SWIFT Connectivity - Expanding the Options for SMEs
Just as the humble VCR and CRT (cathode-ray tube) televisions become the latest technology victims, with high street shops steadily withdrawing them from the shelves, technology has changed dramatically, but not always to the point where it can be discarded. Digital radio, satellite navigation and MP3 players have been the latest ‘must haves’, but technology for technology’s sake does not always bring efficiency or savings.
Pundits in the IT industry have long predicted that the 21st century would herald the paperless office, however, the use of paper is actually increasing according to paper suppliers. One may recall the story of the great film mogul, Sam Goldwyn, at his Hollywood office. When asked by his secretary if she could destroy files that were over 10 years old to make space, he replied, “Yes, but keep copies”.
Electronic document management handling all messaging (including fax and telex) is becoming more important as MiFID (the Markets in Financial Instruments Directive), with stringent regulation and compliance, comes into effect in the securities industry. More innovative data storage and retrieval will need to be factored into costs of doing business, and progressive methods to manage the channels of communication will need to be employed.
It was predicted that the prolific growth in e-mail would consign telex and fax machines to the scrap heap as a new electronic standard approach swept through the industry. This has not happened yet.
In the finance industry is it not the case that we all speak the same language? Use the same definitions? Use common message formats? Employ the latest, fastest, smartest technologies? Automate all connections with all our counterparties? Unfortunately not.
Many larger financial institutions bask in the knowledge that they have invested significantly in technology infrastructures to enable them to handle all eventualities of volume regulation and compliance. However, less agile smaller companies are at a critical point in deciding how to tackle the standardisation of communication, management of new IT processes and ever growing costs.
For cost efficiency and benefit to the industry, one only has to look at the tremendous growth of structured messaging and resulting reduction of unit costs within the SWIFT franchise over the years (evidenced by the SWIFT board granting a 7 per cent rebate for 2005 traffic).
However, while global take-up continues to grow, some regions have reached saturation point and are purposefully reviewing their total costs of ownership and cheaper connectivity methods.
While the custodians of SWIFT governance (namely the board of directors) continually review the changing dynamics of the community, they must also set aside their unique institution’s short term agendas, needs and desires.
By re-embracing that fundamental, co-operative democratic spirit to ensure that traditional barriers to entry are cast aside, the markets would experience growth in membership, and end-point connectivity.
The outer reaches of the industry could bid a fond farewell to the multiplicity of outmoded expensive message delivery platforms, manual processes and ever present creeping ownership costs, as SWIFT usage across the range of FIN messaging, file formats, browsing and access to interactive services becomes standard and all pervasive. But spare a thought for the smaller, lean niche player in the securities industry not served by SWIFT today.
A recent Financial Times article by Kate Burgess referred to a survey of more that 70 UK hedge funds and noted that ‘as the investor profile changes, hedge funds themselves become more institutionalised, spending more money on IT, compliance and trading platforms to meet demands from institutional investors for more risk-managements infrastructure’.
For new entrants into the market, there would typically be low message volumes, limited budgets and IT skills. For these smaller players SWIFT is likened to an elite, expensive, monopolistic golf club. No apologies necessary as the success of SWIFT has been proved in terms of numbers of participants and more than 11 million messages handled per day. However, the various (and growing) categories of membership may still restrict the type of companies which can join directly, and for the un-initiated, you need to be prepared to invest significantly before hitting that first ball on the first tee.
Using the golf club analogy, from the membership process, through buying the right shoes, clothes, clubs, tees, lessons, and proving you are ready to play, you will eventually get to the point where you take that first stroke, and pay for the privilege. Indeed, green fees are payable for each round – no free shots here.
Regarding ongoing costs, while the transaction fee for a single SWIFT message (domestic 6.98 euro cents) is low, the actual cost for a new user, based on membership fees and owning a SWIFT interface for FIN messaging only, with a file transfer based mainframe connection for 20 messages per day will cost tens of euro per message.
What cost-effective connectivity options are available for the smaller player? The introduction of low-cost SWIFT connectivity may have a real impact on empowering all the players in the industry while keeping costs manageable and reasonable. A number of options are available.
Member concentrator model
The member concentrator model enables a SWIFT member organisation to provide a hosting service for other SWIFT eligible institutions, with significantly lower operating costs than if they had opted to have their own messaging infrastructure.
While their daily message volumes may be limited, and costs of ownership and supporting interfaces and communications are growing, small institutions really appreciate the efficiencies of being able to transact messages over a managed service to their counterparties.
In no way diminishing the ability of the participant to retain its own market presence and identity (by using its eight character bank identifier code), this connectivity method provides a small, cost-efficient IT footprint and eliminates process replication, message duplication and resulting costly errors. It also means that a smaller volume, price-sensitive organisation can focus on its business processes instead of building costly connectivity and reliance on a dedicated technical resource in one small area of its operations.
Providing member concentrator services (accredited by SWIFT) and delivering the full range of SWIFTNet messaging options, goes far beyond traditional SWIFT FIN messages. It allows access to a range of established and newly developing value-added services, such as FIX (Financial Information Exchange), Funds, CREST and other specific market infrastructures, which previously would have been out of reach to smaller players.
Member-administered closed-user group
The second connectivity model is the member-administered closed-user group (MA-CUG). Similar to the member concentrator model, this method extends global reach to those financial organisations or corporates unable to join SWIFT directly, without the need for complex hardware infrastructures or interfaces, with the associated costs.
This connectivity for regulated small to medium independent, low volume, low budget institutions also enables unregulated yet financially sound institutions who may be a customer of a member institution, or regulated corporates ineligible to directly join SWIFT, to take advantage of cost-effective, reliable managed communications to their counterparties.
With managed offerings, such as the member concentrator model and MA-CUG, smaller players and new markets may be actively included in the flow of business with opportunities for end-to-end automation at an affordable price.
Fax and Telex Communication Needs
Despite changes in IP-based technology with new file and real-time based delivery methods, this has not diminished the costs of and needs for other communications methods, such as Fax and telex. Integrated fax-over-IP and least cost routing services are still employed efficiently by many of the worlds’ financial institutions, with staggering daily volumes.
Fax and telex is not only prevalent but on the increase in parts of the financial markets, and this is reflected in the functionality of communication hubs being employed to handle the growing volumes.
Organisations have employed innovative messaging solutions to ‘scrape fax’, that is to take an inbound fax message and apply OCR (optical character recognition) techniques to the text, eventually automating the reformat of the output as a SWIFT message, e-mail, telex, XML for internal ERP systems or even SMS message with text alerts.
Ultimately, in the absence of viable ubiquitous messaging solutions and standards, companies must continue to respond to all types of messages, from diverse communication sources.
With so many elements now contributing to the cost of doing business, true differentiation for smaller organisations will come in the form of providing true value for their services and using efficient applications. This will only come through successful integration of end-to-end systems, and the ability to participate with smarter, highly cost-effective, independent players using SWIFT connectivity as a prime delivery channel.