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I am deputy editor at The Banker, a Financial Times publication. I joined the magazine in August 2015 as transaction banking and technology editor, which remain the beats I cover. Previously I was features editor at Profit & Loss, an FX and derivatives publication and events company. Before that I was editorial director of Treasury Today following a period as editor of gtnews.com. I also worked on Banking Technology, Computer Weekly, and IBM Computer Today. I have a BSc from the University of Victoria, Canada.

Friday, 21 May 2010

SWIFT Connectivity: A Villeroy & Boch Case Study

27 Apr 2010

In September 2007, Villeroy & Boch, a leading European lifestyle brand, outsourced parts of its bank connectivity and payments messaging to Broadridge's SWIFT service bureau. In this Q&A, Dr Markus Warncke, treasurer at Villeroy & Boch, explains the reasons behind this move and how it has benefited the company.

Q (gtnews): What made you decide to switch over to SWIFT connectivity?

A (Dr Markus Warncke, treasurer, Villeroy & Boch): We use SWIFT for bank and dealer confirmations for all types of financial transactions, for example foreign exchange (FX) hedges, short-term borrowing or deposits, etc, and also for all types of payment transactions.

Previously, we used fax or email for treasury confirmations, which then had to be manually matched in our back office. In moving to SWIFT connectivity, we now have an automatic tool connected with SWIFT to match all the parameters of a treasury deal. As a result, we have reliable confirmation matching in a short time span. No matter whether it was executed via a web-based platform or by phone, both our counterparty and us know that the deal has been done and both sides have the same information recorded in their books.

We used to use our banks’ electronic banking platforms for transaction authorisations and also file transfer. Similar to most corporates, we have a number of different banks that we deal with, which translated into a multitude of applications. With the conversion to SWIFT, we now have just one IT platform, which means we only pay for maintenance cost on one platform. In addition, SWIFT delivers the highest security level available. Those are the main reasons we changed connectivity.

Q (gtnews): Were there specific market drivers?

A (Warncke): We began the project in 2007 when I took over the treasury. My previous employer transacted via SWIFT and I brought that experience to my new role. I decided that it was strategically important to move from multiple electronic banking platforms to a more homogenous standardised system.

The drivers are not so much from outside the company but more internal - different electronic banking platforms means more maintenance, which is costly, and greater complexity also means higher risk because there are different parallel processes. With one system, you can harmonise the processes and reduce risk.

Q (gtnews): Why did you outsource the connectivity to Broadridge’s service bureau?

A (Warncke): The IT department made that decision. In the end, it was a cost issue because it is not just the investment in hardware but also staff training in terms of SWIFT-specific expertise. They decided it would be more cost effective to outsource the connectivity to a service provider, following the example of most corporates and a number of banks.

Q (gtnews): What size is your IT department?

A (Warncke): It’s quite big - 90 people. The IT department looks after the enterprise resource planning (ERP) system, and customises and maintains the worldwide IT systems out of Germany. It could have been possible to do it ourselves, but the resource and cost issues led us to outsource.

Q (gtnews): What are the advantages to connecting via Standardised Corporate Environment (SCORE) over a Member Administered Closed User Group (MA-CUG) or Alliance Lite, for example?

A (Warncke): At first, the company was only a treasury counterparty (TRCO) member, with one contractual connectivity channel. When we decided to switch connectivity channels, there was the opportunity to use either a MA-CUG with each bank or SCORE, which became available at the beginning of 2007 and allows connectivity to many banks. SWIFT only recently opened a channel for corporates without a bank’s partnership or mentoring, which is the MA-CUG model.

We qualified for SCORE under the rules set out by SWIFT: a company has to be public listed, with a certain turnover, and must operate in a certain number of countries, etc. Also, from our point of view, it was bit of an image thing to be a SCORE partner, rather than part of a MA-CUG. But the main benefit was one standardised contract for all banks, which is what we wanted.

In reality, the standard contract was not that standard after all but different for each bank. There are a lot of standardised parts but there are differences, so we had to read every contract and discuss every change. But basically it was more standard than a MA-CUG contract.

Alliance Lite was not available in 2007 when we made the decision, but I'm not sure that it would suit us anyway since it targets mostly smaller financial institutions and corporates, whereas we have a high volume of payment transactions.

Q (gtnews): What benefits have you gained from implementing SWIFT connectivity?

A (Warncke): The benefits are higher security, reduction in IT complexity and higher visibility of incoming and outgoing funds, because alongside the SWIFT project we centralised payment transactions within treasury. Before 2007, many subsidiaries made their own payments; now, they have to transact through central treasury. In addition, it also improves compliance because we know where the funds are going and we are better able to monitor our cash flow. If it is done locally, it’s a step removed and central treasury does not have a direct grip on the cash flow.

We also streamlined our internal processes and through that discovered that some suppliers have different payment terms with companies within the group. Therefore treasury, together with group purchasing, began a project to harmonise payment terms in our favour. Although this development cannot be directly attributed to SWIFT connectivity, the SWIFT project was an enabler in looking at other processes.

Q (gtnews): How long did it take to go live?

A (Warncke): We adopted a two-stage approach: first to become a TRCO and then a SCORE member. Setting up the TRCO channel and connectivity took about four months. Connecting via SCORE, which included doing the contractual homework, setting up the systems and testing, took about six months. And we did it with our own IT and treasury resources with Broadridge’s help.

Q (gtnews): Were there specific hurdles that had to be overcome?

A (Warncke): Yes, the contractual agreements were a hurdle. Even though there is a standard SCORE contract that has to be initiated with each bank, there are also differences. Each one has to be reviewed and agreed. Additionally, in 2008 when we started the payment transfer, we felt that the banks were also learning how to connect corporates via SWIFT. It wasn’t just a plug and play exercise for the banks - I felt that they didn’t have much experience. So it was a learning process on both sides.

Q (gtnews): How many banks do you deal with? Did you try to consolidate the number of banks during the project?

A (Warncke): Yes, bank consolidation was part of the project. Within Europe we have two banks for outgoing payments, e.g. bulk payments, the supply payments, human resources (HR) payments, etc. However, as a treasury counterparty, we transact with as many as 15-20 banks.

With all of them, we exchange not only deal confirmations but also payments. This is done via FIN message MT 101. But for bulk payments, we use a FileAct payment message with just two banks within Europe, so there was a reduction in the number of bank accounts and banks.

Q (gtnews): What is the impact of the single euro payments area (SEPA)/Payment Services Directive (PSD) on your business? Does SWIFT connectivity help or hinder this?

A (Warncke): I think that SWIFT connectivity is a benefit because we had already centralised the transaction channel. In addition, because we did it - SWIFT and SEPA - together, that made it easier.

Overall, the harmonisation of the European payments landscape due to SEPA and the PSD is a huge benefit. Before there were certain countries that had lower bank transaction fees, such as Belgium, Luxembourg, the Netherlands and Germany, while other countries, such as Italy and Spain, had very high transaction fees. For example, it cost €0.02 for a payment transaction in Germany, while in Italy the cost was up to €2 - 100 times more. So we have moved our payment transaction operations to Germany/Benelux area. This creates a significant savings every year - plus every bank account and cash concentration system that we close down is also a saving. Fundamentally, we could do this more easily because our IT system is standardised.

Q (gtnews): Do you have any future plans?

A (Warncke): Yes, we have future plans for cash management. At the beginning of next year, we will switch to cheaper direct debits - SEPA Direct Debits (SDDs). We have already started the project because there is some homework to do in terms of new mandates, etc.

Another SWIFT-specific implementation concerns letters of credit (LCs), which we use with an export customer where we don’t establish a customer credit limit. The LC is drafted by a foreign bank and usually goes via a domestic bank that gets the information via SWIFT - but then they print it off and send it to us by mail. This is a break in the connectivity and straight-through processing (STP). So we have started a project with two banks here in Germany so that when they get information from a foreign bank, they can route it directly to us.

First published on www.gtnews.com 

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