Swift changes for guarantees – are banks ready to deliver a digital trade service?

The pandemic put a break on the new Swift releases that were originally pencilled in for 2020.

When the releases were pushed back to November 2021, it was a welcome deferment for banks and other financial institutions to ready themselves for the new changes to Trade Finance Category 7 for Guarantees and Standby Letters of Credit.

The question is, will banks’ legacy trade client portal systems be able to handle these changes?

Banks that have prepared for this and now boast innovative trade finance systems will no doubt be able to handle and process the new structured message formats while also benefiting from the increased automation and STP in processing trade finance transactions.

So, what are the changes?

With the new Swift changes (SR 2021) for guarantees released in November, there is an industry-wide upgrade to further support the digitisation of trade finance – moving away from unstructured messages to well-defined message types that allow for increased automation and straight-through processing.

The changes bring upgraded functionalities and message formats for guarantees and standby letters of credit. Banks will need to ensure that their back-office as well as front-end applications and systems, including their APIs, are prepared for the changeover.

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 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.

Today, we are seeing a renewed urgency amongst financial institutions to offer an enhanced digital experience for their customers. But we know that enabling digital trade services for their clients may quickly become a costly and resource-heavy endeavor.

In light of these changes, what are the main features that banks need to look out for to upgrade their existing client portals to accommodate SR 2021 changes?

Delivering an accelerated digital trade experience to customers  

Although there have been changes in international trade practices in recent years, many trade processes have remained manual, paper-intensive and complex. And while digitising trade processes is not a new initiative, the previous lack of open standards, regulations and heterogeneous systems has resulted in the creation of digital silos stifling further progress.

With the advent of technologies like artificial intelligence, machine learning, open-APIs and blockchains, trade digitisation has begun to take shape. In the face of the COVID-19 pandemic and financial market volatility, we have seen the trade finance community adopt digitisation more readily.

Today, there are solutions that allow corporates to send their letters of credit or guarantee transactions to banks using a web application or any third-party portal application, for example. Client transactions are sent to banks on a secured messaging channel and banks can receive transactions via a web application or directly into their back-office systems.

Banks on the other hand have not been able to offer a fully digitised service to their trade customers due to the immense cost, time and complex implementation processes required to offer a fully digitised user journey. But with advancement in recent technologies as well as the number of solution providers operating within the trade finance ecosystem, financial institutions are well placed to offer digitised experiences to their customers in order to conduct their business at speed and with greater efficiency.

The pandemic has highlighted the inherent inefficiencies within trade finance operations and as a result, the demand for digital trade services is at its peak. Trade customers today want to conduct their business online, therefore it becomes vital for banks to digitise the customer experience as quickly as possible or risk losing customers.

Lowering the cost of ownership

The implementation of new software solutions is an expensive exercise. These would typically include the costs of hiring project managers and teams to successfully build a bespoke system as well as training employees on how to use these solutions and the cost of migrating data from an existing system (if there is one) into the new solution.

That’s not all. Banks will also have the costs of setting up server environments and configuring the system for their specific needs. Therefore, banks are reluctant to offer their clients digital customer portals because the setup costs are exorbitantly high, which in turn slows down the adoption of these services despite the strong demand from their trade customers.

Today, we are seeing many innovative companies in the trade finance ecosystem developing ready-made solutions for banks at a fraction of the price. Opting for subscription-level solutions immediately cuts down the cost of acquisition while also reducing the need to hire teams to build these solutions.

Freedom from technical debt

In the world of software development, technical debt often paralyses teams and organisations. Many initiatives and projects fail because of the technical burdens that arise after implementation, such as making sure updates are rolled out in a timely manner.

Technical debt often becomes a major factor that deters banks in their pursuit of building bespoke solutions as banks will not want to deal with the expensive upkeep of the solution.

Some of the biggest financial institutions today are changing course and adopting white-labelled solutions that not only cut costs but free them from the shackles of constant updates for their trade customers and future-proofing themselves from changes that may happen down the line.

In turn, banks are providing upgrades to their online banking platforms and making a positive change to the customer experience and channelling innovation into a booming industry.

Fast-tracking digitisation efforts

The hardship caused by the global pandemic has reinforced a desire for all players in the world of trade finance to embrace digitisation.

That is not to say that banks were not actively accelerating their digitisation efforts, but there are new efforts to digitise as much of their trade operations and services as possible.

With the introduction of new technologies such as blockchain and APIs, we can now more easily link digital processes across the different parties involved in trade. Applying new technologies in trade finance is not new, but the pace of innovation in this area during the last year is something which has never been seen before.

Banks providing international trade services still want to revamp their age-old trade finance department. However, due to the complex nature of trade finance, and the fact that each transaction requires the input of multiple people in various locations worldwide, banks must seize the opportunity to transform their trade finance functions and accelerate their digitisation efforts.

From speaking to banks, today we see that they do indeed recognise that they should improve operational processes to deliver a better customer experience, reduce costs and facilitate secure global trade practices.

The new Swift CAT7 standards will have a significant business and operational impact on the trade finance industry as a whole, and deciding to act now could propel financial institutions ahead of their competition, giving them the ability to become more agile and innovative.