Corporate Banking Connectivity - Who's in Charge?

Corporate banking service provision has been a hot topic at financial sector conferences over the last two years as the pressure for improved corporate banking connectivity continues to grow on all sides. Finance sector change and evolution is traditionally conservative, risk averse and slow. However, with so much influence being brought to bear on this particular issue, one might think that the challenges presented could be resolved with unusual speed. Unfortunately this is not the case.

Faster progress might be achieved if any one pressure group occupied the driving seat and led the charge. Such a presence would maintain momentum and generate a continuous force for change. As things stand, the influence of current agents for change appears limited, so who is best placed to push forward improved corporate connectivity? To consider this, we need to review the existing influencers, to understand what their objectives are and what challenges they face. It may then be possible to forecast where we go from here.

Since the topic is corporate banking, an obvious significant interest group is going to be the community of finance professionals within the major multinational corporate enterprises. Within each enterprise, the CFOs, treasurers and other senior finance executives preside over many departments in many countries. Each department may require multiple local banking relationships. Each relationship may feature a diversity of communications relating to different financial services; trade services, funds management, insurance, foreign exchange orders, payroll, payments and collections, to name but a few. Many of these communications are conducted through a variety of channels including telephone, fax, courier, file transfer, e-mail, web portal, again to name but a few.

Global financial regulation, legislation and implementation of best accounting practices compel corporate executives to be ever more accountable and financially vigilant. Given the operational matrix described above, it is no surprise that they are primary stakeholders and influencers in any initiative that will help to consolidate and standardise their financial control environments. Where multinational enterprises have achieved globally comprehensive and compliant financial control, it is probably accurate to say that they have done so only at very high operational costs – costs that could be reduced with standardised communications, processes and through the extended automation of e-commerce activity.

Seeking a convenient way to outsource a solution to this problem, there has been a recurring suggestion at a number of corporate conferences that the whole commercial service communication issue belongs to the banks. The banks are the undisputed pivotal providers of corporate banking services, so it has been proposed that they should collaborate to establish a consistent global standards framework supporting business process integration with their corporate clients.

Time for the Banks to Step Up?

As service providers, the banks are certainly key influencers in the efficient delivery of a wide variety of corporate banking services, which represent by far the most valuable part of their customer service revenue. The banks want to gain wallet share from each of their multi-banked commercial customers. They want to deliver a service performance ‘edge’ that will win new commercial customers from their competitors. They want to grow revenue by introducing new services to their portfolios and also by connecting these services online to corporates as efficiently as possible.

The banks have an advantage over their multinational corporate customers through the facilities that the global banking community has evolved over a number of decades, processing increasingly complex international financial services. It is now relatively easy for banks to establish a reliable and secure bank-to-bank operating relationship just about anywhere in the world. True, they have to navigate through many diverse regional financial standards and processes in order to execute international commercial business activities and transactions, but at least those standards and processes exist. Business continuity is generally not at optimal efficiency, but bank-to-bank service connectivity can be delivered.

So why has an international banking consortium not stepped up to own the shared problem of establishing corporate banking service standards and connecting commercial customers to the communications infrastructure that the banks already have?

The main barrier is the extreme diversity of technology and communications capability that exists across the global community of corporates outside the finance sector. Unlike the inter-bank world, where e-connectivity can usually be achieved, there are neither consistent rules nor consistent standards governing communication between commercial trading partners and between commercial enterprises and their bankers. For a single bank that aspires to deliver a portfolio of consistent and holistic financial services to its top 200 commercial customers, that bank has two main options:

1. Impose a data communications standard that the bank’s technology will support on each of the 200 customers.
2. Invest within the bank in front-office technology that can emulate and integrate the separate transmission formats that each of the 200 customers is able to generate and receive.

Either of these approaches would do the job, but both are very unattractive.

Option one imposes varying levels of systems investment on each customer. Many will be unable to justify such investment, so will not join the scheme. The cost of entry also will deter new business, compromise the bank’s business development opportunity, and weaken its competitive position.

Option two represents high investment and maintenance costs for the bank, which is already exposed to reducing profit margins on routine services. The requirement for individual customisation is not easily extensible to rapidly onboard new commercial customers. The in-house facility adds a significant development and test overhead for every new or modified e-service that the bank wishes to introduce to its commercial customer base, and does not provide any ability to publicise services to, or directly engage commercial organisations that are not signed-up customers.

So the banks are very keen to participate in solving the corporate banking service dilemma, but however strongly the corporates appeal to them, there are real communication obstacles, and the banks are unlikely to be the sole solution providers.

If the banks and the corporates are both enthusiastic participants, but neither has the appetite to invest in the required connectivity, what other influencers might?

A Swift Path to Connectivity

The big financial data network providers obviously have a keen interest. Like the banks, they are focussed on business development in order to maintain operating revenues against a market situation where the growth in some high-volume classifications of data traffic is flattening out and where competition to carry financial data traffic is squeezing margins. Until the implementation of its SWIFTNet network was completed some three years ago, the SWIFT organisation was pretty much exclusively focussed within the ‘closed’ world of inter-bank communication described above. Its new IP network provided SWIFT with the ability to carry greater diversity of data traffic and created a huge business development opportunity to extend SWIFTNet connectivity into the world of corporate data transmission with much broader applicability.

To date, SWIFT member institutions and direct participants have all been financial services organisations. The first SWIFT corporate expansion initiative was the Member-Administered Closed User Group (MA-CUG). As the name suggests, corporate clients of a member bank were allowed to transmit data over SWIFTNet using that member’s SWIFTNet access as a gateway. This service is still available, but take-up has been slower and lower volume than SWIFT had perhaps hoped (today, some 120 corporates are connected to SWIFT via 100 banks). This is largely because the service proved to be of limited interest to the major multinational multi-banked corporates. They found the process of connecting only through nominated gateway members to be operationally inconvenient and in some cases commercially undesirable.

More recently, on 15 June 2006, SWIFT announced the addition of corporates as a new participant category. The new category will enable qualifying corporates to join a single closed user group (CUG) containing many financial institutions, where corporate-to-financial institution SWIFTNet messaging and file transfer are supported. This improved corporate access process will enable better standardisation and interaction with multiple banks.

Other financial network suppliers and business process integration specialists have also been evolving parallel capabilities to provide both the capability for network connections to SWIFTNet, and the capability to transmit data seamlessly between diverse corporate technical environments and diverse financial technical environments.

So some significant advances have been made in the provision of connectivity between the global commercial community and the global financial community, but other influences are clearly needed in order to accelerate the pace of change.

Creating a Framework for Change

Another source of significant and increasing influence is the professional associations. On the topic of corporate banking, both the Transaction Workflow Innovation Standards Team (TWIST) organisation and the European Association of Corporate Treasurers (EACT) are making major contributions towards real progress.

TWIST originated outside the finance sector, but now very much represents the operational interests of financial professionals across a broad spread of commercial industry verticals. TWIST’s stated aim is to close the gaps in the physical and financial supply chain to release the enormous value locked up in disjointed paper-based processes. To achieve this, TWIST rationalises financial industry standards by creating user-driven, non-proprietary and internally consistent XML-based standards for the financial supply chain.¹ So here there is at least one evangelist and driving force for corporate to bank business communication standards.

The EACT recently announced its CAST initiative, which represents an important direct focus on the corporate banking communication topic. CAST stands for Corporate Action on Standards and includes projects to encourage greater standardisation and process automation in bank-to-corporate and corporate-to-corporate communications across the whole financial supply chain.

CAST is looking specifically at business models, best practices and standardization in the area of remittance information (and e-reconciliation), digital identity and e-invoicing.² The objective is to define end-user requirements in these areas, compare them with any existing standards to detect shortcomings and identify ‘best of breed’ solutions whenever a single solution is not practical or feasible. In addition, CAST addresses the specific issue of interoperability between EBPP operators and Certification Authorities in Europe.

TWIST and EACT recently announced the signing of a Memorandum of Understanding, designed to provide a framework for co-operation between the groups. This will focus on the CAST initiative, co-operation for the implementation of the single euro payments area (SEPA) and the development of other international payment standards. The EACT will not develop new standards. Rather, as a result of CAST projects, it will deliver recommendations on existing standards and requirements for new ones in areas such as the supply chain and trade financing. TWIST will be able to use these requirements in designing new, flexible and non-proprietary standards.

Collaboration Holds the Key to Connectivity

So now, with TWIST and the EACT in co-operation, there exists an influential kernel for the establishment of data communication standards that can be deployed to achieve agreed, practicable and effective business process integration between non-financial corporations and the finance sector. Will the promotional activities of these associations supply the driving force for the global adoption of automated commercial banking processes?

Certainly, these associations are already providing missing components that will help to complete the roadmap to holistic financial value chain integration and are running pilot schemes to test their proposals, but the true motivation for change will be the creation of truly integrated cross-vertical financial partnership communities with critical mass.

This is not an issue for the banks to solve alone. The solution is in proactive collaboration. The opportunities, the networks and the business process integration capabilities to create such communities already exist. Many key communication standards are already agreed and others are being evaluated and confirmed on a continuing basis. The time has come for major participants, banks and non-financial corporations, to move on from distantly applauding the theory and innovation, and to engage in the creation of the critical mass that will truly be the driving force for the future proliferation of a new generation of optimised automation and efficiency in corporate banking. There is much to gain – and now is the time to start working together to realise the potentially huge opportunity that greater corporate connectivity promises.

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