June 27, 2003

Over the course of the next 18 months, more than 7,000 of the world's largest banks will change the way that they communicate with one another.

The result may electrify the entire financial world.

On the surface, SWIFT's decision to migrate users of its FIN messaging service from the X.25 "store-and-forward" protocol to SWIFTNet FIN, an Internet Protocol (IP) network, doesn't seem like the most exciting thing happening in financial services.

Indeed, from the perspective of David Dart, managing director and CIO of HVB America, the SWIFTNet migration is just another project. "I'm not building strategy around the migration to SWIFTNet," Dart said. "It's more like a move to decimalization. It's something I've been forced to do."

But the view from the home office may be quite different, he noted. HVB America is a member of HVB Group, a 680 billion euro financial institution headquartered in Munich. HVB uses the SWIFT network extensively for sending FIN payments and settlement messages to other banks, and even for messaging within the firm. "We are considered, as a financial institution, a fairly heavy user of SWIFT," said Dart.

Although the parent company likely has a strategic approach to the bank's SWIFTNet deployment, HVB Americas by itself has enough of a business case to proceed without having to map out a grand plan. "Once we see what we can actually do with the IP-based network, then we may well seek to take advantage of that," Dart said. "But at the moment, we use SWIFT to route messages, we will continue to use SWIFT to route messages day one, and there is no change."

HVB America seeks to bolster its straight-through processing efforts in money markets, foreign exchange, lending, fixed income and derivatives. To that end, the bank has deployed middleware from SeeBeyond to transmit messages throughout the organization. "Our STP initiatives have largely been the integration and automation of our internal processes," Dart said.

From the back office, virtually all of the bank's payments flow through SWIFT and FedWire. But having an IP network will benefit the SWIFT organization just as much as it does its member banks. "The beauty of SWIFT is once [a message] leaves me, it's their responsibility," said Dart. "They underwrite the failure or misrouting of any particular messages, especially as it relates to payments."

Both the bank and SWIFT can benefit from the ability to track a transaction from start to finish, using the capabilities of the forthcoming Secure IP Network, or SIPN. Even though message delivery is SWIFT's responsibility, bankers have shown keen interest in the whereabouts of their payments instructions. "On the SWIFT network today, the most popular message is a status check," said Tim Lind, senior analyst, investment management, at TowerGroup, based in Needham, Mass. "Is it failed? Is it settled?"

Using SWIFTNet FIN, status checks will be a snap. But the ability to trace messages in the way that overnight delivery services track packages doesn't satisfactorily explain why the technology community is so abuzz with the possibilities.

SWIFT BEGINNINGS

Formed in 1973, SWIFT took the next four years to hammer out operating procedures and bring its initial members online. Then, it quickly became the preferred method for making international wire transfers. "Just to say you were a member of the SWIFT network made a statement about how serious you were in the international business, and whether or not you were a player," said Nelson F. Everhardt, senior vice president and corporate compliance executive (retired), Bank of America, Charlotte, N.C., and president of Everhardt & Associates, LLC.

Now, SWIFTNet is positioned as the replacement to the unwieldy Web. Think of SWIFT as a members-only global Internet, to which only banks meeting strict security standards can join. Unlike encrypted Internet traffic, which travels in the digital equivalent of armored cars over public highways, SWIFTNet messages travel in what, by comparison, would be protected aerial convoys through secured airspace.

In other words, it's an actual private network, not a virtual private network.

To get a full sense of the vision, just imagine an Internet where everyone's identity has been verified. No more denial-of-service attacks. No more spam. Rational pay-per-use pricing guarantees the timely delivery of important messages by knocking less-essential traffic out of the way.

Such a network also has the promise of maintaining secure operations during extremely adverse conditions. "Having an alternative to the public Internet is good, especially in view of the vulnerability of financial networks to disaster," said Frank Barbetta, research analyst, global carriers, for Probe Research, a telecom research firm based in Cedar Knolls, N.J.

SWIFTNet FIN participants will have a choice between four telecom firms, all with dark fiber capacity and regional router hubs: AT&T, Infonet, and Equant, which Barbetta describes as "traditional global carriers," and Colt, a pan-European carrier. "Basically all they're doing is carving out a small percentage of their existing network capacity and locking it down from a security perspective," said John Parker, vice president and general manager of financial markets for Vitria, a Sunnyvale, Calif.-based software firm. "That's much more economical than trying to build that from scratch, to deliver what is, in Internet terms, a miniscule amount of traffic."

Yet in banking terms, SWIFT traffic isn't so shabby. In 2002, the SWIFT network carried over 1.8 billion messages, of which 1.1 billion were for payments, 550 million for securities settlement, and the rest split between treasury, trade finance and other messages.

Some 250 different types of FIN messages will soon travel over SWIFT's secure IP network. But that only scratches the surface of what's possible with SWIFT. "There was one service-the FIN service-on one network," said Robin Cigman, director of strategy and development for Mercator, a Wilton, Conn.-based software company. "They're moving from the X.25 to an IP network, where multiple services can be run on the same network."

A relatively simple way to upgrade for many banks is to install the SWIFT Alliance Access (SAA) utility at each point within the organization that generates FIN messages. Alternatively, banks can install a SWIFT Alliance Gateway (SAG), which consolidates SWIFT traffic within an organization from disparate applications.

The gateway strategy can reduce the complexity of a bank's technology footprint. "This mandatory movement towards SWIFTNet is causing strategic rethinking and tactical consolidation in the back office," said Mark Greene, general manager of global banking for IBM, Armonk, N.Y., who likened the SWIFTNet FIN migration to the Y2K conversion. "You could convert your code and stop there, or, since you were looking at all your stuff anyway for Y2K, some banks reengineered things."

But most banks haven't taken that step towards consolidation yet. "Most of our customers, at least in the banking world, have multiple connections to the SWIFT network," said Vitria's Parker. "They're not yet to the point where they're managing their SWIFT network connectivity centrally, as they should be."

Reticence to consolidate may have its consequences down the line. "For any given migration, you can solve it faster and cheaper with a point-to-point transformation, Parker said. "But if I change all the standards again, I have to throw out all of my previous transformation work, and it's a 'redo' from the start to do a second transformation."

Along with the reduced cost of future development, many banks hope to realize operational savings by reducing the number of points of contact with SWIFT. In the past, each connection has typically required its own support staff, and thus duplication of efforts. So if a London branch generates 80 percent of SWIFT traffic, it makes sense to use that location to concentrate the remainder of the traffic. "There are American banks [with] premises in London, which are managing a portion of their U.S. traffic from London just to optimize their use of the SWIFT network," said Fabian Vandenreydt, managing principal in the Brussels office of Capco.

Furthermore, adding a SWIFT gateway ensures that new services can be adopted as they become available. "Now they'll have one network that offers much more than just the FIN, so a lot of the things that [financial institutions] would want to do would be available via SWIFTNet," said Yossi Covo, vice president, SunGard Business Integration, New York. "The traffic cost would be less than actually connecting via alternative mechanisms."

A QUICK FIX

In order for SWIFTNet to gain traction in the U.S. as a gateway for more than just FIN messaging, it needs to bring with it additional functionality. That's because U.S.-based banks typically do not rely upon SWIFT for clearing and settlement to the same extent as do European banks. "The U.S. market is very well-structured," Vandenreydt said. "SWIFT wants to move up towards the middle- and front-office traffic [in the U.S.] by supporting FIX services on its network."

The FIX service supports communication between buy-side and sell-side securities firms and investment managers, including pre-trade messages, indications of interest and trade messages. "We're not the only game in town - there are other services out there supporting FIX traffic," said Matt Fox, program manager, SWIFTNet FIX, New York. "The biggest value we bring to the world of FIX is access to our community."

When SWIFTNet FIX becomes available over the Secure IP Network, banks will be able to expand their range of trading partners to a substantial degree. "The sell-side's always interested in finding new buy-side clients they can service, and the buy-side's always interested in finding the best execution out there," Fox said.

Indeed, FIX networks live and die by the number of participants they attract. "We have this very large community that we're making the FIX services available to, and a lot of these firms have not used FIX in the past," said Fox. "For a lot of firms on the network, SWIFT is really their only means of communicating electronic information. So having the FIX services makes those services now accessible to firms who couldn't, for one reason or another, get to them before."

One reason that firms have been inaccessible is that FIX sessions had required point-to-point connections. "For FIX, you literally have to subscribe to seven different networks to talk to seven different customers," Fox said.

As a hub-based service, SWIFTNet FIX will allow its users to communicate with the entire SWIFT community without such machinations. "We allow firms to connect into us through a single FIX session, and we manage their connectivity out to their endpoints," said Fox. "In a sense, they've outsourced the monitoring and maintenance of those connections through SWIFT."

This functionality requires installation of FIX engines from companies such as Financial Fusion. "We essentially built an application to deliver FIX messaging across the SWIFT network, instead of having to deal with all the point-to-point connections they would have to deal with if they used FIX as defined today," said Andrew Bergen, director of products, Financial Fusion, Concord, Mass.

The SWIFT-savvy firms new to FIX will have an easier time of it than FIX-fluent traders that have to get onto SWIFT. "[FIX] is just a TCP/IP-based protocol - it's implemented all over the place, in various forms, on various networks," Fox said. "Whereas SWIFT not only has its own messaging standard, but its own private network, and its own services that support communication using its protocols."

Given the cost of adopting SWIFT, banks have shown an eagerness to find new applications for the network as they go. "When they look at how the front offices communicate today - which is not over a standardized network or a private network with the security, reliability, non-repudiation, guaranteed delivery, and those type of features in there, with a single customer service organization supporting them - there's an argument that they can rationalize their infrastructure, and put their FIX traffic over the SWIFT network as well," Fox said.

SWIFT AND SWIFTER

The FIX service is just one example of the peer-to-peer networks that can be created using SWIFTNet as a backbone. Indeed, virtually any inter-bank consortium, marketplace or user group can take advantage of SWIFT's network security and messaging protocols to get nascent ventures off the ground in record time.

Member-administered closed user groups, or MACUGs, can act either as a gathering space for designated SWIFTNet users to communicate with a single entity; as a peer-to-peer marketplace exchange; or as a more general virtual meeting space. "If you want, you can use a closed user group for peer-to-peer communication without having a central market infrastructure at all," said Capco's Vandenreydt.

Indeed, SWIFT will provide the tools for any collection of banks and their corporate clients to form whatever market structures they see fit to construct. "In a closed user group you can use whatever standards you want," Vandenreydt said.

Perhaps the most promising application for MACUGs is to bring on the corporations. In essence, banks could act as Internet Service Providers (ISPs) for their corporate clients wishing to transmit secure traffic over the bank-owned SWIFTNet Secure IP Network. "You're going to see people starting to use the SWIFT network for things like Boeing buying a bunch of aluminum from Alcoa, for argument's sake," said Martin Orbach, director of industry marketing, SeeBeyond, Los Angeles.

But don't expect the SWIFT organization to take a completely passive role in the operation of MACUGs. As banks discover new customer needs based on their MACUG experiences, it's likely that SWIFT will include those items in future revisions of its standard message formats. "They will probably find core things that are needed across closed user groups," said Vandenreydt. "They will be in a position to improve those standards based on user feedback."

Many banks have already taken concrete steps to bring their clients along the MACUG path. "We have already built up our internal platform to offer any services to comply with the needs and demands of corporate customers," writes H. Hashimoto, senior manager of the systems resources management department, in the foreign exchange, settlement and overseas branch team for Sumitomo Trust & Banking Co., based in Tokyo. The bank, in conjunction with Sumisho Computer Systems, has deployed a SeeBeyond EAI platform to help connect its systems through SWIFT into the Bank of Japan Network (BoJ-NET), CLS Bank, and the Foreign Exchange Yen Clearing System.

In accordance with global industry trends, Sumitomo Trust & Banking plans to bring its entire network onto the TCP/IP protocol within 2 to 3 years. "This innovation will accelerate the pace of new infrastructure and new services for not only financial institutions, but also for corporate customers," Hashimoto writes. "The short-term development and deployment of new applications to comply with any client demands will be the key for us to keep our financial market presence and maintain our competitiveness."

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