Getting the Cost-saving Message
A fundamental part of operations for all financial institutions, financial messaging is used for customer, correspondent, subsidiary and market infrastructure communications. Furthermore, payments, securities transactions, foreign exchange (FX) settlement, confirmations, statements and reconciliations all rely on messaging for their communications – putting it at the heart of financial services.
Over recent years, the major global financial institutions have continued to experience a 25-30% rise in messaging volumes. In 2008, this rose even further due to the extraordinary merger and acquisition (M&A) activity in the banking sector, which created ‘superbanks’ with unprecedented total messaging levels.
In addition, the current demand for greater control over the business means that banks are no longer prepared to wait for information to be sent to them at specific points during the day. Instead, they are increasingly pulling data from central institutions or correspondent banks – they want to know where the funds are to feed back to their clients, which are also demanding more transparency in banking. Each request for information depends on a financial message, further pushing up volumes. Banks using the SWIFTNet IP-based messaging platform can now use the InterAct service for this, which enables real-time queries and response. This adds to the complexity and functionality of a financial messaging hub.
Despite the SWIFTNet platform being created and launched in 2002, uptake of the new services is still relatively low and only now is it beginning to gain traction. This is due to banks’ slow migration to XML-based MX standards. Indeed, most institutions are still using predominantly FIN-based MT messages. By migrating to the new standards in small, slow stages, banks themselves are prolonging the life of the old standards. This is understandable given that all underlying systems – many of which are legacy applications – would need to be changed to support XML messaging. And while XML is certainly more flexible than traditional FIN and will, therefore, become more advantageous for banks in the future, ultimately it still performs the same function as the more rigid FIN-based messaging. As a result the migration will continue to be slow, since there is no real business case for a technology change, and it will happen as the underlying business systems themselves are updated or replaced.
In addition to this upgrade, with new SWIFT formats being released on an annual basis, many banks could be forgiven for failing to keep up. This year, SWIFT has acknowledged the burden of change for its community and has streamlined its standards release, which goes live in November. This year’s release will be limited to payments messages and minor amendments – reducing the scope of typical new standards in light of the global financial crisis.
With cost saving pressures at the forefront, substantial investments in messaging simply get pushed down the priority lists of most institutions, in favour of seemingly more pressing operational needs where more obvious cost reductions can be made. Furthermore, even with tools in place that help to convert MT messages to MX, operational risk runs high, since finding a solution to work across all subsidiaries and systems is a major challenge, affecting multiple stakeholders across the business.
Messaging complexities and rising volumes have resulted in higher costs for banks, continually eating away at the bottom line. Given that most banks are still on a pay per message model, this is no longer sustainable. Messaging now represents an area of banking that needs to be addressed in terms of determining where service levels can be improved for clients, economies of scale can be more fully exploited, and costs brought down.
To achieve this, banks need to ensure that their messaging processes are fully automated, they have consolidated the systems used for messaging and messaging operations are effectively managed in real time. In addition to reducing network and hardware costs, this will serve to decrease operational risk and improve client services. Furthermore, by driving efficiencies such an approach should make it easy to manage correspondent banks relationships, while maintaining high security and resilience levels.
Institutions should also strongly consider further consolidation of their messaging hubs, designing these to handle further increases in volume as well as unexpected peaks in messaging levels. Banks need to consider consolidating multiple messaging services, such as FIN, InterAct and FileAct, into a single instance, helping to achieve higher economies of scale. For example, rather than maintaining multiple operations for messaging, a centralised global hub with regional control or interconnected regional hubs can significantly drive down costs and deliver the necessary scale. Banks with heavyweight infrastructure can even turn their hubs into profit centres by processing messages for other banks through offering a white labelled service or simply a managed service.
Another key consideration when it comes to messaging technology is the importance of network independence and an open architecture. Messaging platforms should have the capability to process and route payments and securities messages in SWIFT, ISO, XML and other proprietary formats. This will serve to enable banks to choose the most cost effective delivery mechanism by saving money on unnecessary transaction fees. This approach gives banks the flexibility to conduct bank-to-bank bilateral messaging – an area becoming increasingly interesting to many institutions. It also means they are not bound to a particular network provider, which is a powerful proposition given that SWIFT is not without its competitors. For example, BT Radianz is quickly expanding its foothold for non-critical messages, while other network providers, such as MoneyGram, could potentially open their networks for messaging exchange. With the continued rise in the power of global networks, there simply is not the technology barrier to this that there was in the 1970s when the current infrastructures were developed.
It’s unlikely in the foreseeable future that we’ll reach a point where all financial messages are fully standardised. However, banks are in a position to improve the reliability and efficiency of their ‘wire rooms’ to deliver improved business services and generate genuine cost savings. Just as important is ensuring that the supporting technology in use is designed to scale, as increases in messaging volumes look set to continue. Finally, when replacing or updating this infrastructure, it is imperative to use an open and flexible platform to ensure that the next generation infrastructure will support whichever messaging strategy the institution chooses to take.