Sibos Survey 2004: Leveraging SwiftNet Investment
Exception rates have not fallen in 2004, as they were predicted to do in 2003’s survey results. Respondents estimate that exceptions make up 5 per cent of FX transactions, 8 per cent of securities transactions, and 6 per cent of payments transactions; a bit higher than the 2003 estimate of 2-5 per cent of transactions. Survey respondents rank lack of automation of the transaction lifecycle as the largest contributor to the rise in exceptions, followed closely by lack of standards across the industry. Yet there is hope: an overarching trend in both the securities and payments markets is the focus of institutions, vendors, and industry cooperatives, such as Swift, on the development and promotion of standards across the industry. Additional contributors to the rise in exceptions are a lack of technology investment and lack of account data transparency to customers and correspondents.
Despite an increase in the number of exceptions, the cost of exceptions, as a percentage of trading profits, has fallen. In last year’s survey, respondents estimated that exceptions consume 18 per cent of trading profits – a percentage that has fallen to 15 per cent in 2004. This percentage is on target with the 2003 prediction that the cost of exceptions would decline in 2004.
So why are exceptions on the rise, but costing banks less?
In 2002, survey respondents felt that 50 per cent of institutions would have fully automated exception management processes in place by the end of 2004. Yet, half of this year’s survey respondents believe that only 30-40 per cent of institutions have fully automated their exception processing. And one quarter of respondents believe that 40-50 per cent of institutions have fully automated their processes.
Respondents rank management priorities as the largest contributor to the industry’s state of automation, followed by industry standards, the cost of automating processing, and lastly, by the availability of vendor solutions. This implies that automation solutions are out there, and they’re not viewed as particularly expensive, however institutions’ top management must have automation high on their list of priorities in order to make it happen.
Real-time information is a topic on everyone’s mind and was the major theme of Sibos in 2004. Respondents were asked about their use of real-time information, both now and in the future, and responses were consistent across all paradigms: approximately 30 per cent of respondents use real-time information now, and 60 per cent plan to use it in the future. The chart below shows how the industry currently uses or plans to use real-time information:
Swift has announced that 99 per cent of bank identifier code (BICs) and 99 per cent of Swift traffic have migrated to SwiftNet. And it is safe to say that over the last couple of years banks have made a significant investment in their SwiftNet infrastructure, the majority of institutions reporting a figure upwards of US$5m per institution. Now that the Swift FIN migrations have occurred, institutions are resetting their focus and are looking at ways to leverage their investments with a view to increase their service offerings and reduce cost.
Survey respondents were asked how they planned to leverage their investment in SwiftNet, and 64 per cent responded that they planned to add SwiftNet business solutions, such as cash reporting, securities reporting, investment funds, and exceptions & investigations, to offset the initial investment. Additionally, 30 per cent of respondents see the potential in new SwiftNet services turning a traditional cost centre into a profit centre, as they plan to offer SwiftNet access or services to third parties.
We then asked survey respondents to indicate which services or initiatives over SwiftNet are most important to their business: FileAct and real-time cash reporting ranked first on the list. Additional services and initiatives of mention are exceptions & investigations, corporate client connectivity (member-administered closed-user groups, or MA-CUGs), EBA STEP2, and FIX over SwiftNet are ranked next, with an average 20 per cent of respondents voting them as important.
An overwhelming majority of respondents intend to extend their SwiftNet services beyond FIN, chiefly by adding FileAct to their services portfolio. And 66 per cent of respondents ranked FileAct as important or very important. In fact, 58 per cent intend to actually implement FileAct-related projects. This information is well in line with Swift’s own figures, which show 30 per cent increase in the number of registered FileAct users over the last three months alone. This trend may signal the move of the industry from the current pilot approach, to a production approach, where emphasis is put on robustness, scalability, flexible functionality, and operational needs rather then on merely exchanging a few files with a handful of correspondents. The bulk issuance of securities reporting data by way of Swift MT535 and MT536 messages, the reporting of investment funds through net asset value reports, and the transmission of cheque images in the payments investigations process are just some examples of processes that can benefit from the implementation of FileAct solutions.
A close second to FileAct is the importance assigned to real-time cash reporting: 46 per cent of respondents ranked it as among the most important SwiftNet initiatives. As a key theme at this year’s Sibos, real-time cash reporting is high on everyone’s list. But initial uptake in real-time reporting has been slow and has taken a number of years to establish itself as a mainstream agenda item. Instead, the industry has focused energies on migrating FIN to SwiftNet, on gaining acceptance of a common message standard, and on having vendor solutions that can process items in real-time. Now that supplementary SwiftNet business solutions such as Exceptions & Investigations require real-time information, the value proposition of Real-time Cash Reporting has been extended.
The ability to exchange account information with correspondents in real-time will improve data transparency and enable institutions to detect exceptions very early in the transaction lifecycle… a key requirement in effective exception management and the latest initiative for Swift. And the major players are following suit. Swift reports that over 32 BICs are providers of real-time cash reporting and 43 BICs are users of real-time cash reporting. As a single institution may have multiple BICs, data shows that over 15 banks are implementing or using real-time reporting for liquidity management, and over 40 banks have set up MA-CUGs, a platform on which they could offer the service to their corporate customers in a bank-owned cash management scenario.
Maximizing automation in the securities industry continues to be an extremely important goal. A quarter of respondents are already using FIX, with another quarter planning to implement in the next couple of years. Key to the use of FIX is the ability to match with external counterparties and reconcile internally, and over 30 per cent of respondents are currently planning their matching and reconciliation strategy for FIX. But with the FIX over SwiftNet service garnering a vote of importance from 20 per cent of respondents, perhaps more firms will start to take up the protocol if it leverages the investment they’ve already made.
As securities firms look to rationalize their post-execution services in light of SWIFTNet, respondents agree that Omgeo CTM will become the method of choice for cross-border confirmations processing. Respondents also lend credence to the fact that securities firms who do not increase their levels of STP will become uncompetitive, yet most have not yet made the investment in technology. This is a direct reflection of the exception rate that respondents assigned to securities transactions – the highest exception rate of all transaction types.
2004 marked a serious investment for financial services institutions as they implemented the SwiftNet architecture and migrated FIN-based messages. Based on the results of this survey, it is clear that 2005 will show major institutions looking to leverage the investment they made in SwiftNet – and most plan to do so by adding SwiftNet services, and for some, offering those services to third parties. The survey responses show that exception rates are perceived to be rising, but are costing firms less in terms of trading profits; that the uptake of Real-time Cash Reporting has finally hit; that most financial institutions place significant value in FileAct solutions; and that less than half of financial institutions are making the most of the FIX protocol. The survey also shows that there are SwiftNet services that meet each of these conclusions. It will be interesting to see how firms will leverage their SwiftNet investment and which solutions will actually implemented in the year to come.