Bank Connectivity Options

This article covers the various methods of digital interaction with bank/s.

1) Bank Web Site (or App)

For an individual it may seem difficult to comprehend that there are digital channels other than a website or app to conduct banking. The primary problem with a bank web site or app is that it requires a human to capture, read or download the information. This can be tedious if there is a large volume of payments to capture. It may also be necessary to download bank statements and then upload them into the accounting package or enterprise resource planning system (ERP like SAP) or treasury management system (TMS) to aggregate the bank balances at multiple banks, to perform the reconciliation from the bank statement to the general ledger and to allocate the deposits to debtors.

Furthermore if the corporate is multi-banked they have to hassle with each bank’s security protocols such as passwords, certificates, tokens and other forms of multi-factor authentication.

The advantage of a bank website or app is that it does not require any IT set-up and cost.

The disadvantage is process automation. To automate processes it is necessary to have a channel of communication with your bank that does not require human involvement. Your accounting or ERP system and/or TMS needs to communicate directly with the bank. This communication needs to be two way - in the simplest form, the accounting or ERP system and/or TMS needs to instruct the bank to make payments and initiate collections (debit orders) and the bank needs to send statements to the accounting system or ERP or TMS.  

?2) Host to Host Connection with Bank/s

A host to host connection is an interface between your accounting system, ERP and/or TMS and the bank. If there are multiple banks then there are multiple interfaces. Prior to the standardisation of financial message formats and affordable SWIFT corporate membership this was the most common method for corporates to connect to banks.

Many of the existing host to host connections use the bank’s proprietary message formats for statements and payments. The corporate was expected to convert the bank format into a format which could be loaded into the accounting system or ERP or TMS. The corporate had to pay for the development and testing associated with the format conversions. This made it difficult to switch banks as it was necessary to fund a development project to consume the new bank’s message formats.

The accounting, TMS and ERP systems were quick to adopt regional and international message formats such as Multicash, BAI and SWIFT. Corporates applied pressure on banks to use these standard message formats rather than their own proprietary formats. Certainly most of the newer host to host interfaces use standard message formats such as SWIFT MT940 for bank statements, however many of the payment formats are still proprietary.

The security of the host to host interface is critical. Often a third party tool such as Direct Connect is used. This adds another layer of cost. There is also reliance on the competence of the corporate IT department to ensure the corporate end point is secure.    

The advantage of host to host connections is the avoidance of the cost of alternatives such as use of the highly secure SWIFT network. The disadvantages are the costs the bank and third parties charge for the host to host connection, the security risk and the difficulty of moving to other banks.  

?3) Application Programming Interface

An alternative to a host to host interface, although similar in concept, is the use of a bank application programming interface or API. Internationally APIs are widely used to ingest bank statements into cloud accounting applications such as Xero, Quickbooks and Sage. Increasingly they are also used to send payment instructions to banks. Sadly South African banks have been slow to provide APIs for integration into cloud accounting packages. As of writing this article, Sasfin is the only South African bank that provides API integration into Xero.

?4) Lead Bank Concentrator

Some banks offer the service where they act as a broker to communicate to other banks. There is a host to host connection with the lead bank and they collect balances and statements from your other banks and remit payment instructions to these other banks. Some banks also offer treasury management portals to aggregate cash balances across all banks and allow for sweeping payment instructions to be issued from the portal. If you are committed to a strategic long term relationship with a particular bank then this route may make sense. You are, however, limited to the functionality and services offered by the particular bank and it is then even more difficult to change banks. 

The same advantages and disadvantages apply as for a host to host connection with a bank, however there is a lot greater reliance and commitment to a single bank. A single point of failure is introduced. 

Behind the scenes the lead bank uses their SWIFT BIC code on the SWIFT network to communicate with other banks.

5) SWIFT Corporate Member

A SWIFT corporate member receives their own SWIFT BIC code and is able to communicate with any bank on the SWIFT network using the standard SWIFT message formats.  

SWIFT corporate membership used to be expensive as the only option was the Direct SWIFT Alliance Connection. This was an on-premise solution where a corporate would need to install the required SWIFT networking components (SWIFT VPN devices and security protocols). The once off costs were in the region of EUR 200 000. The corporate would require highly skilled network resources and would continuously need to implement SWIFT updates. Only mega corporates and asset managers opted for this on-premise SWIFT connection. Currently they account for 7% of SWIFT corporate membership.

SWIFT introduced the SWIFT Cloud Alliance Lite Connection which completely changed the affordability of connectivity to the SWIFT network for corporates. The cost is EUR 10 000 once off and the ongoing variable costs seldom amount to more than EUR 700 per month.  

?There are over 12 000 organisations that are members of SWIFT in 215 countries. SWIFT processes over 29 million messages a day with 99.999% availability. There are 240 corporates in South Africa that are SWIFT corporate members and have their own SWIFT BIC codes. 22 of these 240 are South African head quartered corporates. The remaining 218 are part of international groups. Globally there are 2 108 corporate groups that are SWIFT members with their own SWIFT BIC codes.

?SWIFT provides a Know Your Customer (KYC) registry built to the most stringent regulatory requirements where financial institutions can access corporate KYC information. This makes it easy for a corporate to start a relationship with a new bank.  

SWIFT provides sanctions screening and fraud detection service (for unusual or uncharacteristic payments). 

SWIFT also provides a reference service, SWIFTRef, for reference data such as BIC, bank standard settlement instructions, IBAN, ISO currency codes, country, country holiday information, Legal Entity Identifier, Business Registration Number, Market Identifier Code, etc. The SWIFTRef service is an extra charge.  

The advantages of corporate SWIFT membership are numerous. The network is highly secure. The corporate has the freedom to deal with any bank anywhere in the world using standard message formats. Most ERPs and Treasury Management Systems have built in connectivity to the SWIFT cloud network. This is known as SWIFT Alliance Lite L2BA Connectivity (Lite2 for Business Applications).

The only disadvantage of SWIFT Cloud Alliance Lite is the cost. The avoidance of costs associated with the direct host to host bank connections needs to be included in the calculation of the cost delta - there may actually be a saving in costs.

?6) SWIFT Bureau

Some corporates elect to use a SWIFT bureau such as Broadridge, FIS or Fides. Many of the treasury management system vendors, such as Kyriba, are also SWIFT bureaus. It is critical to check that the SWIFT bureau is certified per this link. 54% of corporate clients use a SWIFT bureau.

The better bureaus not only connect the corporate to the SWIFT network (and manage the SWIFT security compliance) they also enable direct connections to banks and EBICS. (EBICS is the European communication protocol that is an alternative to the SWIFT network to communicate financial messages in Europe.) As with the lead concentrator banks some SWIFT bureaus allow corporates to use their SWIFT BIC code. The corporate thus has one connection to the SWIFT bureau which then allows many connections to SWIFT, EBICS and their banks.  

SWIFT bureaus also offer value add services such as translation to and from the ISO20022 message formats, translation into proprietary bank formats, bank onboarding, anti-money laundering and sanction screening.   

The costs payable to SWIFT to use a bureau are more than for SWIFT Alliance Lite - the once off costs are EUR 14 275, there are recurring annual fees of EUR 3 735 for essential kits, EUR 2 000 for the corporate membership and EUR 2 500 for the BIC code, as well as the SWIFT traffic costs. On top of these SWIFT costs are the bureau costs.  

The advantage of a SWIFT bureau is expertise and service. The disadvantage is the extra cost.  

Conclusion

For a small business, API integration of their online accounting package to their bank is the most efficient and practical solution. For larger corporates, SWIFT membership is the obvious choice as it allows diversity of banks, standard message formats and the network is highly secure. A SWIFT bureau is an optional extra.