by Helen Sanders, Editor
Corporations headquartered in regions such as North America, Europe and to some extent Asia are familiar with the opportunities that SWIFT offers for efficient, bank-neutral bank connectivity to support their cash and risk management objectives. In regions such as Middle East, the value of centralised cash and treasury management functions, and sophisticated technology to support them, is also now becoming more apparent. Consequently, companies headquartered in the Middle East are now implementing new processes and technology, while multinationals that have not extended these structures to the region are now doing so as their Middle Eastern business reaches a critical mass. This article considers some of the cash and treasury management priorities amongst companies in the Middle East, and the ways in which they are using technology to support these objectives.
Cash and treasury management priorities
Companies in the Middle East are becoming increasingly affected by both the challenges and opportunities of globalisation as foreign companies create more local competition and companies headquartered in the region seek international expansion. In addition, a number of governments in the region, such as in Abu Dhabi, are increasingly focused on financial best practices to build international confidence and enhance competitiveness. As Mark Sutton, Senior Payments & Integration Sales Consultant, Treasury & Trade Solutions, Global Transaction Services, Citi outlines,
“Governments of Middle Eastern states are increasingly promoting efficiency and integrity of processes amongst both state-owned entities and the wider business community, and the regulatory environment is gradually changing to reflect this emphasis.”
The result of globalisation and a focus on financial efficiency and integrity is resulting in companies of all sizes, both state-owned and privately held entities, reviewing and revising their cash and treasury management processes, including payments and collections. Murali Subramanian, EVP, Head Transaction Banking Group, Abu Dhabi Commercial Bank (ADCB) explains,
“Corporates in the Middle East have been slowly moving towards a more managed, lower-cost treasury model that allows treasurers to focus on their core priorities of risk and liquidity management.”
Marcus Treacher, Global Head of eCommerce, Payments and Cash Management, HSBC continues,
“Access to appropriate funding and return on surplus funds remains high on companies’ priority lists. We are seeing strong interest in comprehensive cash management solutions which enable more accurate cash forecasting, timely execution, and improved efficiency through automation.”
Centralisation of financial processes such as payments and cash management and technology optimisation is often critical to achieving these objectives, with a growing number of companies now starting to engage in these initiatives. Marcus Treacher, HSBC illustrates that while cash and treasury management technology adoption still in its relatively early stages in some cases, the opportunities are growing,
“With the lead being taken by multinational corporates, adoption of treasury technology is still at an early stage in the Middle East. However, we see a strong interest in effective cash management technology in the region, and effective solutions are becoming more readily available at more competitive costs.”
Murali Subramanian, EVP, Head Transaction Banking Group, Abu Dhabi Commercial Bank (ADCB) adds,
“Treasurers and finance managers are typically engaged in a positive and progressive journey towards automated technology. For example, many corporates have either implemented a ERP/TMS infrastructure, or are in the process of doing so. While each company will have different objectives, increasing process automation and financial integrity are common drivers.”
One such organisation that has done this successfully is Tourism Development & Investment Company (TDIC) in Abu Dhabi, as featured in the July/August 2013 edition of TMI, and highly commended in this year’s Treasury Today Adam Smith Awards.
Optimising bank connectivity including integration between companies’ internal systems and the bank is an important element of an efficient cash and treasury management infrastructure. As Murali Subramanian, EVP, Head Transaction Banking Group, Abu Dhabi Commercial Bank (ADCB) outlines, however, this is not always considered a priority in every case,
“Company strategies for bank connectivity, especially in a multi-banked situation, vary, however, and bank communication may be a second phase project in many cases, even though bank integration is an important step in optimising the efficiency of the ERP (enterprise resource planning system) and/or TMS (treasury management system).” [[[PAGE]]]
As awareness of connectivity options increases, however, and the range of options expands, some banks are seeing a shift towards greater adoption of electronic banking systems, as Mark Sutton, Citi explains,
“In the Middle East, we are seeing increased adoption of technology across the board, which from a cash and treasury management perspective has typically resulted in a greater focus on electronic banking systems. Financial processing has been relatively manual, but electronic banking systems have often been sufficient to meet companies’ daily needs. Today, however, companies in the Middle East are expanding into new markets in Asia, Latin America and Europe, resulting in greater complexity and often a larger number of banking relationships. There is also a growing awareness of industry best practices as a result of increased engagement with the wider treasury management community, and recruitment of staff with international experience. Consequently, treasury and finance managers are now prioritising technology for automation, cash optimisation and risk management.”
Typically, companies use proprietary online banking systems provided by their bank(s), either on a standalone basis or integrated with their ERP or TMS. Host-to-host solutions, which are closely integrated with the ERP to allow seamless transactions processing, are becoming more common, as Marcus Treacher, HSBC describes,
“Corporates in the Middle East are embracing increasingly sophisticated technology, in particular emerging ‘host-to-host’ solutions that integrate their treasury systems directly to their banks. These host-to-host arrangements enable corporates to exchange information with several banks at once, using standardised messages that improve their efficiency and make it easier to establish global control over their cash and funding.”
With an expanding international footprint, both within Middle East and into other regions, and a growing focus on financial efficiency and integrity, SWIFT also has the potential to contribute substantially to state-owned and privately held entities as Mark Sutton, Citi notes,
“SWIFT is often integral to corporate objectives by facilitating timely, consistent information flows and efficient processes.”
There are some challenges, however, when deciding to implement new processes and technology that may differ from those in other regions as Murali Subramanian, ADCB describes,
“One of the characteristics of many family-owned businesses in the region is that the owners have had a high level of visibility and control over cash positions and banking relationships. Implementing sophisticated reporting technology and SWIFT leads to concerns in some cases that company owners will lose some personal autonomy by disseminating information and responsibilities to employees, even though this visibility and control may have been achieved through manual methods. In some respects, this is the opposite but comparable problem to decentralised companies in Europe or North America that are centralising their operations. While this necessitates a change in mindset, there is widespread professionalisation of businesses of all sizes in the region.”
He emphasises however, that SWIFT is starting to gain traction,
“Although companies have embarked on different technology journeys, corporate SWIFT adoption is gaining currency amongst the largest corporates, particularly in Saudi Arabia, Qatar and to some extent Oman as a result of a large energy sector, with modest growth in the UAE and other Middle Eastern countries which have more diversified economies, with a significant proportion of family-owned, SME and mid-cap companies. In the UAE it is primarily foreign corporations e.g. those with joint venture operations in the region, as opposed to local companies driving adoption.”
Marcus Treacher, HSBC concurs,
“The adoption of SWIFT by corporates has been relatively slow in the Middle East and particularly in the UAE. This is because earlier adopters were predominantly multinationals and their centralised treasury functions, many of which are located in other parts of the world. However this is starting to change. By the end of 2013, there are expected to be over 30 corporates on SWIFT in the Middle East, and this still modest figure is set to grow as treasurers see the benefits of direct host-to-host connectivity first hand. There is also interest from most government-owned entities and government departments. Reduction in the cost of access, ease of implementation and awareness of the benefits have all driven this increase in adoption.”
Mark Sutton, Citi is positive about adoption rates so far in the region,
“No longer is SWIFT adoption in the Middle East restricted to ‘early adopters’. Initially, we saw global corporations with a Middle Eastern presence adopting SWIFT, but this has now extended to domestic corporations.”
Drivers of SWIFT adoption
In many cases, the factors that are influencing corporate decisions to implement SWIFT are similar to those in other regions, but companies’ priorities will vary according to their business objectives, as Murali Subramanian, ADCB discusses,
“Companies adopting SWIFT are driven by the attraction of a single standard to deal with all their diversely located banks. These are typically the main priorities that corporates have told us about in terms of how they approach the adoption of SWIFT:
- Visibility – i.e., where is my cash? When multi-banked, achieving consistent visibility of accounts is a priority. For example, companies in all industries are seeking to retrieve MT940 (end of day account statements) or in some cases also MT942 messages for intra-day visibility. MT 900/910 (credit/debit advices) are also valuable in achieving automated reconciliation.
- Payments – e.g., vendor payments and payroll. SWIFT is attractive for companies across all industries as it offers the ability to transfer funds through local clearing systems in various jurisdictions to pay suppliers and employees. Typically, MT101/MT103 messages or FileAct are used where proprietary standards are required by clearing systems such as UAEFTS(UAE), SARIE(Saudi Arabia), QPS(Qatar), KASSIP (Kuwait), CHIPS, ACH and others. With different standards and regulations in each market, SWIFT is helpful for executing cancellations, exceptions and investigations by enabling companies to use a single standard can be used with all their banks.
- Treasury and Money Markets – i.e., FX deal confirmations. Energy companies in particular use category 3 (MT3xx messages) as they usually have high levels of liquidity and prefer to deal directly with bank treasuries rather than bank front offices in bidding for, and placing funds at, the best rates available for short tenors.
- Trade Finance flows - Category 7 (MT7xx) messages are typically used only by the most advanced corporate treasuries e.g., Saudi Aramco and Octal in Oman.”
[[[PAGE]]]
Mark Sutton, Citi continues,
“While arguably companies do not need SWIFT to achieve these advantages, the ability to be bank-agnostic is often important. For multi-banked corporates, the alternative to SWIFT is to set up multiple electronic banking or host-to-host connections, each of which needs to be maintained individually. As these are specific to each bank, it can be difficult to switch or add to a company’s panel of relationship banks. In contrast, SWIFT is more portable, allows better counterparty risk, and allows new banks to be onboarded easily. While larger corporations typically have more banking relationships than smaller companies, the benefits of bank-independence and portability are just as significant for smaller companies as larger ones, particularly as there may be fewer resources available.”
He adds,
“Security is a crucial reason why corporate treasurers and finance managers choose to use SWIFT. The SWIFT network is scalable and robust, and a message has never been lost. Not only can SWIFT be used for payments, but it has a variety of other purposes, including securities.”
Connectivity opportunities
One of the potential obstacles to SWIFT adoption common to all regions, including the Middle East is that SWIFT is a solution only for the world’s largest multinational corporations. Inevitably, these organisations were often early adopters as the value of SWIFT was most immediately apparent, but new deployment options and widespread expertise amongst banks and vendors now means that SWIFT connectivity for bank communication is feasible for a wide range of corporations. Marcus Treacher, HSBC explains further,
“There is a common misconception that SWIFT is only suitable for corporates with very large transaction volumes. In fact SWIFT’s offering can be tailored to suit a variety of corporate needs and can be used modestly or extensively by companies of all sizes, according to the extent that a companies chose to integrate SWIFT message types into an automated workflow. There is a range of SWIFT connectivity options a corporate can use, ranging from very high volume/high maintenance to low volume/low maintenance. These include:
- Alliance Lite2 - a simple internet connection to SWIFT for corporates. This is highly secure and reliable, and supports the message and file volume requirements of most SWIFT corporate users. It has a light footprint, and is accessible via any Windows PC or laptop. Messages and files can be automated or manual when transferred to financial institutions.
- Shared connectivity – A number of companies offer ‘cloud’ style access to SWIFT, where the corporate rents space on the provider’s cloud service. These are called service bureaus in the SWIFT world. The bureau hosts the SWIFT infrastructure on behalf of its customers, thereby reducing costs and administration. Bureaus also offer value-added services to corporates. Many banks, including HSBC, offer their own bureaus to their corporate clients who wish to connect to SWIFT.
- Private connectivity – Corporates can connect to SWIFT directly, in the same way that banks do, by purchasing and installing SWIFT connection software and hardware with dedicated IT expertise on their own premises, in line with its specific internal security/compliance policies. This heavy-duty method is suitable to corporates with huge SWIFT volume.”
An important characteristic of both Alliance Lite 2 and shared connectivity options that Marcus outlined is that there is no need to invest substantial resources or expertise into the implementation, allowing resources to be directed towards financial and operational optimisation. Mark Sutton, Citi emphasises,
“Alliance Lite2 offers greater opportunities for corporate users than its predecessor, Alliance Lite, by removing transaction limits and improving connectivity options, which in turn encourages adoption. Although we are seeing an expansion in the corporate community adopting Alliance Lite2 for SWIFT connectivity, this is in addition to those who work with a service bureau. Often service bureaus provide services beyond connectivity, so we anticipate that the service bureau connectivity model will continue to flourish.”
Murali Subramanian, ADCB agrees,
“Alliance Lite2 offers more cost-effective and straightforward SWIFT connectivity. Although larger corporations, and subsidiaries of foreign corporations connect directly or via a service bureau, since 2009, 95% of the new corporates have connected via Alliance Lite or latterly Alliance Lite2.”
Not all organisations will choose to adopt SWIFT, of course, particularly those that work with a single banking partner or pursue a limited international strategy. Furthermore, although SWIFT is an increasingly viable connectivity choice for some, many will continue to benefit from banks’ proprietary communications technology, as Mark Sutton, Citi discusses,
“SWIFT does not render electronic banking solutions obsolete, and many of the 323 Citi customers that use SWIFT also make use of our electronic banking solution CitiDirect. For example, CitiDirect may be used to allow local business units access their account information and make ad hoc payments that it many not be possible to make using regular payment channels, or that need to be made outside of the normal payment cycle. Electronic banking solutions may also play an important role in companies’ contingency planning.”
Bank support for corporate objectives
One challenge for corporations seeking to replicate the operational and financial efficiency achieved by their peers in other regions is that they do not necessarily have the necessary experience within their organisations to do so. Murali Subramanian, ADCB outlines,
“As yet, there is still limited expertise on treasury technology and SWIFT in the market, so many corporates work with consultants and other industry specialists to translate their objectives into technology and communication solutions. Although this may lead to a lack of internal skills once consultants have completed the project, many prefer to obtain external validation and expertise for their projects to mitigate risk.”
Local and international banks alike are also investing in local skills and expertise in the Middle East to support their customers’ cash and treasury management objectives. Murali Subramanian, ADCB provides an example,
“ADCB is a prominent advocate for SWIFT for corporates, and one of the early adopters of SCORE. We have developed automated systems that interface directly. ADCB has automated systems which are directly interfaced to SWIFT to achieve STP processing of both inward and outward messages.”
In addition to locating on-the-ground expertise in the Middle East, banks are also engaged in wider initiatives for standardising and streamlining bank-to-corporate communication from which companies in the Middle East can benefit alongside their peers in other regions. Marcus Treacher, HSBC highlights,
“The most important contribution by banks has been to work together to standardise messages they ask their corporate clients to use when communicating with them. This is a subtle undertaking but profoundly important, because it creates a common language for all to communicate. An important message standard is XML ISO20022. HSBC is a strong advocate of ISO 20022 XML messaging, driving the on-going evolution of this standard through its work in various industry working groups with corporates, standards bodies and peer global and regional banks. Banks also collaborate with SWIFT to engage corporate clients to consult on specific workflow requirements and how tasks can be automated/ made more efficient. This helps corporate clients quantify the benefits of moving to a SWIFT-based messaging system.”
He continues,
“Integration to corporate treasury workstation technologies or enterprise systems such as SAP or Oracle are also common endeavours by banks in support of corporates who adopt SWIFT.” [[[PAGE]]]
Future developments
While companies in the Middle East may be a little later than some of their peers in other regions to centralise, optimise and standardise their cash and treasury management operations, they have the opportunity to avoid many of the pitfalls experienced by early adopters and leverage the latest best practices and technology. Consequently, we are likely to see the rapid development of highly efficient, technologically sophisticated cash and treasury functions in the coming years. Marcus Treacher, HSBC predicts,
“The Middle East is evolving as one of the fastest growing and most demanding markets for corporate-to-bank connectivity. Corporates in the Middle East, many of which are medium-sized, are keen to join SWIFT - particularly since the launch of Alliance Lite2. This ‘cloud’ approach to connecting to SWIFT opens up significant potential for the network and associated XML standards to be used cost effectively by mid size and smaller companies. Software providers and banks will use these base technologies to create new, better solutions for treasury and cash management, which will in turn drive adoption. Adoption of SWIFT by large government owned entities, an important feature of Middle East usage, will also increase the acceptability of SWIFT as a standardised medium of exchange.”
However, Murali Subramanian, ADCB warns that local regulatory requirements still need to be managed carefully, and local banks may be able to offer particular benefit in achieving this,
“SWIFT will achieve further scale and market penetration in the region by engaging with the local banking community. While global banks play an important role in the region, local banking relationships are pivotal to corporations of all sizes. Government-owned entities are typically obliged to work with local banks and there are significant benefits to foreign multinationals too in terms of depth of solutions that are closely aligned with local market needs and significant expertise in local markets.”
As Sibos takes place in Dubai this year, we expect the event to be a catalyst for organisations across the Middle East to build awareness of SWIFT and other connectivity options, and to review and seek to optimise their cash and treasury management operations. With banks and vendors now becoming increasingly well-placed to support these objectives, organisations in the Middle East have unprecedented opportunity to reduce costs, increase efficiency and control, and enhance their competitive position regionally and globally.