The most recent SWIFT update of November 2021 shows the following: The digitalization of guarantee management has been one of the SWIFT organization's focus topics, and a further evolution towards standardization in the handling of processes related to guarantees is anticipated in the years ahead. This has become particularly clear with the extended structuring of the relevant message types. Of particular note is the MT760 message type, which has evolved from free-text fields to clearly defined data elements that are easier for banks to process.
Indeed, this is by no means an entirely new observation, as many companies, especially those with a global footprint, are recognizing the benefits of the opportunities offered by a digitalized guarantee management system. As in many cases, the COVID-19 pandemic was not the root cause of this development, but it was definitely the catalyst, as not only the companies but also the banks themselves had to realize that their previous operational processes (for example, in cooperation with correspondent banks for the indirect creation of guarantee documents abroad) were often fraught with too many discontinuities to ensure efficient processing even in such an exceptional situation.
In guarantee management, which areas would benefit from increased automation and electronic processing, and where are the pain points in the traditional way that claimants and issuers of guarantees work together?
The guarantee management process
So far, the process has often been characterized by many manual activities requiring ongoing coordination and agreement between all stakeholders. Often, the application process is initiated by a subsidiary and requires the signatures of several authorized signatories on a physical application form. Typically, this varies from bank to bank and therefore makes standardization difficult. In many cases, the coordination between the applying company, the treasury/trade finance department and the financial institution takes place by telephone or e-mail and is accordingly labor-intensive and time-consuming. Also not to be underestimated is the amount of documentation required for this procedure both to document the status in the workflow up to issuance as well as various ancillary agreements with the parties involved in a comprehensible and verifiable manner. The guarantee document signed by the bank or correspondent bank is then sent by mail/courier. However, once the document has been created, the process is far from being completed. Amendments/extensions and ultimately derecognition often also result in elaborate coordination efforts.
How can modern solutions for guarantee management improve the efficiency of this process?
Especially organizations that 1) have a large volume of guarantees to process and 2) operate with many companies in different countries and where as a result numerous different employees are involved, are not satisfied with the process described above. A number of providers of guarantee management systems have recognized this market in recent years and offer their solutions to clients. These solutions offer added value in a variety of ways:
Guarantee management systems allow the control of workflows, for example from a risk perspective, whereas in the manual process each application and processing follows the same pattern. So, for instance, for different criteria of the application (e.g. use of the bank standard in the guarantee document, amount of the guarantee, type of guarantee), the organization can define whether and how many treasury employees have to review the document before it is submitted to the bank. As a result, employees can focus on cases that deviate from the standard or involve higher risk, which saves time. Likewise, bank partners can be automatically entered into the application using predefined assignments, which in turn reduces manual steps. Also, a credit limit check, for example when a critical utilization threshold is exceeded, can be implemented automatically in the workflow.
Transparency regarding authorizations in the guarantee application process, as well as their documentation, is key not only for auditors, but also for treasury management. In a system, this can be adequately mapped via authorizations and roles, with new or leaving employees being clearly visible. Additionally, all activities are recorded in an audit log and are thus easily and objectively verifiable in the system, without the need for manually signed logs. This in turn reduces operational risk through ongoing monitoring and fewer manual activities. It is also possible to generate automatic e-mails to employee (groups) if there is a change in the status of the guarantee claim, for example.
Bank communication and connectivity
By now, some banks are providing platforms where customers can apply for guarantees. While this certainly makes things easier for some companies, in the case outlined above with many different banks, a central channel linking all partners is the more efficient solution (multi-bank capacity). Rather than having to log on to different bank portals, the application is created in the guarantee management system and sent to the issuing bank via SWIFT and FileAct. Ideally, all banks recognize a standard format; failing that, it is possible to create individual forms for each institution and pre-populate them with the values entered in the application. Alternatively, if the bank does not support the SWIFT message formats (7xx) required for guarantee processing, the banks could be given access to the guarantee management system, thereby carrying out the processing directly in the system. Mail chains will therefore become a thing of the past, and in the best case scenario, all communication will be fully digitalized.
Consolidated information and reporting
It will no longer be necessary to painstakingly collate information in Excel for the accounting department or Management. Instead, standardized or customized reports in various formats are just one mouse click away. In addition, each guarantee's current status is retrievable 24/7, as is the total portfolio, which can then be evaluated on an ad-hoc basis. On top of that, the system can send these reports by e-mail to specific recipients at predefined times. And of course, all relevant guarantee documents, including the documentation of the SWIFT messages, can be stored along with the corresponding transaction and are thus available throughout. Being able to comment directly on the transaction leads to significantly fewer queries and promotes the goal of a single source of truth.
Without an adequate tool, monitoring the invoicing of guarantee fees and the corresponding charging to the operating units is a time-consuming task. Based on stored cost information per bank, guarantee management systems can calculate the fees and for instance provide information for a specific guarantee for a defined time period (e.g. the last quarter). In a next step, the fee notifications received via SWIFT can be compared with the calculated values to verify the invoicing.
ToDos and outlook
In our experience, what needs to be taken into account when implementing a guarantee management system?
- We recommend conducting a detailed requirements analysis and workshops with several vendors, so as to find the best possible solution for the respective company.
- Of course, as soon as processes are fundamentally changed and digitalized, involving all stakeholders at an early stage, especially IT, users and auditors is an absolute must. Quite often, the completion of projects is considerably delayed due to problems occurring late in the process, which could have been avoided by early coordination.
- It is also recommended to coordinate the internal IT compliance requirements for SaaS solutions with the selected provider at an early stage.
- -The SWIFT interface (host-to-host, SWIFT Service Bureau) should be implemented at an early stage allowing sufficient time for testing with the banking partners.
- Thorough planning is required to migrate inventory guarantees and ensure that they can be processed at any time.
Momentum is building in the market and banks are also realizing that investing in digitalization is worthwhile. In a 2020 ICC Global Survey, 83% of global banks reported that they have a digitalization strategy in trade finance. Some 34% said they would invest in technological solutions in the next 2-5 years. Not only is there potential in the handling of guarantee processes, but also in the creation of digital guarantees either for dispatch by mail - with some insurance companies already a step ahead of the banks - or for digital retrieval on fully integrated platforms. This is where the first providers are already positioning themselves. It will be exciting to see in which areas the development will pick up speed.
Source: KPMG Corporate Treasury News, Edition 119, March 2022
Nils Bothe, Partner, Finance and Treasury Management, KPMG AG
Tobias Riehle, Manager, Finance and Treasury Management, KPMG AG
Nils A. Bothe
Partner, Financial Services, Finance and Treasury Management
KPMG AG Wirtschaftsprüfungsgesellschaft