One of the most popular topics in treasury has, and continues to be, bank connectivity. Treasurers want to receive timely information and visibility – so long as it doesn’t cost too much, of course.
Traditionally, these objectives have been at odds as one typically had to trade cost for convenience. However, the advent of software-as-a-service and connectivity-as-a-service has offered new opportunities to have both the convenience of connectivity to all banks and not incur excessive costs to achieve such integration.
In America, we have often used secure host-to-host protocols to bridge internal systems – including ERP and treasury – to banking partners. In Europe, connectivity is more likely using regional banking protocols such as EBICS or similar, where all banks in a particular country can be reached via ‘plugging in’ to a single network.
While these remain fine domestic solutions, most organizations require a greater choice of banking partners in a variety of geographies so they can benefit from preferred service and cost arrangements in each region. Such diversity, however, can come at a cost if the bank connectivity strategy is not well thought through.
So, how does one choose the optimal global bank connectivity strategy? Simply put, it is a matter of knowing the alternatives and more importantly knowing which alternative best suits your banking profile.
Bank Connectivity Choices
- Consolidation through a banking portal. Leveraging a current banking partner to consolidate all your global bank reporting is a convenient choice. It is often very expensive solution. Treasurers often shy away from this solution because it ties them to a single bank, reducing flexibility and increasing counterparty risk. It is also only a solution for multi-bank reporting. For those looking to leverage multiple banks to centralize payment workflows – including reducing international payments in favor of making local payments through local banks – different choices need to be made.
- Host-to-host connections. Host-to-host communication, usually leveraging a secure file transfer protocol (FTP), is commonplace in North America and a several other geographies. When available, this option is inexpensive and reliable – and can be easily supported internally by an IT team or externally via an outsourced partner. If outsourced, the connection may incur a monthly fee to support/maintain but additional transaction volume fees will not be charged making host-to-host ideal for high volume banking relationships. However, ‘when available’ is the key phrase here. Host-to-host connections are not commonly offered by European or Asian banks, meaning that other connectivity alternatives are needed to complement those banks that can indeed connect via host-to-host connections.
- Regional networks. Regional protocols or networks, such as EBICS, exist in specific European geographies and select Asian markets. Most or all major banks in that region are part of the network, meaning that connecting to the network allows connectivity to all its participating banks. When available, these regional networks offer a valuable option because while there is an entry cost, the transaction costs charged by such a network are typically nonexistent or very low. With a reasonable level of activity or number of banks in that particular country, regional network protocols offer good value for both bank reporting and/or for payments.
- MT Concentrator. One could easily spend an entire article talking about SWIFT, as there are a variety of membership types and resulting services. One such service is the concentrator model, which allows for a ‘shared’ SWIFT membership from a connectivity provider to be utilized for bank reporting or payments for that provider’s corporate clients. The SWIFT access (or BIC, as commonly referred) belongs to an organization that specializes in outsourced SWIFT connectivity. Ideally, that partner is owned by or affiliated with a bank allowing full access to all SWIFT participants as well as minimizing the onboarding process for each bank connection. Pricing schemes for the concentrator model vary, but typically we see an a la carte model with pricing by account for bank reporting and by transaction for payments. Concentrator services are ideal for low account to bank ratios – for example when an organization has 15 accounts at 12 banks.
- SWIFT for Corporates. SWIFT for Corporates means the corporate client becomes a member of the SWIFT Network (SWIFTNet). They receive their own BIC and have freedom to exchange messages with other banks and organizations subscribed to the SWIFT for Corporates membership group – including for bank reporting and payments, as well as trade confirmations and other activities. There are different models for corporates, such as the entry level Alliance Lite2 as well as what is often called a SWIFTNet Service Bureau, more of a managed model provided by a connectivity provider. The difference between Alliance Lite2 and the Service Bureau approach, for example, is price as well as the degree of self-service a corporate wishes to take on themselves. Some treasury providers, such as Kyriba for example, offer both the hosting of Alliance Lite2 as well as the more comprehensive Service Bureau SWIFTNet offering.
Which is best for me?
The answer: it depends…on you. When choosing the appropriate connectivity offering, it is critical to know your banking profile – number of banks, number of accounts, and most especially number of transactions.
There is never a one-size-fits-all solution to bank connectivity. Most often a combination of connectivity choices is best, because your number of banks, accounts, and transactions is not evenly divided across each bank. A large American-based multinational may have 300 accounts, with over half of those accounts at only two to three US-based banks. For those two to three, it makes sense to connect via host-to-host, because no additional transaction charges will be levied for the connectivity channel. For the remaining accounts, the number of banks, where they are located, whether payments are initiated or the accounts are only being reported on all makes a difference as to what of the regional networks and/or what flavor of SWIFT is optimal.
The type of SWIFT service requires careful consideration as well. Use of SWIFTNet incurs transaction charges for the sending party – meaning that if you send payments then you will be charged for transmitting each of those items via SWIFTNet. However, what many forget about is the hidden costs for having your banking partners send you balance and transaction reports via SWIFT. While you don’t incur costs directly, your banks incur costs sending via SWIFTNet and it is quite likely those costs will be passed on through bank fees. So, again, knowing your banking profile will determine if some or all of your banks are ideal for SWIFTNet, or a different connectivity choice.
It is, therefore, a balanced equation where the details are immensely important. Making the wrong choice will cost your treasury budget more money every single month. While the depth of the analysis can seem overwhelming, there are fortunately organizations that offer a multitude of choices and can determine the best connectivity offerings that can help. The key consideration, though, is to ensure that the solution provider that is helping actually has a large inventory of options (i.e. more than 2 or 3) so they can truly be objective in their recommendations, working in your (and not their) best interests.