For Paul Tawel, senior manager of treasury operations at Canadian National Railway (CN), the solution was SWIFT but the obstacle was scale. The Montreal-based freight carrier, which was privatized in the 1990s and had C$10 billion (U.S. $9.8 billion) in 2011 revenue, needed to escape the inefficiency of using 12 separate online banking platforms to get reports and send payments. But Tawel couldn’t justify the cost of joining SWIFT, the cooperative that provides financial messaging for banks, to get a common communications platform for the company’s 12 banks.
Building a SWIFT infrastructure in-house was out of the question, and even using a service bureau was too expensive for CN’s modest but real needs. “When we heard that SWIFT would be open to corporate members several years ago, we were interested,” Tawel says. “But the solutions then were built for companies that used more banks and had more message traffic than we did.”
There was a cheaper alternative. In 2011, Tawel invited SWIFT representatives to talk about SWIFT Alliance Lite, the SWIFT-hosted solution for small users. What they told him was a revelation: Instead of adopting Alliance Lite, the representatives suggested CN wait for Alliance Lite 2 (AL2), a new product SWIFT was developing that would be hosted on the cloud, could run without the aid of a service bureau and would have none of the limits on transactions and message types that held back the old Alliance Lite.
CN signed up as one of the first users of AL2, which was rolled out to the general market in September. For the railroad, AL2 makes SWIFT affordable. “It saves us money,” Tawel notes. “A service bureau would cost us 25% to 30% more and it would mean relying on a commercial third party. Now SWIFT is our service bureau and we are building in-house expertise to manage SWIFT.”
If AL2 is a service bureau, what does that mean for other service bureaus, which have become the primary intermediaries between corporate treasuries and SWIFT? Companies can link directly to SWIFT, but that’s an expensive effort involving considerable IT resources, so usually only large corporates do so. SWIFT lists 14 service bureaus on its Web site, including such major players as SunGard, Fundtech, Fides and Bottomline Technologies, and estimates that 75% of corporates that connect to SWIFT do so using a service bureau.
With the advent of AL2, companies can now “eliminate a third party and deal only with SWIFT,” says Matt Monaco, regional director for SWIFT Americas. “A lot of companies don’t like to share their data and feel more comfortable with a cooperative like SWIFT than a third party.”
Treasuries are definitely interested. “AL2 has companies very excited about the scope of messaging and outsourcing of bank connectivity management to SWIFT,” notes Laurie McCulley, a partner at consultancy Treasury Strategies in Chicago. The original version of Alliance Lite, AL1, experienced light take-up because of message and volume restrictions, but AL2 removes those restrictions and makes it possible to avoid using a service bureau as the middleman, she says. “It will interface with a back-office system like a treasury workstation or ERP, and that’s really good.”
Is SWIFT using AL2 to start replacing the service bureaus it historically encouraged? “We have a delicate situation,” McCulley says. For example, “the SWIFT-certified service bureaus are still listed on the SWIFT Web site, but they’re harder to find now,” she says. “It’s hard not to conclude that SWIFT is seeking business they directed to service bureaus until recently.”
Graham Warner, client access product manager for global transaction banking at Deutsche Bank, agrees that AL2 is a serious contender for corporate customers since it has no limits on message volume, supports multiple message standards (MT and MX) and is cloud-based. “It is more robust, which will attract some corporates, but it does not yet offer everything that some service bureaus do,” Warner says, noting that service bureaus provide continuous access to expertise. If a company has that expertise in-house, it may like AL2. If not, it may choose to stick with a service bureau, he explains.
Kurt Vandebroek, senior vice president of product management for SunGard’s AvantGard, also doubts that AL2 will replace service bureaus. SWIFT may yet become a formidable competitor to successful service bureaus but not today, he says. SunGard provides managed connectivity globally through service bureaus in the U.S., France and Switzerland. SWIFT AL2 is now comparable to a traditional SWIFT service bureau, Vandebroek concedes, but vendors like SunGard offer more than a traditional service bureau and more than SWIFT can match today.
He insists SWIFT will have trouble selling AL2 as a service bureau replacement because it doesn’t work with ASP-hosted systems. “Most of our customers can’t use SWIFT Lite 2 now,” he explains, because it requires a hard token and hosting on dedicated servers. “It’s easy to sell the Alliance Lite 2 concept until you get into the details.” Still, Vandebroek concedes that AL2 is on the move. “It will take SWIFT another year” to develop a product it can sell to a broad market, he estimates.
Jersey City, N.J.-based Fundtech runs a SWIFT service bureau, but its chief marketing officer, George Ravich, says he’s not concerned about competition from SWIFT. “The more SWIFT markets, the more business we get,” he says. Using SWIFT’s AL2 will connect companies to SWIFT but only to SWIFT, Ravich argues. “We connect to other transaction networks as well,” he points out, such as CHIPS, SIC, SECOM and Fedwire.
Given a choice between signing up with an established service bureau or helping to develop AL2, Ed Barrie picked the service bureau. Barrie, head of treasury operations and foreign exchange at $2.4 billion Itron in Liberty Lake, Wash., headed Microsoft’s pioneering project to adopt SWIFT in 2006.
When he was ready to adopt SWIFT at Itron, SWIFT pitched him on becoming a beta tester of AL2, but Barrie decided to use a tested service bureau, Fundtech, instead. “We had an aggressive timetable and needed to move quickly with a partner that has strong experience in integrating SWIFT messaging with IT2 and Oracle,” he explains.
SWIFT offers a communications network and message standards, but “you need to connect the data with the applications that use it, which would be your ERP and treasury management systems,” Barrie explains. “That requires intelligence and human expertise built on experience with SWIFT messaging, line of business applications and the banks you are establishing connectivity with. Service bureaus have that experience.”
Barrie thinks AL2 eventually could become a formidable competitor to service bureaus but says it’s not clear how soon SWIFT will be able to match the mapping and integration services provided by service bureaus.
SWIFT markets AL2 as light lifting, but it’s not as easy as flipping a switch. For Canadian National Railway, AL2 is still a work in progress, divided into a 2012 Stage One and a 2013 Stage Two.
“We are using it now, and it is working,” Tawel says. “We’re sending and receiving MT 101 and MT 940 files successfully.” But the back-office integration, primarily to CN’s SAP ERP system, is still an IT project, so files are manually uploaded or downloaded. “We’re getting statements and sending payments to some of our banks—just five at this point—but we’ll have to tackle 12 eventually,” Tawel reports. “We started with our smallest, simplest relationships and will add the bigger, more complex ones as we gain experience and work out the integration to our back-office systems.
“Our goal is to have all of our daily bank balances uploaded and integrated in SAP by the end of 2012,” Tawel explains. AL2 is easy to use, but implementing it is still complex, and there is a learning curve, he adds.
SWIFT certainly doesn’t think of AL2 as an immature product. In the first month or so of availability, 40 companies reportedly signed up, including corporations, banks and market infrastructures. Eileen Dignen, managing director for sales and market development at SWIFT Americas, says 90% of the first 40 users are new to SWIFT and 10% previously used service bureaus. “We continue to gain momentum in the corporate segment with nearly 1,000 corporations connected,” Dignen says, up from about 400 in 2008.
Even if service bureaus hang onto their existing customers, will AL2’s affordability attract a wave of midsize companies like Canadian National? Don’t count on it. Treasury Strategies’ McCulley suggests that for many companies, AL2 won’t provide big savings over a service bureau. The initial AL2 setup costs about $25,000. Maintenance can top out at close to $27,000 a year for heavy users, compared with $30,000 to $35,000 for a service bureau, she calculates. “SWIFT may be a little cheaper, but it’s in the same ballpark as a service bureau,” McCulley says.
There’s also some evidence that banks are deliberately cutting the cost benefit to middle-market companies moving from proprietary bank platforms to SWIFT. Historically, many banks resisted opening their SWIFT club to corporate members. And now, “something strange is going on,” SunGard’s Vandebroek reports. “Some banks say they support SWIFT, but they have adjusted their fees so that it costs their clients more to use SWIFT than it does to use their proprietary network. The big Tier 1 corporations have the negotiating clout to make SWIFT economical, but Tier 2 corporations—those between $500 million and $3 billion in annual revenue—find themselves in a trap. They can cut their connectivity cost by joining SWIFT, but other banking fees go up more than the connectivity cost comes down. Free connectivity is useless if it ends up costing you more.”
Don’t expect to see mass adoption of SWIFT by Tier 2 companies unless participants rethink the business model or banks change their pricing strategy, Vandebroek says.
That’s not so, Deutsche Bank’s Warner counters. There was a time when banks may have looked at proprietary access as a sticky point in their customer relationships, but now, “we help clients get access to the SWIFT network,” he insists. “We do not stand in their way. That’s part of how we build value and earn loyalty.”
If SWIFT is unchaining treasury operations from banks and their proprietary interfaces, it may be linking them more closely to their treasury workstations.
“In the old days, treasury management systems vendors asked how many bank connections their clients wanted them to build,” McCulley reports. “Now they are using SWIFT to make one connection to many banks. This is making it much easier to access SWIFT, but it’s also tying treasuries to their TMS providers more than ever.”
SunGard has its own service bureau and ECHOS platform, she notes. Reval has partnered with Fides, a Swiss service bureau and data aggregator, and Wallstreet Systems uses Fides as well. IT2 and G Treasury partner with various bureaus, including Fundtech and Bottomline. Kyriba uses a member-concentrator model and is considering other solutions to optimize bank connectivity, McCulley reports.
Dignen says sales of treasury management systems by vendors that operate service bureaus or have service bureau partners are driving corporates to SWIFT.
“About 90% of companies that join SWIFT are putting in new back-end systems at the same time,” she says. “After 2008, there was a spike in new installations of treasury management systems and ERP systems, and that benefited SWIFT.”