date. They were developed in a time when IT costs were counted by each character of information and processing systems were only capable of churning them out in an overnight batch process. They provide only minimal information on any individual transaction and only show entries post Value Date. As a result they are a pretty useless basis for any form of accurate position keeping or liquidity management. The intra-day hybrid SWIFT messages failed to plug this gap as they contain little more useful information and have not been universally adopted.
Cash Management today is evolving rapidly and definitely needs a change in infrastructure. Real-time gross settlement systems have done this domestically. Proprietary real-time links between a bank and its customers are commonplace. This factor, although not always spoken about, is certainly muddying the waters. Banks have invested significantly in their own network services and in establishing relationships with their clients. Their clients on the other hand want to have the choice to switch their accounts or payments to gain lower fees or at least have a stronger bargaining position with their current provider. Having automated links with specific systems means that this is simply not possible.
Some banks do not want to surrender this investment by switching to a standard service unless there is a strong compulsion to do so. This reticence however is misplaced. Proprietary networks are a tie-in but longer-term there is a clear overall benefit in replacing these with a standard service. Ultimately, in any market, it is the personal relationship and quality of service that is the key differentiator. Enforced tie-ins only lead to lax service and customer resentment. The banks pioneering the new service have realized this and will therefore benefit from improved market recognition. In a bazaar everyone knows to shop around to get the best price. This is what a standard network would offer. No wonder there is some ambivalence on the part of banks! However, it is the relationship itself that in the end often becomes the main distinguishing factor. After some initial shopping around regulars to the bazaar will normally stick to the vendor they trust and know the best and maybe only occasionally test the water elsewhere. Stallholders generally know this and usually do realize that maintaining the relationship long-term outweighs any desire to exploit it in the short-term.
Clearly a standard service facilitates maximum choice in supplier. So what are the other benefits that could possibly justify switching to a real-time framework? First, a word of caution. The term real-time is in danger of becoming misconstrued if not abused and already means different things to different people. Even avoiding the technical debate of what is the maximum time lag that can be labeled ‘real-time’ there is undoubtedly some cynicism that this highly subjective term generates.
Only a small percentage of payments in wholesale financial markets need to be made in real-time. However, real-time payment status information is essential in order to offer payment certainty and reduce the time taken to reconcile errors upon which accurate cash management decisions can be based. Identifying payment exceptions on the day they occur makes it far easier to resolve them quickly and reduce the overall processing cost for them. 90 per cent of the world’s fund transfers are for amounts of $50,000 or less and it is a standard real-time framework that can clearly most efficiently manage the information trail for these payments. As well as enabling better cash flow this will also shorten the amount of time an organization needs to allocate credit.
For providers of real-time information the process is simple, in theory at least. As soon as there is any movement or change in an account they only have to spit out the details to the correct destination and be done with it. However, no user would be attracted to the idea of being constantly bombarded with every new piece of information, no matter how small, from all directions. The value to them lies not directly in the real-time nature but in the fact that whenever they need to know their position, such as just before currency cut-off times, they can be certain that the figures presented, based upon any number of sources, are both accurate and contemporous. A Gartner survey calculated that today at least 75% of the cash management function is spent collecting and collating data and only a quarter of treasurers believe their cash forecasts to be accurate. Using suitable software users of either service can confidently buck the trend and for example manage collateral to pre-arranged credit or overdraft limits more effectively.
Further benefits are made possible through the mandatory presence of an irrevocability indicator on every trade. Again suitable solutions can use this to automate reconciliation pre-settlement and immediately update dealing solutions. Treasuries are thus able to conduct additional transactions within existing counterparty and currency limits that would have otherwise been prohibited.
Whichever route or mechanism is chosen the advantages of knowing a liquidity position with minimal effort and maximum confidence are clear. The real-time aspect may be a bit of a red herring but a standard service is certainly not. Without a unified platform it becomes more difficult for solution providers to offer something that covers all the options and hence make it obvious to get off the fence.