Multi-Banking: Presenting the Case for H2H
The gtnews Payments Survey annually reviews the number of banking partners that corporates deploy. The 2013 edition found that for nearly half of the North American organisations surveyed, their number of banking relationships ranged from just one to four. By contrast, for European organisations the figure was higher and one in three organizations surveyed had relationships with 20 or more different banks.
However, many expect the onset of the single euro payments area (SEPA) in February 2014 to trigger a wave of banking consolidation in Europe and it will be interesting to see whether the relationship figure is very different in a year’s time. Even given the trend to consolidation, the need for low-cost multi-banking solutions will remain. While SWIFT- based connectivity models are being perfected, host-to-host (H2H) connectivity – traditionally used by banks to meet their corporate clients’ enterprise resource planning (ERP) connectivity requirements – has been deployed effectively by banks such as France’s BNP Paribas to provide a conduit for its clients to other non-treasury banks.
How the Model Works
To offer an example – a corporate wishes to send bulk drawdown requests to its partner banks. It sends the file over the H2H, which is received by the treasury bank. This model entails use of the H2H adaptor by both parties within the treasury bank’s environment. The client side component collects new files as they are generated by the accounting package or ERP system on the corporate side, compresses and encrypts the file before transmitting it to the treasury bank over a public or dedicated network.
The treasury bank, on receiving the file, checks whether decryption or decompression is needed and if the file carries any digital certificate to be read. The file is then parsed, followed by a reference check of the file format preference of the partner bank to ascertain if file conversion is warranted. In-flight file conversion takes place. A similar lightweight client side component also sits in the outgoing side of the treasury bank environment. This component works on the converted file and transmits it to the destination partner bank.
Corporate treasury departments reviewing the pros and cons of H2H-based multi-banking connectivity will consider the following:
Cost: An important element in a corporate’s multi-bank strategy is the charges associated with traffic that it generates with its various banking partners. For the SWIFT-based Standardised Corporate Environment (SCORE) model, it hinges on the Bank Identifier Code (BIC) sender to receiver locations. When the two BICs belong to the same country, domestic charges apply. Corporates employing the SWIFT-based connectivity model usually perform a cost analysis based on the study of the BIC locations, within the domestic landscape, of recipient banks and the treasury bank. From this they determine indicative charges for a sample real-life mass of in-country multi bank traffic. Similarly, before a corporate decides on a H2H-based multi-banking model, it can use the price catalogue from the treasury bank to estimate the bank fee-linked cost for a given volume of traffic with an indicative mix of local service requests.
The multi-bank model using H2H connectivity works well within the domestic environments by keeping connectivity costs low. Treasury banks that offer this model to their corporate clients as a compelling pricing proposition could study the SWIFT pricing for domestic boundary-based messages.
H2H-based links to a treasury bank are fairly widespread and can be expanded to handle the partner bank service request transmission through the treasury bank. This helps to prolong investment in the H2H infrastructure, for both corporate and bank.
Ease of Connectivity: Alliance Lite and Alliance Lite 2 are SWIFT’s own connectivity adaptors to simplify SWIFT connectivity. They support both online and batch-based requests and do not require any connectivity infrastructure. Corporates connecting to SWIFT also have the option of using SWIFT service bureaux for handling the complexities involved in connectivity. In the case of H2H-based multi banking, connectivity is through the installation of a light-weight client side component in the corporate customer’s environment.
File Format: A significant volume of multi-bank service requests are batched and sent as files to the partner bank. Similarly, account statements and transaction listing require that file-based responses are returned to the corporate. Thus file format design and transformation support are critical functions of multi-banking support. The banking industry is tackling the worldwide challenge of getting clients to adopt a standardised format, as offered by the ISO 20022 extensible markup language (XML). Messaging and file format compliance in the corporate community will be fundamental to the SEPA zone. So the ability to receive file formats that a corporate is comfortable with is an invaluable feature, whichever approach is chosen. The H2H model requires the treasury bank’s to receive files in the client’s preferred format and transmit it in the partner-preferred format, involving a two-step conversion.
Request Aggregation: A further aspect of the H2H-based multi banking model, which also impacts on the cost, is the ability to aggregate requests directed to multiple partner banks into a single consolidated file. This means the treasury bank must be able to:
Content Agnostic: A corporate expects to be able to send and receive responses to all types of service request from its partner banks via this treasury bank-sponsored bridge, including the following:
The H2H-based model performs strongly based on this criterion by usually supporting all these different request types.
As banks innovate to remain relevant for their clients as a treasury bank, low-cost full-featured multi-banking support using the H2H connectivity framework offers a compelling proposition, which will continue to be popular for some time to come.