Till Death do us part?
“What is the best and more importantly cheapest solution for my payments setup?” Both treasury consultants and system vendors are approached with this or similar questions time and again. There are many “quick-fix” answers that treasurers hear in return, depending on who they ask, “SWIFT has a phenomenal range but it is generally too expensive;” “local communication standards are always the cheapest solution;” “a direct host-to-host connection to a bank can never be implemented quickly and without difficulty, this is always a time-consuming project.” So what is the answer?
Navigating complex bank connectivity solutions
There is some truth to all of these propositions: yes, SWIFT has become attractive, cheaper and more straightforward in terms of onboarding for corporates, not least because of integrated solutions such as the BELLIN SWIFT Service. Host-to-host connections are by now a tried and tested, comfortable option for bank connectivity and the setup is more or less complicated depending on bank or country. Standard communication channels, such as EBICS, can easily be integrated into a TMS; this is often a good option to get started quickly. However, this does not mean that any one solution is always preferable to another. Those who offer “quick-fix” answers, such as “I always recommend getting started with local payments and adding global payments later on,” or “SWIFT is the most comprehensive and therefore always the best solution,” are most likely unable to offer all options and simply don’t know any better. There is no such thing as the “one-size-fits-all” approach. What represents the best solution always depends on the individual company and its specific situation! This is why it is so important for us as consultants to understand the motivation and situation of each company.
The ideal bank connectivity combination – short, medium and long term!
Let’s start by dispelling a common misconception: it simply doesn’t make sense to say, “I have to choose 1 type of bank connectivity if I want to manage all my payments in 1 system – either SWIFT, host-to-host or a local communication standard.” For most businesses, a combination of different forms of connectivity represents the most suitable scenario, for example, a SWIFT connection and an EBICS connection for specific countries.
Anyone trying to find the ideal bank connectivity solution for their company needs to put some real thought into what they actually want to achieve. A common flaw in people’s reasoning: looking for the ideal solution for today’s requirements only. Such a decision should never solely focus on a short-term solution, especially considering the cost. Tomorrow’s requirements are just as relevant and have a financial impact, especially in the long run. Despite such projects being time-critical, it pays to also anticipate future needs and to ask yourself what you want to achieve with a connection in the medium to long term.
Internal checklist for bank connectivity
- First of all, corporates should consider if all they need is a means to collect account statements or if they also want to process payments via a direct bank connection in their treasury system. In most cases, the latter makes more sense, in particular in the long run, taking into consideration system integration and the reduction of individual logins, platforms, access, and tokens. This is not necessarily true for all countries and banks but at least for a company’s most relevant business areas.
- A second very important aspect is directly connected to this: the scope of the integration project. In which and in how many countries do I want to optimize payments? In which countries do I only need to collect account statements? Where do I want to actively make payments? Security also often plays a crucial role when analyzing requirements for specific countries – for example regarding corruption or payment fraud.
- Another crucial factor when deciding on a bank connectivity solution is which banks a company mainly works with and wants to work within the future. Do they have a large bank portfolio? Are they planning a consolidation? Or does the company’s strategic focus on one main bank? The banking strategy plays a vital role, in particular when it comes to deciding between a direct connection to a bank or using the SWIFT Network.
- The volume of payments and the question of whether the company mainly makes bulk or single payments – depending on bank and country – are the decisive factors when it comes to costs. Using the SWIFT Network entails volume-based costs for the messages transferred: fees that are not incurred in this form for host-to-host connections or standard communication channels. Other important criteria are potential additional electronic transactions to banks, now or with a view to the future, for instance in Trade Finance. For example, a company that uses SWIFT for payments, in general, could also use it to match Money Market and FX deals or to manage Trade Finance deals, such as guarantees or Letters of Credit at no great extra cost. Instead of the MT101 format for payments or the MT940 format for account statements, messages are then sent in other formats via the same connection, e.g. MT798 for Trade Finance or MT3XX for confirmations. Any projects a company plans in these areas could really influence cost calculation.
- As consultants, we also analyze the general setup of a treasury – more decentralized with many local, independent units or more central with one strong Group Treasury. The people who are responsible for treasury tasks in the local entities, the quality of data that is delivered, staffing resources, the degree of autonomy and the extent of local treasury expertise – all the factors can help determine how important the automation and centralization of banking transactions are.
Realistic scenarios of flexible bank connectivity solutions
The most suitable solution for a company can be established based on these deliberations. However, I can say from experience that there are some general rules that illustrate possible bank connectivity solutions for specific scenarios.
- This company’s requirement is to achieve cash management visibility by electronically collecting account statements in all entities and integrating them in the company’s TMS. Payments, however, are generally made in the core business countries. The decentralized units are responsible for local trade transactions. Trade Finance deals, hedging or the electronic management of guarantees can be neglected; the same is true for the concept of an in-house bank. In this scenario, it most likely makes sense to establish a solution that makes all local account statements available centrally and in real time. Here, it could be a good idea to introduce SWIFT Reporting. For the core markets on the other hand, where direct payments are made, it might be useful to establish a host-to-host connection or a standard communication channel (e.g. EBICS).
- Another company might be very active in “exotic” locations and have a company structure involving many local banks that have grown over time; they want to collect account statements, make payments centrally and maybe even plan to automate banking communication for Trade Finance: for them, it certainly makes sense to also consider a SWIFT connection for payments. This doesn’t necessarily apply to the entire banking communication as core markets with a high volume of transactions might be covered by a host-to-host connection or a standard communication channel. For example, some of our customers continue to use EBICS, FTX, and MBS in DACH countries while using SWIFT for other countries.
- This company’s main challenge is security for payments in “difficult countries” – such as China, Brazil etc. They’re not opposed to having one main bank and should consider if a direct host-to-host connection to one bank in the countries they operate in would make sense. For a number of banks, such host-to-host connections in “exotic locations” have been tried and tested and can be implemented with relatively little effort in a realistic timeframe. In turn, pilot projects with specific banks requested by the customer are also very common – we don’t do “can’t do.” We can always add local “plug and play” communication standards to a solution.
In most cases, a combination of different bank connectivity solutions guarantees success and is most cost-efficient – for local and international payments. The seemingly cheapest option is not always the best option – it pays to take a closer look and to take into consideration future developments. This way companies can establish a thought-through and comprehensive setup for their bank connectivity structure instead of many different “lukewarm” connections. Do it once but do it right!