BANKING TO THE PEOPLE
A new offering from financial messaging network Swift promises to enhance treasury and cash management in Asia – but not all companies are eligible.
By Cesar Bacani

You don’t have to sell the idea of direct connectivity to Nuraini Ismail, senior general manager at the group treasury division of Petronas. Since 2005, the Malaysian oil company has had direct interfaces with six of its banks via Swift, the global financial messaging network, and the processing time for paperwork has fallen dramatically. “We used to have people stay quite late in the night faxing confirmations and other messages out,” recounts Nuraini. “Now it’s all done by 6 pm.” And because numbers and other information are automatically fed into the treasury system, it’s easier to generate and analyze reconciliation reports and other documents.

So Petronas was excited when Swift launched in January a new service called Score, for Standardized Corporate Environment. Previously, in order to connect with Swift, companies had to register with each bank, which decided whether to accept the application and what services to make available to the particular corporate. Score is alternative to that model, also known as MA-CUG (Member Administered Closed User Groups). Now, companies will need to register only with Swift to connect with hundreds of banks.

That would be ideal for Petronas, which hopes to connect its more than 100 subsidiaries to Swift. There’s one problem, though: the company isn’t eligible. Swift has decided not to extend the new service to corporates in Malaysia, along with those in many other Asian countries. “Malaysia is an established financial market,” says Nuraini. “Why isn’t Swift extending Score to Malaysia?”

Yet another front has been opened in the corporate wars. Like many aspects of running a business these days, treasury and cash management is increasingly seen as a source of competitive advantage. So when a new service like Score becomes available to some corporations but not to others, it’s bound to raise some hackles. Indeed, corporate treasurers in China, India, Indonesia, the Philippines, Thailand, and other places in Asia judged ineligible to use Score may well be asking the same question as Petronas.

Running with Swift

Asia’s treasurers have come a long way from the days when they managed fundraising, liquidity, working capital, foreign currencies, investment, accounting, and tax by hand and through post and telex machines. Productivity rose with the introduction of the fax machine, but really took off with the advent of high-speed telecom links and the internet. Suddenly, corporate treasury divisions could send and receive messages instantly and could automate their recording, reporting, and reconciliation processes – assuming they were willing to spend money on software and pay to hook up with their bank’s proprietary system.

But different banks use different systems, so a corporate with more than one or two major banking relationships –international companies typically have five or six – must contend with different messaging formats and standards. That lack of standards impeded plans for straight-through processing. Dealing with different security levels and protocols was another problem. Even the vaunted visibility from electronic communications did not always materialize. Bank reports were structured differently and had disparate cut-off times, so the treasury team could not really say how much cash the company had at any given time.

This is why influential multinationals like GE turned their sights on Swift. Owned by more than 7,800 banks and financial institutions around the world, Swift (which stands for Society for Worldwide Interbank Financial Telecommunication) had traditionally focused only on bank-to-bank links. Over time, it developed a highly robust and secure global messaging system that features, among other things, standard formats for high-value payments. Through Swift, member banks are able to do straight-through processing and gain the benefit of greater transparency, both of which also appeal to corporates. So why not open Swift to corporates, not just to financial institutions?

The idea had been debated within Swift for a number of years, says Swift board director Marilyn Spearing, who is global head of trade finance and cash management for corporates at Deutsche Bank. In the early days of electronic access, a bank’s ability to offer a secure channel to its clients was a competitive advantage in certain segments. But the situation had changed by the 1990s, and MA-CUG was introduced in 2001. Swift had opened up – but with certain restrictions. Control remained firmly with the banks, which must agree to sponsor a company before that corporate can use Swift’s network.

That did not sit well with some companies. “There was dissatisfaction among the early adopters that it wasn’t as clean a process as they would like,” Spearing concedes. “As Swift realized that there was demand for corporates to be able to intermediate their processing requirements directly into the Swift system and into the banks, we thought, ‘Let’s make it easier.’ So the Score model came up.”

Score currently covers only standardized high-value payments, but will roll out uniform formats for cash, liquidity, and treasury management later this year. It aims to expand to transactions involving securities, trade, and exceptions and investigations in 2008. In theory, these transactions can also be done via MA-CUGs. But that will require a decision by the bank to offer them to the corporates it has accepted as members of the closed user group.

Barely four months old, Score has already signed up 17 corporates around the globe, including steel giant Arcelor Mittal, GE, Johnson & Johnson, Merck, Renault, and Unilever. That compares with 181 corporates who participate in MA-CUGs, among them Matsushita and Travelex in Japan, Petronas in Malaysia, Cargill and DuPont in Singapore, and AB International and Wealth Bridge in Hong Kong.

“Score is relatively new, so many corporations began by joining our MA-CUG,” observes Richard Brown, senior vice president and regional head of global treasury services at Bank of America. But now, in markets where Score is available, he says, “a corporate that qualifies for Score chooses Score over the MA-CUG option, in most cases.”

We Want to Score, Too

But why is Score being kept away from most corporates in Asia? Swift decided to restrict the service to companies listed on the regulated stock markets of countries that are members of the Financial Action Task Force (FATF), the inter-governmental body that develops and promotes policies to combat money laundering and terrorist financing. Currently, only five markets in the Asia Pacific are FATF members – Australia, Hong Kong, Japan, New Zealand, and Singapore. “We want information disclosure on the customers going to Score,” explains Luc Meurant, head of Swift’s corporate access program.

The issue appears to be who will take the blame if a participating corporate gets implicated in an anti-laundering or anti-terrorism investigation. With MA-CUG, member banks take responsibility for screening users under the know-your-client rule. In Score, that job shifts to Swift (although banks can still decline to do business with a Score-enabled corporate). A bank may be willing to accept a privately held company into its MA-CUG because of its prior dealings with that corporate. Lacking such relationships, Swift will in effect let the regulated stock exchanges in the 31 FATF markets do the screening for it. “We need to maintain trust in the network and its integrity,” explains Spearing. “That led us to put restrictions on [what kind of corporate] can join as a member.”

Meurant defends the decision, pointing out that unlisted and non-FATF corporates will still have access to Swift connectivity because MA-CUG will remain an offering alongside Score.

Tell that to Petronas’s Nuraini. “We want to extend connectivity to our subsidiaries, but there are more than 100 of them,” she says. “Each one will need to register with the MA-CUG of the banks it has a relationship with, and that is time-consuming.” Further, the range of services may vary from one MA-CUG to another, depending on what the bank is willing to provide to which particular client. The banks on Score support uniform offerings.

Individual MA-CUG administrators have the option not to carry all Swift services, but Meurant says it does not make sense for banks to carry two different sets of products on Score and MA-CUG. The chances are that what is on Score will eventually trickle down to MA-CUGs. The policy of allowing access only to listed companies in FATF markets “might evolve over time,” he adds, “but this is the rule today.” He says Swift is trying to improve MA-CUG to bring it up to the level of Score. “Over time,” he promises, “whether it’s the next quarter or a few years, the two models will be closer to each other in terms of standardization levels.”

On a Clear Day . . .

For now, there is still little to distinguish Score from MA-CUGs. “You connect once to Swift in both cases,” says Meurant. “The fees are exactly the same whether you’re in one MA-CUG or 25 MA-CUGs or whether you join Score.” Depending on the volume of messages and whether or not the client connects directly to Swift or outsources connectivity to a Swift-vetted service bureau, annual cost can be anywhere from €10,000 to €100,000 (US$13,600 to US$136,000). That includes the one-off cost of buying and installing middleware to link Swift into the company’s treasury system.

The services are also identical. Corporates on MA-CUGs and Score send and receive messages for high-value payments from their banks, formatted in the universal banking standard that allows straight-through processing. Clients on both models can also send payment instructions to their banks in whatever format they want via FileAct, a file transfer mechanism. This is especially useful for corporates in Asia that require the use of double-byte character sets for local language support, such as those in China, Japan, and Korea. Attachments sent via FileAct generally need some manual manipulation (such as translation into English) for feeding into the company’s back-end systems, but processing these electronic files is easier than paper documents.

Corporates are generally pleased with SwiftNet, as Swift’s messaging network is known. GE Corporate Treasury, which serves more than 4,000 business units that maintain some 20,000 accounts with nearly 200 banks around the world, used to maintain 38 proprietary software connections with its various banks. That has now been reduced to just one connection via Score (GE recently switched from MA-CUGs), cutting the connection failure rate from an average of 50 times a year to zero. In a study, research and consulting firm Thoughtware Worldwide estimates that GE will generate US$10.5m in net benefits from its investment in connectivity to Swift over five years.

Since October last year, Microsoft has been using SwiftNet to connect to eight MA-CUGs, with six more being processed. “We could migrate to Score, but there are really no major differences from our standpoint between the two structures [at this time],” says Ed Barrie, group manager for treasury. “Some press reports say [connecting to a MA-CUG] is a lot of work and very onerous, but we have not found that to be the case.”

Microsoft’s MA-CUGs with eight banking partners in Australia, Europe, Japan, North America, and South Africa are providing the company “visibility into an additional 250 bank accounts that treasury did not have daily electronic visibility to before,” says Barrie. “We now get information about opening and closing balances as well as the transactions being processed in those accounts every day, allowing us to post the transactions in the correct general ledger clearing accounts on a daily basis.” Posting, reporting, and reconciliation used to happen only monthly.

Daily visibility also reveals cash balances that are too high and accounts that are in overdraft. “What we’re trying to do is tighten our controls and also reduce our costs, because every bank account we open is additional incremental cost,” says Barrie. Microsoft hasn’t calculated its return on investment, but Barrie says “the connectivity has paid for itself and enabled us to do things that we have not been able to do before in the history of finance at Microsoft.”

The Next Big Thing(s)

Microsoft’s treasury team hopes to extract even more value from its MA-CUGs, such as cash forecasting and just-in-time funding. But it remains to be seen whether companies can indeed wring such gains from Swift. Success depends on how the pipe is used, and that in turn depends on the quality of the company’s financial management, the capabilities and vision of its treasury team, the willingness and ability of its subsidiaries to work with a centralized treasury center, and the regulatory environment.

A company also needs an adequate IT infrastructure. Straight-through processing won’t happen unless the client company has an automated treasury system, something that is still relatively rare in Asia. Another requirement: middleware, although this may become easier when the next-generation of ERP suites come with built-in Swift message generators and connectivity. Swift is working with SAP, Oracle, Trema, and other vendors towards this end.

Companies that have a primarily domestic focus or few banking relationships will not reap many benefits. But for the increasing number of firms that work with many banks across numerous markets, Swift can be a competitive advantage – if they use it not only to ensure visibility, but also to enhance operational procedures and control. As always, it is the hand that wields the tool that ultimately makes the difference.