Driving better customer service with SWIFT’s new guarantee message standards

Due in November, SWIFT’s upcoming SR 2021 release is set to bring some significant changes to trade finance messaging standards – specifically those relating to guarantees/standby letters of credit. 

Until now, bank guarantee messages have been characterised by large portions of free text, making it challenging for banks to sift through unstructured data and find specific information. In a nutshell, the replacement messages will include more fields and more structured data, enabling banks to increase automation and drive straight-through processing, while reducing processing times and costs.

While the upcoming changes will bring plenty of benefits, the flipside is the associated burden for banks as they switch to the new standards. In fact, these changes have already been postponed for a couple of years as a result of the burden associated with a previous round of changes in 2018, as well as the impact of the pandemic.

But while the new standards do have cost implications for banks, it’s also important to understand that the transition needn’t result in sunk costs. Instead, there is an opportunity for banks to leverage the changes as an effective way of improving customer service and driving growth.

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Why guarantees matter

Back in the 1980s, most global trade was conducted using trade instruments such as letters of credit (LCs) and guarantees. While these instruments play an important role in mitigating risk, the cost and time it takes to obtain them is significant. As a result, most trade is now conducted on open account – in other words, the customer pays for goods after receiving them from the supplier, without using additional trade finance instruments.

The picture continues to evolve, as Andrew Coles, Global Head of Solution Consulting at Surecomp, explains. “Over the last five years, we’ve being seeing a shift in the traditional trade space from LCs to guarantees,” he says. “Guarantees come at a lower cost. They also provide the risk mitigation companies need without the same burden around document presentation and document checking associated with LCs.”

But while guarantees may be increasing in popularity, the time it takes to issue a guarantee continues to be a hindrance. “As a customer bidding for a new contract, you might need to provide a guarantee as part of the bidding process,” says Coles. “You can send your request for a guarantee to the bank – but if it takes two weeks for the bank to come back, you could lose that business opportunity.”

Bank-to-customer

As such, there is plenty of room for improvement where guarantees are concerned. The good news is that the upcoming changes present an opportunity for banks to offer a smoother customer experience.

While the new SWIFT messaging standards apply directly to bank-to-bank messages, the same standards also feed into bank-to-customer interactions, notes Coles. “For example, if you have an online portal for the customer to submit their guarantee application, the fields and validations are generally based on SWIFT standards,” he says. “So that data capture at the customer end is validated all the way through to the underlying bank message.”

In other words, the greater efficiency being pushed by the standards extends to data capture at the customer end. With a larger number of data elements available, the new messages can therefore improve bank-to-customer interactions, with greater opportunities to harness API and interoperability standards.

Moving forward, banks should consider whether the new message standards may enable them to plug into their corporate clients’ ERP systems via API connectivity. This, in turn, could enable corporate clients to use their procurement workflows to request a guarantee from their banks.

“With the increased amount of structured data elements, that will then lead to efficiency around the negotiation of the wording in the legal clauses, the validation against the limits and the interaction with other banks around the issuance of the guarantee,” says Coles.

New message standards: the benefits

• Unstructured data replaced with more structured data elements.
• Increased straight through processing and greater efficiency.
• The ability to extend standards towards the customer.
• Opportunities to define API standards and increase interoperability.
• Better customer experience.

What should banks be doing now?

As SR 2021 approaches, banks broadly have three courses of action available to them:

1. Do nothing. The first option is to avoid making any changes, instead opting to support the transition via manual processing. Banks that choose this approach will need to rekey data manually so that they can continue sending messages via SWIFT, so additional resources may need to be hired to carry out the necessary manual work.

“This is a real option, particularly for banks that are not using the interface into SWIFT, but it’s not a strategic view,” comments Coles. “Global trade is moving rapidly towards end-to-end digitalisation, so banks that don’t adapt to the new standards run the risk of not being part of this business in the future.”

2. Minimum effort. Some banks may choose to approach the transition as a compliance exercise, focusing only on the changes needed to comply with the necessary requirements. While banks may find the software upgrade is provided as part of their maintenance agreement, they will still need to invest in the resources needed to implement and test the systems upgrade. “The focus here is on maintaining the SWIFT interface and being able to send messages via SWIFT,” says Coles. “For banks that don’t leverage the changes from a business perspective, this is purely a sunk cost.”

3. Harness the opportunity. For banks that do choose to approach the upcoming changes as an opportunity for growth, the focus should be on investing into future-proof digital solutions. In particular, banks should consider how digital solutions can help them attract and retain customers and increase their market share. “Rather than being seen as a cost of compliance, there is an opportunity for banks to adopt an easy-to-use solution that enables their customers to request guarantees more easily,” says Coles. 

DNB – the leading bank in Norway – is one example of a bank to harness this opportunity and was one of the first banks globally to be ready for the migration in switch-off mode last year. It has successfully deployed Surecomp’s SR2021-compliant digital trade finance solutions, and now has the advantage of being able to allocate funds, time, and resources to other value-generating initiatives safe in the knowledge that it is already prepared ahead of the November deadline. 

“Among the most important advantages of more structured MT messages from the SWIFT change are reduced manual processing and operational risk with increased automation and efficiency,” explains Anne Kathrine Arnesen, Head of International Guarantees at DNB. “It also enhances security by enabling better AML and OFAC procedures, all of which will lead to an improved customer experience, and a more efficient and streamlined customer service.”

Building a future-proof approach with the cloud

While banks have the option of adapting to the changes on a minimum-effort basis, it’s clear that they have more to gain by leveraging the new message standards by investing in the necessary systems and professional services. What’s more, with further regulatory changes likely to follow in the coming years, the cloud has a role to play in helping banks adapt to future changes in a more agile way. 

“At Surecomp, we provide a Trade Finance as a Service (TFaaS) system on a managed cloud-based environment,” says Coles. “As part of that managed service, we ensure the system remains compliant with regulatory changes. That means the regulatory burden shifts away from the bank, and becomes part of your annual subscription to the TFaaS solution.”

As Coles explains, this approach means that banks can focus on growing their businesses, instead of tying up resources with compliance exercises. It also enables banks to harness new innovation more effectively by taking advantage of emerging fintech solutions via Surecomp’s open API marketplace.

“There are clear ways that banks can harness the upcoming changes to grow their businesses – but this won’t be the end of it,” he concludes. “We expect the regulations to continue changing as new solutions are brought to market. And one way for banks to mitigate the potential future spend and future risk is by adopting a TFaaS solution where regulatory compliance is part of the subscription.”