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The Resource for the Global Finance Profession

Case Study: Vanguard’s SWIFT Implementation

  • By Stephanie McClintock, CTP, and Robert Freiling, CTP
  • Published: 2014-07-25

Vanguard’s Money Movement Unit, which initiates billions in payments on a daily basis, was too dependent on manual processes and legacy systems that couldn’t handle the workload. Migrating to a treasury workstation and utilizing SWIFT enabled the company to streamline its payments process and reduce risk.

Vanguard is the largest mutual fund company and third-largest asset manager in the world, with $2.7 trillion in assets under management, globally as of March 31, 2014. The company’s Money Movement Unit, a part of its Fund Financial Services (FFS) group, is responsible for executing daily payment instructions supporting fund custody operations and transfer agent funding.

In the years leading up to its SWIFT experience, the FFS Money Movement Unit initiated approximately $25 billion in payments daily across 800 counterparty bank accounts. The payment process, which had evolved and intensified over the years as Vanguard’s assets climbed, had become cumbersome and inherently risky. The core process was people-dependent, manual in nature, and reliant on proprietary systems that were no longer scalable. There was little opportunity for straight-through processing with Vanguard’s banking partners. Payments were also delivered through supplemental methods that included bank software and fax. The manual workflow, which had been operationally appropriate during the firm’s earlier years, was now highly inefficient. Additionally, as payment activity and the dollar size of payments increased, the need for intraday payment oversight of the counterparty banks had become significant.

Improving money movement

To mitigate this comprehensive list of risks and to improve efficiencies, the Money Movement Unit needed:

  • A dependable and scalable payment instruction methodology
  • The ability to send aggregate, netted payments to reduce payment size
  • Straight-through processing with counterparty banks
  • Improved security through the elimination of payments communicated via fax and bank software
  • Visibility and intraday oversight of bank payment execution
  • Reconciliation effectiveness
  • The ability to support future global expansion.

A team was formed to discover and implement solutions. Through in-depth risk analysis, it became obvious that the Money Movement Unit needed to leverage the SWIFT standardized messaging infrastructure for payments and other transactions, including reconciliations. The capability for international messaging was also important.

As its first step toward the goal, the team established a treasury workstation, with a payment factory emphasis providing SWIFT instruction enablement. The system made it possible for incoming payment sources to be translated into payment transactions, with the ability to deliver bank counterparty instructions through MT202 SWIFT messages.  It also provided for the receipt of overnight SWIFT statements (MT940/950s), allowing for an automated reconciliation process.

With payments being directed via SWIFT messaging, the increase in efficiency and reduction in risk were immediate. The system also produced instantaneous straight-through processing with the banks, at a rate of 98 percent STP, resulting in improved timeliness and accuracy. The use of bank software and faxes for payment was reduced by 99 percent. Finally, the reconciliation process became faster and more efficient, with improvements to auto confirmation and matching that measured in the high 90th percentile.

Lessons learned

Through its implementation of the treasury workstation and SWIFT, the team gained several lessons learned that will translate to other projects. Among them: Given the size and complexity of the payment process, the migration to a treasury workstation and SWIFT called for a methodical, phased approach.

Because Vanguard’s initial strategy was to leverage payment supplier requirements that would provide the greatest opportunity for automated SWIFT output, the team did not accurately anticipate payments that fell outside of those conditions. As a result, while the transition from the old system was immediately successful in terms of SWIFT outcomes, it led to unanticipated short-term increases in some manual payment types. Finally, the transfer from legacy systems to a SWIFT-enabled platform was a considerable process change for the group to digest, prompting the insight that the more change-management communication, the better.

Since the SWIFT implementation, the Money Movement Unit has continued working to optimize the payment process with a focus on quality, scalability, and strict risk management. To mitigate the increase in manual work caused by payments outside the established SWIFT criteria, payments from internal systems have been automated to flow directly into the treasury workstation. The initial implementation included aggregation of payments moving in the same direction between like accounts; this resulted in an increase in individual payment size and increased intraday overdraft risk by our banking partners. The treasury workstation has now been enhanced to allow for the netting of payments moving in either direction between like accounts. The result was a 60 percent reduction in daily payment dollars moved and a 30 percent reduction in daily payment instructions.

Next steps

So where is Vanguard’s Money Movement Unit headed now? As a global financial steward, the unit is positioning itself to support a payment environment encompassing operations abroad as well as in the United States. In support of this goal, the treasury workstation will be enhanced to allow for multicurrency payments. Another improvement will include a monitoring dashboard view providing for increased payment oversight and intraday business process monitoring. Lastly, the team will recommend use of additional SWIFT codes, including MT210s and MT900s, to fully support global payment functionality and allow for real-time view and oversight of payments.

The vision for the future is a global operating model to include:
1.    Increased use of SWIFT messaging for payments, reconciliations, and intraday oversight
2.    Centralized global organizational oversight with local ownership on the continents
3.    The use of a single global treasury workstation and
4.    Centralized governance over policies, procedures, and risk and control oversight.  

Stephanie McClintock, CTP, is manager, and Robert Freiling, CTP, is senior manager, fund treasury services, for Vanguard.

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

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