Last month SWIFT released its Annual Report for 2008. Most people don’t get excited about reading an annual report, but I am always eager to get a copy of SWIFT’s. Why? Because there is lots of cool data in it about B2B transaction volumes in the financial services sector. I found the 2008 report particularly interesting because SWIFT was able to link activity on its network with the major macroeconomic events occurring around the world. This is an excellent illustration of EDInomics and further proof of how B2B integration technology provides a critical underpinning to the world economy.
SWIFT has the Best Available Data on B2B in Financial Services
The SWIFT network carries a variety of transaction types related to foreign exchange, trade finance, securities and payments. With the dramatic decline the stock market during 2008, I found the data on securities transactions to be the most interesting. Securities transactions represented about 42% of overall FIN transaction volume in 2008. Payments were the largest category of transactions representing approximately 50% of 2008 volume. Many of the payment instructions exchanged on SWIFT are related to buyers paying invoices to suppliers in foreign countries. However, a significant percentage of the payment transactions are related to securities settlement. By my estimates, over 60% of the 3.8B FIN messages exchanged on SWIFTNet in 2008 were securities related. With such a large sample size, I would contend that SWIFT’s transaction trends are the best available indicator of capital markets activity for B2B.
SWIFT FIN Messages by Category
Source: SWIFT Annual Report 2008
People often ask me how the credit crisis and stock market collapse has impacted B2B transaction activity in the financial services sector. They are typically surprised to learn that B2B transaction volumes are at an all time high. This is because transaction volumes in the securities and payment segments are typically counter-cyclical. During a stock market crash, the volume of trading activity increases substantially. Consequently, B2B financial transaction volumes increase significantly on the days of heaviest trading and highest market volatility. Associated with each securities trade are multiple messages that are exchanged at different points in the lifecycle. For example there are messages to execute the order; confirm/affirm the trade; allocate positions for individual accounts and finally funds transfer for the actual settlement.
Correlating Financial Market Activity with Transaction Volumes
The section of SWIFT’s annual report that I found most interesting was a section labeled “2008 in Context” in which the volume of FIN messages is trended graphically by month. On top of the volumes, SWIFT plotted the major events leading up to the financial crisis and the subsequent government bailout activities. Additionally, SWIFT offers its interpretation of how message volumes rose or declined based upon activity in the financial markets.
SWIFT Transaction Volumes and Context July-December 2008
Source: SWIFT Annual Report 2008
There is one chart in which SWIFT plots FIN transaction volumes against actual trading activity on the NYSE. Both charts show very similar trends with the SWIFT transactions lagging the NYSE trends by a few days. The lag is expected because the clearing and settlement processes facilitated by messages exchanged on SWIFT typically occur 1-5 days after a trade.
SWIFT Transaction Volumes compared to NYSE Trade Activity
Source: SWIFT Annual Report 2008
There is also a clear correlation between the days that the stock market plummeted and transaction volume on SWIFTNet. For example, SWIFT witnessed two peak transaction days in early January 2008, correlated with the heavy downward trading that occurred January 21st. Throughout September 2008, there was a high degree of market volatility following the collapse of Lehman Brothers and the AIG government bailout. Not surprisingly, two of SWIFT’s top 5 peak days were September 19th and September 30th. The situation got more interesting in October as the capital markets continued to decline. SWIFT experienced record-breaking transaction volumes in two back-to-back days October 14th and 15th, each with over 17M messages per day.
Other Significant Events Impacting B2B Volumes
Beyond the credit crisis, there were a number of other events occurring in the financial services industry during 2008 that could have impacted transaction volumes:
- SEPA – Major milestones in Single European Payments Area (SEPA) were plotted against FIN message volume. There appeared to be no direct impact to SWIFT volumes from the introduction of the SEPA Credit Transfer in January or the phased migrations of clearing systems onto TARGET2. The first group of Western European countries including France, Spain and the Netherlands was migrated to TARGET2 in February followed by a secondary group from Estonia, Poland and Italy migrating in May. Neither resulted in a noticeable change in traffic patterns.
- Seasonal activity – Some of the traffic peaks and troughs experienced on SWIFT are expected to occur every year due to seasonal holidays. For example, there is typically a drop in financial transaction activity during the month of August when many people are on holiday. Conversely, there is a year-end rise in financial transaction activity in December as many people are making trades to satisfy tax planning goals or to achieve annual return objectives.
SWIFT Transaction Volumes and Context July-December 2008
Source: SWIFT Annual Report 2008
The SWIFT data also provides insights into how B2B transaction volumes are growing year-over-year in the financial services sector. Payments message volumes grew 4.2% in 2008, which is significantly lower than the 16.1% growth in 2007. Despite the higher overall transaction numbers, growth slowed in securities as well from 32.2% to 17.3%. Trade messages typically used to process letters of credit between banks, were the only category experiencing a decline (-4.5%) in 2008.
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