Cash & Liquidity ManagementPaymentsSTP & StandardsThe Latest Technology Developments in the Push for e-Business Standards

The Latest Technology Developments in the Push for e-Business Standards

Addressing the Corporate Demand for STP Payment Capabilities

Corporations continue to focus on efficiency as a strategic objective, both in treasury and in global supply chain processes. The latest technology developments leverage the Internet – and, in particular, XML-based language – to standardize electronic business communication and enable advancement towards the longstanding goal of straight-through processing (STP) efficiency. The collective corporate vision also incorporates financial settlement, and towards this end, corporations have been pressuring the banking community to develop STP payment capabilities.

The SWIFT Member Associated Closed User Group solution (MACUG) aims to address corporate requirements to streamline and standardize banking communication and to include payments in STP initiatives. In parallel, a number of other groups – including RosettaNet and the Treasury Workstation Integration Standards Team (TWIST) – are focusing on advancing XML-based communication protocols for processes that either intersect with the payment or that incorporate the payment itself.

This article looks more closely at MACUGs and briefly reviews other major initiatives that aim to create STP standards. But before examining MACUGs it is useful to understand the broader push for efficiency that is underway in the global payments industry.

Efficiency Measures Underway in the Broader Payment Systems

Businesses are already taking advantage of payments standardization occurring at the systemic level. For example, corporations are achieving treasury centralization in the European market, spurred on by the introduction of the euro and recent changes to the European payments landscape, which aim at harmonizing the payment environment to achieve a single European payments zone. Many U.S. companies also are seizing the opportunity to rethink their product sourcing strategies so as to take advantage of the new payment efficiencies emerging in Europe. In the U.S. market, Check 21 exemplifies the drive for automation to achieve STP efficiency in the check payments system.

The euro and Check 21 exemplify broader efforts underway within the global payment industry to standardize within and across payments systems and services for greater efficiency. These developments demonstrate how corporations are leveraging changes in the broader payments systems to build more efficient treasury structures and global supply chains. But they do not address other corporate aspirations to standardize corporate-to-bank communication and integrate STP payment capabilities with other supply chain and treasury activities.

The Corporate Perspective: The SWIFT MACUG Solution to Bank Communication Challenges

From the corporate perspective, banks serve as the financial members of their supply chain. Therefore companies naturally wish to streamline connectivity and standardize communication across banking relationships just as they seek to standardize business communication protocols with their other supply chain partners. Historically, companies have been forced to operate multiple proprietary client access (i.e., front-end) systems, one or more for each of their banking providers. By achieving a single banking interface, however, companies could reduce training costs, minimize errors and enhance operational efficiency. Another challenge has been the need to maintain separate interfaces between the different front-end client access banking systems and legacy ERP systems. Corporations would again benefit by maintaining a single set of interface specifications, record layouts and report formats.

In response to these longstanding corporate challenges the banking community introduced MACUGs under the auspices of SWIFT in June 2001. Using standard Internet protocols, MACUGs link a bank to those corporate customers it sponsors within its closed user group via the secure, private SWIFT network. The solution uses a hub-and-spoke model, whereby all messages to and from the corporate participant pass through its bank sponsor. Therefore, MACUGs support multibanking, since a bank can relay messages from its corporate users to other banks via SWIFT. Companies also may opt to join multiple MACUGs based on their banking relationships.

The MACUG solution addresses the first corporate objective outlined above by replacing multiple front-end systems with a single SWIFT device. This procedure streamlines operations and provides a single set of standards for integrating with legacy systems.

The growth of MACUGs has been slow to date. One reason is that banks are currently focused on making the conversion to SWIFT’s new Internet protocol (IP) communications network called SWIFTNet. This is a transition that will occupy many banks through 2004. At this point, any new corporate users will join in the SWIFTNet environment. SWIFT’s conversion to IP is an important development, because it enables corporate participants to achieve Single Window Access, whereby they could leverage SWIFT infrastructure not only for traditional transaction-related messaging but also for their intranet infrastructure and other e-commerce applications as well as for improved information reporting.

This would save corporations the cost of developing and managing their own proprietary communications infrastructures. SWIFT is also working with its bank members to develop SWIFT C2B XML (corporate-to-bank data file standards) to provide a new interchangeable flat file format. In the longer term this development potentially extends the corporate value of SWIFT beyond payments. Banks and corporations see the possibility of SWIFT becoming a single channel solution for secure communication covering a broader array of cash management services, such as ACH, wires, Positive Pay and controlled disbursement, to name a few. The development of an extended product set will be in 2005 and beyond, once banks complete SWIFTNet conversion.

SWIFT’s introduction of the SWIFTNet product suite is of particular interest to corporate participants. Key services include InterAct and FileAct. InterAct will enable corporations to receive intraday account information on a real-time basis. This will aid balance and position monitoring and facilitate timely accounts receivable processing. FileAct will enable corporations and their banks to exchange bulk data. For example, individual payments could be bundled into a single bulk message. This service will encompass more than payments – trade documents, check images, statements, and other data can be sent as well. Compared to the single message alternative, FileAct sets the stage for cost savings and greater efficiencies through the paper-to-electronic conversion of documents.

That corporations are including a question in their RFPs to ask banks about their MACUG capability is evidence that MACUGs are appearing on the corporate radar screen. Increasingly, leading global banking providers are taking a consultative role in helping clients understand what it means to convert to SWIFT. In the majority of conversations with corporate clients, Wachovia finds that clients are focused on the solution’s value at the front-end, in creating a single banking interface.

Yet a study by the Association for Financial Professionals found that 78% of surveyed corporations cited the lack of integration between electronic payments systems and their accounting systems as the major barrier to achieving STP. Therefore, when evaluating the MACUG solution, corporations should consider the cost and effort involved in achieving ERP integration. Here is where the true STP efficiencies lie, as evidenced by the integration work that banks did long ago under SWIFT. Given the nature of MACUGs, we view this as a solution primarily for large corporations, at least in the medium term.

An Overview of Other Technology Developments

The Interactive Financial eXchange, or IFX, is a bank-driven initiative to establish an XML-based financial message protocol. The initiative’s scope encompasses payments and other business-to-business banking activities such as information reporting, as well as consumer-to-business banking and payment activities. Electronic Payment Indicator (ePI), another noteworthy initiative, is being developed jointly by a working group of The European Committee for Banking Standards and SWIFT. The group aims to facilitate STP for cross-border payments by creating a standard data container that both enables and supports different ways of initiating and executing a payment. For example, the ePI could aid a customer originating a payment in providing its bank complete information on the beneficiary, thereby facilitating an STP payment at a lower price.

Some have felt that bank-driven efforts have not been fast enough to respond to corporate needs. RosettaNet and TWIST exemplify solutions driven by corporations, for corporations. Both initiatives aim to forge common standards for electronic communication as the basis for achieving a straight-through processing solution, although each focuses on a different set of business processes.

RosettaNet – a non-profit consortium comprising over 400 companies mainly in high tech industries – establishes standards for electronically sharing business information for supply chain activities such as purchasing. By developing a bank-neutral solution using XML-based messaging and process specifications, RosettaNet is staking its claim as the standards bearer in the quest for e-business standardization. RosettaNet has also put a stake in the ground on payments; the RosettaNet Payment Milestone Program aims to drive the automation of payments associated with RosettaNet supply chain transactions. The solution puts forth RosettaNet as a Single Window Access into which banks can integrate to deliver STP payment capabilities.

Whereas RosettaNet addresses supply chain processes, TWIST takes a treasury focus. The group is developing XML standards that enable corporate treasurers and fund managers to interface electronically with banks, brokers and trading platforms for the processing of FX trades, as well enabling the corporate to efficiently track payments, automate reconciliation and cash positioning. TWIST has formed an alliance with SWIFT, for which SWIFT has
developed a range of new XML-based foreign exchange order messages.

Most recently the International Standards Team Harmonization initiative has emerged as an umbrella group for many of the competing and complementing initiatives around XML standards. With group participation including IFX, SWIFT, TWIST, among others, the group’s objective is to create “a single core payment XML ‘kernel'” and to develop global messaging standards, which can be used by all corporations and banks.

The Quest for STP

The ability of businesses to electronically share business information, including transaction information with their banks, is critical for achieving STP efficiency. But progress has been thwarted by the lack of a common language for systems communication. A number of groups – including SWIFT, RosettaNet and TWIST – have emerged to propose common communication standards. Whether corporate-driven or bank-driven, these efforts demonstrate how emerging solutions are focusing on various aspects of e-business and can complement, overlap or compete. It is a long process towards the emergence of a single, dominant global standard. While the full realization of STP efficiency is still to come, the latest technology developments show that steady progress is underway.

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