SSBs: A Changing Marketplace

There are two main ways to connect to SWIFT these days if you are a treasurer wanting to take advantage of its standardised cross-border international messaging and tracking capabilities for payments and other transactions: Alliance Lite2 (AL2) is the shiny new launch from SWIFT unveiled last year, which replaces the failed first iteration with a new cloud solution and is the collective’s great hope to get more corporates using its infrastructure. Meanwhile, the third-party SWIFT service bureaux (SSBs) are still the primary corporate connectivity providers with 66% of the market, but there have been changes here to the qualifying criteria and operational performance levels, with more emphasis on security, professionalism and resiliency perhaps driving some smaller players from the market as the new updated Shared Infrastructure Programme (SIP) criteria is rolled out.  

Larger SSBs providing a full end-to-end bureau capability, such as Bottomline, GXS, Axeltree, Fundtech and others, which all assist in navigating the complex legal and technical issues in connecting to SWIFT and have back-up facilities and business continuity plans, could be the last ones left standing as a consolidation process gets underway. Consolidation is being driven on by the increased expense and demands of being an SSB under the new SIP criteria.  

The member-concentrator model, which is being phased out and is not accepting new members, still accounts for 8% of SWIFT corporate users as banks and the infrastructure providers provide a direct in-house service for huge volume users, but for the purposes of this discussion it can be discounted as its role is purposely being reduced, and the high cost and required in-house expertise make this model niche. The remainder of corporates, some 26% at last count, are using AL2 or its older first iteration to connect to SWIFT at present, although this number is expected to grow as the second cloud-based solution is rolled out.  

AL2 is supposed to represent a more affordable connection option and assist SWIFT in its drive to get thousands of corporates using the platform. Officially launched in September 2012, it is much improved over AL1 and has the potential to attract many new joiners because its cloud computing delivery method is easily accessible, has negligible upfront costs to sign up to, and is centrally controlled to ensure security and resiliency.   

These are all benefits, however, that third-party technology companies, qualified as SSBs under the new SIP criteria, can also provide. There are currently about 140 SSBs and as mentioned about two-thirds of corporates use this method of connection at present; many because firms generally offer on-boarding assistance too to help corporates navigate the complex legal procedures necessary to sign-up to SWIFT. 

New SIP Certification Requirements

In early 2013, SWIFT introduced new requirements under its Shared Infrastructure Programme (SIP), a set of qualifying criteria and guidelines that details the operational requirements covering security and resilience, which all SSBs must meet. The updated SIP has three levels of certification for treasurers to look out for now: minimum, standard and premier. Each of these service levels offers a different set of support, staff expertise, business continuity and other requirements to a corporate, which should choose the most appropriate to them. See graph below.   

Figure 1: The three different criteria for SWIFT Service Bureaux (SSBs) under SWIFT’s revised Shared Infrastructure Programme (SIP), covering minimum, standard and premier operational practices, are detailed below.

SWIFT SSB BG_SIP Fig1

Source: SWIFT.

SSBs will initially be required to meet the minimum certification level, which includes registering at least two employees with the SWIFT certification programme no later than April 2014. The standard level of certification will become mandatory under SIP by the end of 2015 and, in addition to the requirements for the minimum level, bureaux will also have to use the most resilient type of SWIFT connection, Alliance Connect Gold, and maintain a disaster recovery site at a second location. All these changes can be expected to drive smaller niche players from the marketplace.   

SWIFT says the new requirements are not unreasonable and will raise the quality of service provided by SSBs, while providing transparency for new joiners during the bureau selection process. The updated SIP will also minimise risks for end users, as well as for SWIFT itself, which could be vulnerable with open connections to third-parties it doesn’t fully trust. 

SWIFT’s senior sales manager for corporate business in Europe, Middle-East and Africa (EMEA), Neil Gray, does admit however that: “Many service bureaux are operating at high levels already and the new programme will allow them to differentiate their service through the operational certification levels and publication in the new directory. Having said this, there is probably more work to be done by some bureaux than others.” 

Some market consolidation is likely as the compliance challenge could be beyond certain players, with smaller SSBs possibly exiting the market altogether as consolidation gathers pace.  

Laurie McCulley, a partner at the Treasury Strategies’ consultancy, corporate technology practice unit, believes that the new SIP requirements are a positive but bold step, which will definitely lead to change in the marketplace: “The certification will be good for the SSBs that are able to comply,” she says. “SWIFT is being very aggressive here and the smaller bureaux will inevitably struggle, while the big SSBs will be able to adapt.” 

The avoidance of risk is the main driver for the updated SIP in the opinion of Gareth Lodge, a senior analyst at the Celent consultancy, who views the new certification requirements as part of a growing awareness of risk among treasuries. “Corporates seem to be more cognizant of risk associated with some smaller service bureaux,” he says, “and consequently the larger players will get a larger share of the market.”  

David Kelin, a partner at the London office of Zanders treasury and finance solutions and a gtnews contributing editor, also believes that the new criteria will force a change and many small SSBs will be forced to re-evaluate whether or not they have sufficient business to justify the necessary investment to comply with the new standards. “A smaller SSB might have a limited number of clients (roughly 10-12 clients or fewer could denote a small SSB), they might offer a limited number of services or have a limited geographical reach,” says Kelin. “Smaller bureaux are already struggling and I think this will inevitably increase. They have to decide whether they have the capability to expand and whether they have sufficient business to invest in the new changes.”  

Key Considerations for Corporates: Security, Integration, Support

So what are the various considerations for corporates when choosing which of the connectivity options to SWIFT to plumb for? If a treasury chooses to go down the SSB route, how can they select one of the many on the market that best suits them? Price, of course, ranks very high on the list of priorities, but security, integration with existing enterprise resource planning (ERP) systems, and customer support are also key considerations. Disaster recovery and the time it takes to get connected (i.e. on-boarded) should also be deciding factors in the selection process of which model to follow and, if a SSB is selected, which vendor to specify. 

  • Security: Guaranteeing the SWIFT connection is secure is one of the main concerns for corporates. “In big companies, the IT department will be concerned about the security aspects of the connection, as well as disaster recovery issues. “For example, AL2 currently uses an ‘auto client deployment’, which presents security concerns for many corporate policies,” says Treasury Strategies’ McCulley. AL1 also necessitated the use of a USB stick, which would not comply with many companies’ IT security policies, so security considerations will impact choice. Marcus Hughes, director of business development at Bottomline Technologies, agrees with the need for security: “AL2 has been good news, it complements existing SWIFT connectivity and raises awareness of the benefits of SWIFT. But for it to be really successful, SWIFT will have to make some improvements and its success will depend on how quickly it can do this. For example, today AL2 doesn’t include any data re-formatting capability and it has limited connectivity options – it is only via the internet, although there is talk of an AL2 virtual private network (VPN). Clients want secure connectivity and automated file transfer.”  
  • Integration: Treasuries and finance departments are also concerned with integration. As Treasury Strategies’ McCulley explains: “Integration with their ERP platform is a major consideration. They also want to know how much the provider can help them with the on-boarding process, and continuing customer support is also important.”  
  • Customer support: This is a huge concern for corporate users of SWIFT and it is one of the areas where SSBs have a distinct advantage over the outmoded direct in-house member concentrator interface and the cloud-based AL2. It was expensive to sign up to the member-concentrator model as expert staff were required, while the level of customer support that SWIFT provides with AL2, and its predecessor, is limited. 

As Bottomline Technologies’ Hughes says: “Corporates still want hand-holding and peace of mind. They value face-to-face meetings and training, so the personal touch remains very important.” 

Corporate User Numbers and How Will AL2 Affect SSBs?

Although SWIFT’s new SIP certification requirements do pose a new challenge for SSBs and will drive consolidation and disrupt the marketplace, the launch of AL2 in September 2012 cannot be discounted as a driver of change either. Some bureaux see it as a threat to their business and there is a real likelihood that AL2 will attract a significant share of new joiners in the future.  

SWIFT’s Gray argues that, while SSBs have dominated the market in the past, SWIFT is now providing more choice to its users: “Service bureaux have been a very popular connectivity model for new joiners and will remain so. But AL2 is set to play an increasingly important role in providing easy access to SWIFT,” he says. “It is still early days, but we have seen a rapid take-up and a lot of people want to hear about it.”  

SWIFT quantifies its users in terms of business identifier codes (BICs – referred to by SWIFT as BIC8s because they have eight digits). It currently has 10,000 BIC8s, which could loosely translate as 10,000 users. However, in reality financial institutions are likely to have many BIC8s representing just one legal entity, while inversely, multinational corporations (MNCs) are likely to have just one BIC8 that represents multiple entities globally.  

SWIFT for Corporates Status and On-boarding

SWIFT’s official figure for the present number of corporate users is 1,035 as of December 2012. In reality they have 1,035 corporate BIC8s, and this could represent as many as 40,000 different legal entities, claims SWIFT somewhat optimistically. Of the 10,000 total user-codes (roughly 10% of which are corporates), currently 30% connect via a SSB, claims SWIFT. When you look at just the corporate segment of users, the percentage is much much higher – at roughly 66% claims SWIFT. 

Whoever’s take on the figures you go with, there is no denying that SSBs currently have a substantial share of the market and the lion’s share of the corporate market with two-thirds coverage, which means SSBs have a lot of business to protect. How the on-boarding process is presented and managed may also prove crucial in attracting new SWIFT joiners, as this has traditionally been a bureaux unique selling point. 

“Corporates sometimes express their frustration in connecting to SWIFT,” says Zanders’ Kelin. “You’re talking months rather than weeks to get it. Sometimes corporates expect the process to take days, but that’s not the reality.”  

Becoming a SWIFT member can take one month and the whole on-boarding process via a SSB can take more than two or three months. Many companies join SWIFT as part of a broader treasury transformation project, adds Kelin, and so other factors can also add time to the process. AL2 may be better than what it is replacing but you’re probably still talking about two months to get a connection.  

“AL2 is definitely a competitor for SSBs,” concludes Kelin. “It will become an increasingly compelling option for corporates as they love the idea of being bank agnostic and AL2 is a direct connection to SWIFT (rather than through an intermediary). The pricing model for AL2 is also more attractive and streamlined.”  

A More Commercial SWIFT?

Many in the market see the launch of AL2, together with the more stringent SIP certification standards, as a sign that SWIFT is becoming more commercially minded. As Celent’s Gareth Lodge says: “AL2 has done two things – it has shown SWIFT has a much more commercial edge to it now and it is also creating a proposition for large banks, as well as corporate users. But in effect SWIFT is now competing against its own ecosystem. At least a few bureaux were initially considering claiming ‘anti-competitive’ behaviour against SWIFT, though I’m not aware of any actually pursuing that course of action, which would have much broader implications.” 

Whether there are solid grounds for claiming anti-competitive behaviour remains to be seen and it would be a very brave SSB that bites the hand that feeds it. SWIFT maintains that its new SIP SSB standards are simply about raising the quality of service and protecting users, while AL2 is just about offering choice to users and keeping its products in-line with the latest cloud technology trends. SWIFT was of course created as a non-profit organisation owned by its members, with its main purpose to provide a secure network for the financial industry and minimise cost.  

SWIFT’s Gray maintains: “We are owned by the industry, for the industry, and I wouldn’t expect that approach to change any time soon.”  

The Future for SSBs and the FSN Outsider Challenge

So what does the future hold for service bureaux? Surviving in an increasingly demanding and competitive marketplace may depend on diversity of services in future. “If you’re a bureau and just providing connectivity, life will become difficult,” says Bottomline’s Hughes. “Bureaux have to offer more than connectivity – for example, services such as duplicate checking, Faster Payments, single euro payments area (SEPA) or cheque outsourcing solutions will be necessary.”  

But ultimately, the biggest threat to SSBs might not be internal and could, in fact, come from outside the SWIFT community. SAP, the global business management software company, has approximately 1 million corporate customers worldwide – far more than use the SWIFT network and it has a new challenger. When SAP announced its Financial Services Network (FSN) in 2012, it was light on detail, but the private communications hub could certainly pose an alternative network for banks to communicate with corporates and vice versa. 

“The SAP FSN could form a rival to SWIFT, which would lead to two possibilities,” says Celent’s Lodge. “It could either mean that all SSBs lose business to SAP FSN, or it could provoke a response from SWIFT. A bit of competition, however, should drive innovation and efficiency in pricing for treasurers. I would be very surprised if SWIFT were not looking into this [potential threat] in a great deal of detail.” 

The possibility of complete disintermediation and further disruptive forces exists therefore. A revolution – not just evolution – is possible in this changing marketplace.  

 

 

 

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