Transaction banking services continue to undergo significant changes in response to market developments. Corporates are challenging their bank service providers to fulfil their needs more effectively – and even to appreciate them more, perhaps? The vendors who support the market are challenged as to how best to spend their investment budgets. And across the board, competition to win transaction services business is fierce.
Even the best banks are wrestling with the impact and demands of higher client expectation and greater operating and regulatory controls, along with the associated costs they bring. Corporates, particularly those in the mid-market segment, are increasingly requiring more effective global multi-bank cash management services. They want what the large multinationals have enjoyed for some time: the ability to manage multiple account relationships spread across their trading regions more effectively at a costeffective price. The same applies to the agency banking market.
One way of achieving this is by using the SWIFT network to manage bank relationships, preferably independently of banks’ proprietary links – this is attracting a lot attention from corporates, not least because of SWIFT’s continual drive to open the network to new participants and substantially increase the levels of corporate membership from today’s low levels.
The Role of Service Bureaus
There are several options available for corporates and banks wishing to use SWIFT in today’s market. SWIFT promotes direct access, but implementing and maintaining the technical connectivity is forbiddingly high and carries many risks, despite the fact that the cost has come down considerably over the past few years.
Many prefer the option of partnering with a service bureau provider but this too presents challenges. The market is a diverse mix of organisations offering basic, domestic connectivity and those that now look to offer SWIFT-based services focused on adding defined business value and global reach. Some service bureaus have reached a point of no return as they struggle to compete in a competitive market with operating models based on technical links that are costly to maintain and do not drive new revenue streams.
One positive development, however, is that both buyers and sellers of transaction banking services now see the viability and attraction of SWIFTbased service bureaus to a wider market. It is viable because SWIFT has broadened its membership criteria to include corporates, while the network and standards have evolved beyond their origins as a financial bank-to-bank messaging network. Today’s requirement for any network is to permit file transfers in a variety of formats between sender and recipient in real time – and SWIFT supports this.
But with this development comes certain challenges. The number of service bureaus that emerge successfully will be measured in tens, not hundreds as they are today. Too many are small enterprises operating nationally in a business that is increasingly global, and they will struggle to supply the basic connectivity services to their small customer base at an economical price. This represents greater operational and commercial risk to their corporate customers and banks, as well as to the robustness of the SWIFT network.
As SWIFT drives corporate access from a relatively low base of approximately 700 users to its goal of 5,000 by 2015, it has a heavy dependency on services bureaus. It openly supports providers and investors who look to add value to today’s bureau proposition. But with such requirement for growth dependent on bureaus, the systemic impact of the failure of one or several moves to centre stage. This is an area that calls for greater governance and regulation, yet becoming a SWIFT-recognised service bureau provider is neither as onerous nor as challenging as it should be. This has to be addressed by SWIFT changing the accreditation process and this is the time to do so.
This is particularly true because SWIFT service bureaus increasingly form part of the ‘plumbing’ of global transaction services and are seen as pivotal to the cash management market. When it comes to connecting to SWIFT, service bureaus emerge as the channel of choice, with 80% of corporates preferring this option.
Despite being a favoured choice with many benefits, the pitfalls and permutations are complex and require thorough assessment before selecting a bureau partner. Some banks put forward preferred providers in order to link corporates to their specific products and services. Such arrangements may be beneficial to both parties, as they will have established links to technically connect to a corporate and on-board a bureau offering. This does not eliminate the contractual engagement and dependency on bureaus to fulfil the corporate’s requirements, nor does it guarantee that it will receive the most appropriate solution to meet its needs.
To be successful, a service bureau will need to grow and develop by offering value greater than a single technical connection to a corporate and each relationship bank. But are they doing enough?
Banks offer services through their branded proprietary electronic channels and corporates, in turn, have to manage multiple accounts and relationships to check balances globally. This is an unwieldy, resource-sapping exercise at a time when corporate treasuries have greater focus than ever on cash, controls, governance and risk. For many corporates, this results in reporting account balances in multiple currencies and banks many hours, or even days, after trading has closed. Corporates need more time-critical accuracy and transparency of their financial position, and the combination of automated and manual capture and reporting that delivers this information today is unacceptable. Pushing the service bureau proposition beyond the centralised handling of transactions is essential.
For corporates, replacing their dependency on multiple proprietary links and acquiring transaction information through a service bureau connection to capture their bank’s data in a central source is an attractive proposition. Bureaus that unlock the value of presenting multiple cash positions and balance activity in an intelligent and comprehensible way are a measurable value. Too few focus on this.
Vendors providing transaction service to banks should look to deepen the opportunities for intra- and end-of-day cash management, reconciliation of transactions and adherence to governance and reporting rules. Working towards this will drive change in the market – a number of providers are already responding to the challenges of offering more effective cash management services on a regional and global basis.
Indeed, positioning a service bureau as a ‘hub’ for handling all forms of SWIFT-based financial messaging is the way forward. Not just the traditional payments and cash management services, but also all forms of trade transactions, foreign exchange (FX) deals and those settled through Continuous Link Settlement (CLS). The services should expand beyond solely handling messages to capturing, formatting and presenting the results in a meaningful way to a point where it is a viable alternative to solutions offered by treasury management systems (TMS), enterprise resource planning (ERP) systems, etc.
The service bureaus that choose this route will consider mergers, and acquisitions (M&As) to finance their investment. Through M&As they will be able to realise the opportunities and increase their market share, and ultimately achieve the commercial solidity and operational reliability increasingly expected by their customers. In addition, they must achieve the levels of reliability and resilience required of those offering SWIFT services.
From a bank’s perspective, they should view a service bureau offering as a competitive tool providing better service to corporates and strengthening their customer relationships. The service bureaus may sit alongside the bank’s proprietary solutions and offer an alternative route to deliver its services to targeted markets. This too, however, will change.
The market dependency on liquidity is a strong factor to take into account. Against the backdrop of global economic and financial circumstances, banks offering transaction services focus increasingly on the level of corporate deposits held in order to effect their payments globally. Managed effectively – and often they are not – this is an increasing and significant source of liquidity for banks. For corporates, the same applies. Yet they struggle to maintain a current, time-critical view of their cash requirements. Often banks are perceived as a weak link in the chain to achieve this visibility.
Service bureaus that meet the customer demand from different market segments with effective tools to manage cash management and heightened controls in a tighter regulatory regime will be attractive and persuasive to both banks and corporates.
Therefore, today’s model of a service bureau providing basic, domestic connectivity (interfaces) is challenged to a point where it is not sustainable for many providers. Others who build on this by handling a variety of managed services are better placed to meet the market requirements as they grow. Some have recognised the opportunity and are positioning themselves accordingly through acquisition and organic growth regionally and globally.
But there is a bigger opportunity still to come and it is this potential that attracts new investors to the market. The prospective value for those banks, corporates and providers who recognise today the near-term opportunity to position SWIFT-based bureau services is still to be realised.
Corporates are looking for less costly options to access the SWIFT network, in order to gain greater control of their bank relationships, and see service bureaus as the means of achieving this. Banks, on the other hand, look to extend the value of the transaction services they offer to their clients and, in the light of the opportunities the market transition affords, should question their current plans and propositions.
Who succeeds and who struggles is a fine balance and one that will challenge both the market and SWIFT. Assessing the risks and opportunities is the challenge for all.
The SEPA Consultancy has recently published ‘The Service Bureau Report’.
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