As if migration to Swift’s new internet protocol platform, SwiftNet, was not challenging enough, banks now need to find out how to best use the new technology. Frances Maguire examines why the payments industry is beating the securities users to the new offerings.

From the beginning of this year, Swift began levying fines on banks that had not fully migrated from the old Swift X.25 network to SwiftNet in time. However, while SwiftNet gives banks a new roadway, migration is only half the story.

Migration has finally brought the banking back office up-to-date but the full development of the capability, and the applications, to utilise the new technology to its full extent and reap the financial rewards may still take several years.

At last year’s Sibos conference in Atlanta, a survey of banking executives conducted by SunGard showed that one-third of respondents went further in their plans to leverage their initial investment in SwiftNet by turning a traditional cost centre into a profit centre by offering SwiftNet services to third parties. A further 66% of respondents ranked FileAct, one of the new pieces of technology on SwiftNet, as important or very important to their future business processes, with a further 58% planning to implement FileAct-related projects.

Bulk payments potential

To date, it has been the payments industry that has seen the potential of FileAct for bulk payments. The tool provides a standard envelope for financial data, regardless of message type or format, which enables users to send more per transaction and can include cheque images. It also negates the need to maintain leased lines and private networks for low-value/high-volume bulk payments and financial data that previously would not have gone across Swift because of the cost incurred.

FileAct is particularly suited to bulk payments, securities value-added information and reporting, as well as central bank reporting and intra-institution reporting. More than 300 correspondent banks have so far registered to move their bulk payment processing from costly proprietary messaging formats to SwiftNet FileAct.

Bulk payments are primarily low-value and/or non-urgent payments, such as salaries, pensions, retail payments and cheques. They are often grouped by common characteristics and exchanged in electronic files through automated clearing houses (ACHs) or between banks. The flexibility to send a file of any size and in any agreed format to an in-country correspondent, for onward processing by the local ACH, is a major benefit for banks processing international bulk payments.

Avoiding high costs

“FileAct provides a common technical solution, supporting existing payments formats and business practices,” says André Casterman, senior product manager for banking markets at Swift. “SwiftNet FileAct allows our customers to re-use their SwiftNet investment to exchange payments files bilaterally, thus avoiding the high recurring costs of proprietary messaging infrastructures and tapes.”

Bob Blair, vice-president, industry issues, at JPMorgan Chase Treasury Services, says: “SwiftNet FileAct will allow us to send and receive large volumes of transactions easily in the most cost-effective manner available in the market. We process millions of low value ACH transactions across Europe. Moving to a SwiftNet environment reduces the need to rely on or interface with proprietary systems for each country or partner. Moreover, we believe it will improve our clients’ straight-through processing.”

Clearing houses follow suit

Spurred on by the decision of the Euro Banking Association (EBA) to use SwiftNet FileAct for clearing cross-border euro payments, Step2, and the gradual build of the Single Euro Payments Area (SEPA), several ACHs have followed suit. The Swedish and Dutch ACHs, BGC and Interface, are already using FileAct for Step2 payments and are now considering using it for domestic payments, where the higher volume is. The UK’s VOCA, formerly known as BACS, finalised proof of concept to adopt SwiftNet FileAct earlier this year. About 300 correspondent banks have signed up to use it for cross-border, low-value payment transactions, with one-third of them currently live. Large corporates are building regional, and global, payment factories where the use of FileAct as third-party users of SwiftNet is enabling them to create payment hubs for subsidiaries and make quick gains in efficiency.

“The majority of banks are using FileAct for cross-border, low-value payments but some are also utilising FileAct for bilateral domestic payments, replacing leased lines and old protocols,” says Mr Casterman.

“The national proprietary networks make it costly and difficult for domestic clearing systems to move to a pan-European system because they need an international platform to reach outside institutions. The reason why FileAct has been so successful for payments is because we positioned it, from the start, in support of proprietary products so all those instructions and reports that are not structured FIN standards, but in national formats, are attracted onto the platform. This has helped corporates and financial institutions to rationalise the number of technologies they are using,” he says.

Further to this, the XML standards that are being developed by Swift and the International Standardisation Organisation (ISO) will enable users to abandon the use of country-specific formats, and further rationalise the number of formats they support. These standards will support the new pan-European direct debit instrument that is being developed, whether this will be used on a bilateral basis between banks or whether this instrument is supported by a pan-European ACH.

“SwiftStandards XML for credit transfers have been available since 2002, and were implemented by EBA in 2003. The direct debit standards are being developed now and will be finalised by the end of 2005 and available from Q1 2006,” says Mr Casterman.

Improved reach and longevity

There is no doubt that the move to SwiftNet has extended Swift’s reach and its longevity. SwiftNet FileAct is likely to be one of the core enabling technologies of SEPA, scheduled to be in place by 2008. The aim of SEPA is to do away with cross-border payments in the eurozone and allow the EU to operate as a single domestic entity for euro payments.

“FileAct is also being considered for flows, other than low-value transactions, such as the distribution of reports and directories in Target2 – the euro real-time gross settlement system (RTGS) that will replace the 15 RTGSs operating in the EU,” says Mr Casterman.

The payments industry’s move towards the use of FileAct beyond low-value payments has already begun. Deutsche Bundesbank, which runs the German real-time gross settlement system, RTGS Plus, has been using FileAct since late 2004 for reporting; and the Reserve Bank of South Africa has implemented FileAct for balance-of-payment reporting. Both are now using the security of Swift in place of proprietary networks for reporting.

Another challenge ahead for the payments industry is cheque truncation. Cheque imaging is a next step, for which FileAct lends itself well to the payments industry, and will enable banks to speed up cheque clearing by enabling correspondents to send images to US and UK banks electronically. According to Mr Casterman: “In the US, the new Check 21 legislation allows cheques to be transferred as an image. SwiftNet FileAct is ideally suited to provide a highly secure and reliable cheque image transmission mechanism for banks to deliver cheque images to their US correspondents.”

Industry innovators

One of the fastest innovators in this area has been ABN AMRO. In one year, it has carried out three implementations: EBA Step2, bank-to-bank and corporate-to-bank low-value payments. “Because of the re-usability SwiftNet offers, the same implementation can support many different counterparties,” says Mr Casterman.

Leonard Schwartz, director, MA-CUG & FileAct, in ABN AMRO’s Transaction Banking Group, says: “ABN AMRO is using FileAct in three ways: for EBA Step2 transactions; for connecting to our correspondent banking partners in a way that enables them to cut the cost of multiple connections; and to connect to our customers’ back offices.”

Mr Schwartz believes that the benefits of using FileAct are equal for both bank and corporate customers. The cost savings, he adds, come from the shorter implementation process and lower maintenance costs from the smaller number of connections and formats to maintain. “The first priority of any implementation process is the connectivity and security issue,” says Mr Schwartz. “If you can eliminate that work in connecting to a new partner or customer, the related cost is taken out. With SwiftNet, we more easily gain a level of certainty and a greater understanding of what can be achieved, immediately.”

The entire point of FileAct, for Mr Schwartz, is that it brings the positive attributes of Swift network and security to files, whereas before it was restricted to messaging. “This opens up the technology. There are no limits with the envelope-mechanism of FileAct.” It also highlights a key difference between the payments industry and the securities users of Swift, which has grown up around messaging, critical enough to warrant banks paying per message for message validation priority, store and forward and delivery notification.

Swift focuses on new users

While the payments industry is jumping at the chance to bulk up low-value payment files that were not previously sent over Swift, the securities industry is continuing to pay per message, similar to the high-value payment users – the traditional heartland of Swift. According to user research conducted by Swift, this is unlikely to change in the near future. The co-operative seems content to encourage new users of Swift rather than to convert traditional users to using bulk transfers.

Although some banks are considering the use of FileAct where there are significant volumes of the same message going between the same customers daily, the securities industry is more likely to use it for securities reporting and corporate actions instructions, which – similar to the payments industry – currently go over proprietary networks.

As far as the banking community is concerned, SwiftNet has brought with it a raft of new possibilities, and put leased lines and proprietary networks out of fashion. As far as Swift is concerned, vive la difference.

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