Corporate banking: clear sky thinking
Swift’s global payments innovation (gpi) has taken giant steps towards solving many of the challenges corporates have faced with cross-border payments.
Earlier this year, six leading Swiss companies – Asea Brown Boveri, Nestle, Roche, SBB, Swiss Re and Wurth – issued an open letter urging banks worldwide to use Swift’s gpi to improve cross-border payments. The corporates, which have international operations, said gpi addressed the challenges they face when making cross-border payments, and was a long overdue, essential improvement to cross-border payments.
“With considerable industry support across the globe and an increasing number of leading transaction banks committed to the service, we are convinced that Swift gpi represents a major improvement in cross-border payments,” the letter stated. “The increasing number of banks going live on this service addresses the demands of corporate treasurers. Hence, banks cannot afford to not join the initiative and go live as soon as possible. Our expectation is that all of our cross-border payments will be end to end Swift gpi payments in the future.”
Responding to the letter, Marc Delbaere, head of corporates and supply chain at Swift, said the cooperative had heard similar calls for action from corporates around the world. “Corporates want to know as fast as possible when a payment has been delivered to the end beneficiary. If there is an issue along the way, they would like to have more efficient ways of investigating exceptions.”
Large, multi-banked corporates, used to multi-banking approaches on Swift, want a common experience across banks, he added. The cooperative is working very closely with the banks to bring these capabilities.
gpi combines real-time payments tracking with the certainty of same-day settlement and was launched in January 2017. At the time the letter was written, 20 global transaction banks had begun using or implementing the service. That number has climbed to more than 110 transaction banks from Europe, Asia Pacific, Africa and the Americas.
When the global payments innovation initiative becomes a reality for corporates, there will be a push for further innovation in global payments, says Aurélien Viry, global head of payments and cash management, Société Générale Global Transaction Banking. “gpi is all about timing, transparency and efficiency. We are at the beginning of a journey, which may lead to many new capabilities and a change in the way banks charge their clients for global payments.”
gpi is a legitimate response from the banking industry to the problems corporate treasurers face in making global payments, namely timing, transparency and traceability, he adds. In the past, treasury departments would make payments but didn’t know when a payment would reach the counterparty. gpi puts a time limit on that, with banks committed to ensure payment arrives within two hours. Going forward, it is likely to be less than two hours and may even evolve into instant payment, says Viry. Transparency is addressed by gpi banks committing to inform treasurers of the fees that will be attached to any cross-border payment. This is a breakthrough as correspondent banking has a complex pricing structure, which depends on several factors.
“Often it is not clear which party to a transaction is imposing a fee, which can damage a bank’s relationship with its corporate client,” says Viry. Finally, traceability will enable corporates to discover where a payment is at any time and who is handling it. This is particularly useful if a client wishes to place another order for goods – knowing where the incoming payment from the receiver is will give the supplier more confidence to fulfil the subsequent order.
A further development of gpi could be the ability to recall payment transactions. At present, the recall of an incorrect transaction is time-consuming, inefficient and costly. Going forward, the GPI banks could collectively develop agreements for recall procedures that are fast and efficient, says Viry.
The success of gpi will rest on getting the involvement of the key correspondent banks globally. Unless such participation is achieved, the traceability element of gpi will suffer. It is a sensitive issue for some correspondent banks, however. By participating in gpi, banks will to a certain extent reveal how much margin they make on correspondent banking, says Viry. There are also technical issues. Some correspondent banks still process Swift payments manually and will be unable to commit to the two-hour time window in their service level agreements, let alone any shorter period. Participation in gpi for these banks will require significant investments in tools and systems.
“gpi has been developed at a time when corporate clients are demanding more sophisticated cash management services. Because the charging arrangements in cash management are complex, we may see the emergence of different pricing models for GPI. Some banks may offer gpi services for free, but other services will attract a charge. The pricing will depend on the type of client and the business it does with the bank. Given the capabilities gpi will deliver, it is likely that many corporate clients will pay for this new service as it addresses so many problems associated with global payments.”
Beyond what is happening with gpi, Ben Singh-Jarrold, corporate banking strategist at Finastra, says digitalisation has “ruthlessly exposed the inefficiencies in traditional transaction services”. Moreover, globalisation has driven the fragmentation of corporate value chains, changing the services a bank needs to offer, and the ability to offer them in a more agile and tailored way. Although cash management, trade services and supply chain finance fall under the transaction banking banner, the platforms underpinning these services are often disparate. “To mitigate the jarring user experience of multiple logins, different user interfaces, mismatched data, and inconsistent entitlements we see banks continuing to invest in sophisticated, integrated corporate digital front-ends,” he says. However, regional nuances exist such as the proliferation of cheques in the US, boleto payments in Brazil and renminbi invoicing in Asia Pacific. A more globalised world means corporates are seeking market-specific online and file channel solutions from more regionally-focused banks.
Singh-Jarrold identifies three features of transaction banks’ digital transformation strategies. First is a focus on re-intermediation through legacy transformation, with banks simplifying fragmented corporate banking back-office platforms. The manifestation of this has been a focus on the digitalisation of commercial routines in the end to end credit process. According to Finastra research, conducted by McKinsey and Co in 2017, 60% of corporate banks said corporate and commercial lending is the priority area for transformation, with 40% saying they are now challenged by corporate clients on the issues of “time to yes” and “time to cash”. Another key driver is trade and supply chain finance. Transformation here, says Singh-Jarrold, involves the integrated delivery of a full range of cross-border working capital solutions, while also finding ways to digitally connect buyers, suppliers, distributors and other participants and marketplaces. An overarching goal is to remove paper from the process.
Second, digital corporate channels are evolving as banks invest heavily in core functionality of digital front offices, which push more towards corporate self-service. Automation has gained traction in payments and business as usual areas. In 2018, enabling innovation and revitalising legacy platforms with open APIs will simply be “table stakes”, says Singh-Jarrold. “With this intertwining of bank services and corporate treasury, the one constant barrier will be security concerns. Where there is digital innovation, there will be new questions around data protection and cyber security. Legacy challenges, exacerbated by innovation initiatives.”
Finally, banks have begun to “truly embrace” innovation. The single biggest enabler of innovation will be open banking as it forces financial institutions to embrace collaborative models, he says.
Nick Williams, managing director of commercial digital at Lloyds Banking Group, says banks are investing heavily in digital technology with varying degrees of capability among the competitors in the sector. “Financial services firms are prioritising the simplification of the corporate customer experience with self-service, automation and improved data insight being delivered. To move technological capabilities forward, banks are partnering with fintechs to make use of the latest innovations,” he says.
Clients expect to be protected from criminal fraud and cyber risk, he adds, and this is a “clear priority” for banks.
Ather Williams, head of global transaction services at Bank of America Merrill Lynch (BAML), says when it comes to corporate banking, financial institutions’ focus and energy must be in two places: the current core legacy systems that allow all economies around the world to operate safely and securely, and the shifting paradigm of payments where new technologies and payments rails are emerging at a seemingly exponential rate. “We are taking an active role with those innovations, exploring how they can be adopted within the regulatory framework and in synchrony with other payments options our clients are using. This last point – interoperability – is core to the success of any new technology though it’s often overlooked.”
BAML’s Williams says corporates are undergoing an evolution driven by four macro trends: the growth in nationalism and digitisation, hyper-competition and network value. The hyper-competition follows when there’s an unbundling of services and non-traditional players enter their market. Companies are also faced with the emergence of network value, where participants are interacting and sharing in creating value that didn’t exist before. “These factors are creating a complex world for corporates and their treasurers. We, as banks, need to help corporates better understand these challenges and give them solutions to help overcome them. Those solutions are in three key areas: risk management, data analytics that provide new insights, and simplified operational processes,” he says.
Agility and speed to market is important to the success of financial institutions; they need to deliver those new technologies faster than ever before. “At Bank of America Merrill Lynch, we are working alongside fintechs, clients and industry consortiums on developing these innovations. In some cases, we’re also investing in our own platform. Bottom line – we’ll work with the best technology solution no matter where it originates so long as it directly helps our clients adapt to the challenges of an evolving and complex world.”
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