Cash & Liquidity ManagementCash ManagementAccounts ReceivableHigh Levels of Auto-Reconciliation for Global Accounts Receivable — Is it Possible?

High Levels of Auto-Reconciliation for Global Accounts Receivable — Is it Possible?

In the US, accounts receivable (A/R) operations have achieved high levels of
auto-reconciliation for most electronic payment instruments. Incoming electronic
wire transfers and Automated Clearing House (ACH) transactions are around 95%
auto-reconciled. Thanks in a large part to Electronic Data Interchange (EDI)
and liberal clearing systems that allow hundreds of remittance data lines to
be sent along with the payment instruction. Global A/R operations, on the other
hand, is far from being as successful with auto-reconciliation. Most global
A/R operations currently achieve, on average, a 20% auto-reconciliation rate
for electronic payment transactions, which is far less than satisfactory results
for most large corporations.

This manual reconciliation process also inhibits the buyer’s ability to maximize
use of its credit line, as items have not cleared within the seller’s A/R system.
Additionally, it may also result in goods not being shipped in time, due to
the missed A/R posting. A group of RosettaNet corporations decided to address
the global A/R auto-reconciliation issue, and enlisted SWIFT with some of its
global banking members to create a solution.

What is RosettaNet?

RosettaNet is a non-profit consortium of more than 400 of the world’s
leading information technology, electronic components, semiconductor manufacturing
and solution provider corporations working to create, implement and promote
open ebusiness process standards. RosettaNet is named after the Rosetta Stone,
which, carved with the same message in three languages, led to the understanding
of hieroglyphics. RosettaNet is using XML and Partner Interface Processes (PIP)
to establish a common language and standard processes for the electronic sharing
of business information within the entire supply chain. Deutsche Bank is one
of the founding members of the RosettaNet Payment Milestone Program (PMP) and
actively participates on the Focused Process Team for this initiative.

Corporate Accounts Receivable Reconciliation Issue

As illustrated in Figure 1, the RosettaNet corporations described their current
frustration within the A/R and treasury operations as two-fold. First, and most
painful, is the labor-intensive manual processes associated with global A/R
reconciliation, which Killen & Associates has estimated to cost a typical
$1 billion corporation as much as $27 million annually.

Second, is the lack of visibility of incoming funds, which the payment cycle
(sometimes as long as 3-5 days) limits use of available funds for that same
period of time.

Remittance Referencing Challenges

So where’s the bottleneck? Achieving high levels of auto-reconciliation on
global A/R is challenging for a number of reasons. First, most clearing systems
outside the US are not set-up to allow for large amounts of remittance information
to be carried along with the payment instructions. Instead of hundreds of lines
of data, these clearing systems are generally limited to between 18 and 378
characters of information per payment instruction. Additionally, this limitation
is inconsistent between clearing systems within a particular nation (e.g. real-time
gross settlement may allow 140 characters vs. bulk clearing which may only allow
18 characters). Second, between the multiple interfaces and intermediaries within
the payment initiation process this limited reference data is sometimes overwritten
or lost in the process, leaving the beneficiary with incorrect or incomplete
data to associate the payment with the original invoice(s).

Global Banking Solution

To tackle these issues, the RosettaNet Corporations asked SWIFT to facilitate
a solution with the broader banking community that it represents. The SWIFT
standards team along with its banking members, decided to tackle this issue
within the scope of its existing SWIFT Customer-to-Bank (C2B) XML initiative.
This initiative had already begun to develop an XML message for the payment
based on the existing bank-to-bank (SWIFT FIN MT103) message, however considering
the entire end-to-end C2B workflow.

Effectively, RosettaNet was given a voice, as a partner, into the design and
validation of the SWIFT C2B XML standards. These standards will then be adopted
within the RosettaNet set of standards for the payment process. SWIFT has taken
a similar approach with other XML standards forums such as Treasury Workstation
Integration Standards Team (TWIST), IFX and UN/CEFACT – TBG5 (Finance)
in an effort to drive the convergence to an acceptable XML standard for the
payment and credit advice.

A RosettaNet PMP was created to develop the new XML-based electronic payment
initiation standard, which would facilitate A/R auto-reconciliation and better
payment information visibility for the corporate treasury regarding the incoming
payment. The Program currently involves a consortium of parties: RosettaNet
corporations, the RosettaNet organization, banks, vendors and SWIFT.

The Program’s scope aims to improve the following four areas of the payment
process for corporations with their banks, complementing existing RosettaNet
and financial processes, standards and networks:

  • Initiate Payment: Process to allow the buyer or its agent to initiate a payment connected to a remittance advice to settle payables with a seller. The payment is to be initiated by the buyer through the buyer’s bank. Typically, the payment settles multiple invoices with the seller.
  • Confirm Payment Initiation: Process to allow a seller to gather payment initiation confirmation from a financial institution prior to payment settlement to provide early visibility of incoming funds.
  • Payment Settlement with Detail: Process to allow the seller to receive remittance detail connected to the funds notification to allow auto reconciliation of A/R at time of settlement.
  • Track Payment: Process to allow both the buyer and seller to track the progress of the payment through the banking networks. This is expected to be an optional value-added service offering from the banking partners.

The PMP primary objective is to reduce cost per account receivable line item
by linking 3C6 remittance advice to the payment via a Unique Remittance Identifier
(URI) which enables auto-reconciliation and Straight-through Processing (STP).
However, it’s not just about 100% STP and auto reconciliation rates, corporations
also need timely information on incoming funds.

Benefits of an Enhanced Process

Corporations may benefit from the RosettaNet PMP as a buyer and/or seller.
In the RosettaNet PMP process, shown in Figure 2, the buyer’s enterprise system
generates a 3C6 PIP remittance advice which is transmitted along with a URI
to the seller. At the same time, beginning again with the buyer in step 2, the
buyer would generate a payment request formatted in SWIFT C2B XML, which also
includes the URI, and sends it to the buyer’s bank. The payment would then move
in step 3 to the seller’s bank, via existing inter-bank clearing/settlement
systems, where this bank would send a payment confirmation (credit advice) including
the URI to the seller in a SWIFT C2B XML format. Then in step 5, the seller
would use the URI to automatically link and post the payment to the remittance
detail facilitating auto reconciliation of the A/R process.

Next Steps – One Global XML Payment Standard

Once the global SWIFT C2B XML payment and advice standards are achieved, SWIFT
will seek ISO certification and act as the administrator for this open standard.
Banks will need to add these standards into existing bank solutions.

Using open standards, such as the SWIFT C2B XML, for the corporation means
automated supply-chain management resulting in substantial cost savings. For
the bank, it means interoperability with their clients and standardized delivery
of product offering, which over time is less expensive to develop and maintain.
Achieving high levels of auto-reconciliation for global A/R is possible, however
only after the successful implementation of SWIFT C2B XML by banks for payments
and credit advice, and more importantly by the adoption of this XML payment
standard by corporations themselves.

Arthur Brieske, US Head of Accounts Payables & Receivables, Global Cash Management, Deutsche Bank

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

10m
TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

1y
Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

1y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

1y