April 20, 2004

Banks are moving to a new IP-based messaging system that enables them to exchange information at warp speed. The system, called SWIFTNet, lets banks send messages in bulk instead of one at a time, creating an electronic envelope into which they can stuff as much information as they want.

About 37% of the world's financial institutions already are on SWIFTNet, with the remainder expected to be on board by year's end. The transition involves installing new telecommunications equipment, providing extensive redundancy and recoverability of data, and upgrading information security to conform to the mandates of the Society for Worldwide Interbank Financial Telecommunication, which operates SWIFTNet.

SWIFTNet lets banks transmit large files inexpensively and securely. For example, Wachovia Corp. uses it to exchange foreign-trade documents with European correspondent banks, which act as its agents in foreign countries.

The system also makes it easier for banks to communicate with business customers. J.P. Morgan Chase & Co. (New York, $771 billion in assets) has built a secure extranet using SWIFTNet that lets some of its largest customers, including a major international oil company, communicate high-value payment instructions. J.P. Morgan also plans to use SWIFTNet to transmit asset statements to money-management firms, which entrust custody of clients' funds to J.P. Morgan. Sending an asset statement, a headache under the old packet-switched-based system that SWIFTNet replaced, is almost as easy as sending an e-mail. "Rather than shoot 10,000 individual messages that have to be put back together, we compress them into one file," says Theodore Rothschild, senior product manager at J.P. Morgan Investor Services.

Businesses can access SWIFTNet directly instead of through their banks, something they couldn't do under the old system. "SWIFTNet has opened the door to corporations that previously had been closed," says Barb Stockler, an executive with Wachovia's international treasury services group.

Multinational companies see SWIFTNet as an opportunity to consolidate banking relationships that are spread across many countries. "SWIFTNet might allow for greater centralization, so that we could make payments out of a single euro account," says Tom Selby, assistant treasurer at publisher McGraw-Hill Cos.

As the amount of investment by U.S. companies in Europe, and vice versa, increases, banks are looking to use SWIFTNet to send recurring, low-value transactions such as retirement payments, for example, letting a pensioner in France directly deposit payments into a relative's U.S. checking account.

Two clearinghouses through which banks route such recurring payments, Electronic Payments Network in the United States and STEP2 in Europe, are in preliminary talks to link their systems via SWIFTNet to enable cross-border transactions, says Electronic Payments Network president George Thomas. As a prelude, the network and STEP2 last month began letting banks connect to the clearinghouses via SWIFTNet.

Still, banks caution that steps must be taken to ensure that transactions are screened against terrorist lists supplied by the Office of Foreign Assets Control and the Financial Crimes Enforcement Network. "As a U.S. bank, we have to be able to track, monitor, and scan files against OFAC and other regulatory lists," Wachovia's Stockler says.

Protecting the banking system from terrorist organizations is a prerequisite for using SWIFTNet for cross-border payments. Says Thomas, "To hook up to Step II, each of us needs to have good screening mechanisms in place."