How can companies save valuable resources by digitalising guarantee management?
In general, guarantee management always involves three-party relationships between debtors or guarantee applicants, beneficiaries and security providers such as sureties, guarantors and guarantee issuers. There are clearly defined key data such as the amount, type and duration of the claim and security, as well as a list of the conditions under which payment must be made.
Nevertheless, no uniform standard previously existed in the paper-based world. This was reason enough to standardise the messages as far as possible as part of the digitalisation process.
The international network for exchanging standardised messages between connected financial institutions and, increasingly, non-banks, SWIFT, probably took the most important step towards the globalisation of the guarantee business by defining Category 7 Message Types for Documentary Credits and Guarantees/Standby Letters of Credit. However, participation in this paperless exchange of messages was, and still is, subject to numerous requirements that many companies were either unwilling or unable to meet.
The standardisation process and the limited number of fields and characters also meant that some companies could no longer include all the information they considered important. For companies applying for guarantees from only one or two domestic relationship banks, SWIFT was also far too expensive as a digital communication channel.
Awareness is only slowly growing that guarantees can also be requested via EBICS, the Electronic Banking Internet Communication Standard that many companies have been using for payment transactions for many years. Based on the SWIFT MT7nn bank-to-bank messages, files can be exchanged using the order types GUK for sending guarantee messages and GUB for retrieving guarantee messages. The file formats G01 to G07 are commonly used, with G05 and G06 intended for free-text messages between the two parties. The following files are available to represent the typical workflow:
- G01 “Order to issue a guarantee” (customer sends to bank, order type GUK)
- G02 “Information on the issuance of a guarantee” (customer retrieves: order type GUB)
- G03 “Order to amend a guarantee” (GUK)
- G04 “Information on the amendment of a guarantee” (GUB) and
- G07 “Notification of reduction or release” (GUB)
The specifications for the data formats can be found in Annex 3 of the interface specification for remote data transmission between customers and banks in accordance with the German Banking Industry Committee’s DFÜ Agreement at https://www.ebics.de/de/datenformate. Chapter 6 of Version 3.5, which has been valid since 21 November 2021, shows that additional formats such as G08–G10 and G12 have been defined to optimise processes and that the settlement of claims and fees using G11 will also be capable of digitalisation in the future. The content has been expanded to include additional fields, allowing more information to be recorded about the parties involved, special agreements with the bank and counter-guarantees. As a result of these improvements, increased use of EBICS/DTA formats in digital guarantee management can be expected.
For the forthcoming EBICS 3.0, which will standardise the use of the secure transmission procedure with “EBICS banks” in Germany, Austria, Switzerland and France, the Business Transaction Format (BTF) “GUA” has already been defined as a cross-border order type, together with the corresponding mappings.
Most banks with their own or leased EBICS servers offer this service, which can significantly simplify, accelerate and secure guarantee management. Authorisations in EBICS are carried out using the familiar electronic signatures and the initial setup of the corporate customer on the bank’s computer system for the exchange of electronic keys. These electronic signatures are generally linked to an individual and function like qualified digital signatures.
As a secure transmission procedure between customers and banks using standardised order types and file formats, EBICS can be used by all German and Austrian banks, many Swiss banks and, with the forthcoming Version 3.0, also in France. Unfortunately, EBICS is not yet as widely used in other countries, which is why many global companies use the SWIFT network. SWIFT provides access to approximately 11,000 financial institutions worldwide, but requires a company to have its own BIC or Business Identifier Code. Applying for and subsequently using a BIC involves costs that only become economically viable when there is a sufficient volume of transactions. Appropriate agreements governing the exchange of messages must also be concluded with the respective counterparties. This process can be quite time-consuming and requires sufficient lead time.
A new option: the central digital guarantee register (“Digital Guarantee Vault”)
In addition to banks, there are other guarantors involved in the assumption of liabilities that cannot be reached through either EBICS or SWIFT: credit insurers such as Euler Hermes, R+V, Atradius and Coface. They play an important role for companies wishing to protect themselves against payment defaults through bad debt insurance or trade credit insurance. If a customer fails to pay as agreed, the insurance company steps in, which is ultimately the same basic structure as a surety bond or guarantee. Similarly, the amount of risk to be secured, the applicable conditions and the relevant period are defined, meaning that the same file format could generally be used.
To bring together all the parties mentioned above, a central register can be used. Following registration and a credit assessment, both applicants and guarantors such as banks and insurance companies can access the register in a standardised manner. Participants undertake to comply with certain rules and can use the central register to apply for and manage surety bonds, guarantees or credit default insurance. Insurers and guarantee issuers are informed in real time through the digital access and can immediately review, approve or reject applications, or submit requests for amendments, which are forwarded directly to the applicant. Once the parties have reached an agreement, the arrangement is digitally signed and its existence can be communicated to the beneficiaries without requiring them to become members of the central register. By ensuring the acceptance of the conditions by all participants, implementing effective measures against manipulation and forgery, and guaranteeing secure long-term storage in an ISO 27001-certified data centre, the electronic documents achieve legal validity in many countries. Through a REST API connection, the liability agreements, including their full amendment history, can be administered by the parties throughout their entire term in a time- and cost-efficient manner.
What can Trinity offer in this context?
The management of surety bonds, guarantees and credit insurance in a wide variety of forms as a three-party relationship linked to underlying transactions, projects, investments and financing arrangements, including liability amounts, terms, maturity dates and automated guarantee fee calculations, has long been available in Trinity TMS. Letters of comfort can be requested within the group by a subsidiary through Trinity TMS and subsequently granted by the parent company on market-standard terms. This can replace isolated database applications and spreadsheets that do not provide an adequate audit trail.
Quickly accessible analyses display all types of guarantee facilities, filtered or sorted by transaction type, guarantor, term, maturity, purpose and other criteria, maximising transparency. Trinity provides numerous “ready-to-use reports” through its integrated reporting system, as well as the option to present a group-wide overview of liability relationships in a concise CFO dashboard.
Integrated Treasury Management Systems such as Trinity TMS transfer the relevant cash flows, which primarily consist of guarantee fees, directly into liquidity planning and daily cash positioning without requiring duplicate data entry. They calculate the costs automatically and display the complete development of the guarantees over time. When electronic account statements are reconciled, guarantee fees are identified by the system using predefined rules, making them easy to verify and clearly classify for target-to-actual variance analyses.
Allocations to underlying transactions and projects can be represented as many-to-many relationships. Accompanying documents and guarantee documents can be stored as PDF files with the relevant transaction in the central database for access at any time. Compliance with and utilisation of credit facilities and/or limits for each counterparty can be monitored at any time.
To apply for surety bonds or guarantees from banks, the SWIFT MT7nn or EBICS/DTA Gnn file formats required for EBICS- or SWIFT-based exchange can be generated in Trinity TMS and transmitted to the respective recipients.
New features include a REST API connection to the central register operated by DVS Digital Vault Services GmbH in Munich and the option to use qualified, EU-compliant digital signatures for authorisation.
Naturally, all data available in Trinity TMS can be used for individual analyses of liability relationships. For example, users can calculate the totals of the relevant categories by counterparties or counterparty groups, underlying transactions, projects, remaining terms, maturity dates, types of liability and many other criteria, or maintain a complete overview of the difference between contingent liabilities and contingent assets at all times. Volume and fee summaries can also be prepared specifically for bank negotiations.
By managing guarantees in the same database in which all other financial transactions, credit facilities and bank accounts are administered, finance managers receive an optimal basis for decision-making, enabling them to actively manage and sustainably safeguard the company’s liquidity.
Detailed authorisation profiles combined with a structured and largely automated workflow enable fast, audit-compliant and error-free processing as well as complete end-to-end tracking of the guarantee process, from the initial application through to the full release of the contingent liabilities.
As always with Trinity, you select only the functionality you require for digital guarantee management.
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