Cash & Liquidity ManagementPaymentsSTP & StandardsFacilitating End-to-End Reconciliation for Corporates – The Yellow Brick Road to STP

Facilitating End-to-End Reconciliation for Corporates - The Yellow Brick Road to STP

There is a growing drive for improved alignment between the physical and financial supply chain. There are several major initiatives taking place today that will lead to greater convergence across a broad front of players. This is most evident in Commercial Payment Initiatives where bodies such as RosettaNet and TWIST have engaged their community, their respective banks and their solution providers to develop common business processes to improve payment initiation and accounts receivable reconciliation.

This convergence is being facilitated by SWIFT, the industry owned cooperative supplying secure messaging services and interface software to financial institutions. SWIFT’s key role has been in organizing and coordinating the responses of the financial institutions to these initiatives, ensuring where possible convergence of standards and a practical phased approach is adopted.

There is much at stake here and clearly convergence and adoption of common standards will save participants billions of dollars each year that are lost because they are unable to reconcile receivables. Delays in reconciliation can mean any or all of the following:

  • Credits are not put to best use from a cash management perspective – resulting in higher credit charges or lower interest income
  • Goods are not shipped to buyers – resulting in frustrated counterparties and inefficiencies in inventory management, production and sales
  • Credit limits on buyers are used up preventing further sales to these parties – resulting in reduced sales growth and profit potential of suppliers, whilst opening the door to competitors to fill the gap
  • Unnecessary time and effort for all parties, including banks throughout the payment chain, to reconcile these payments – sometimes resulting in bank charges being levied for such investigations thereby exacerbating the costs

Adherence to standards could also provide savings to participants on account of more transparent procedures and practices to adopt with lower systems integration spend and switching costs.

The solution principles agreed thus far by the banks are as follows1:

  • Develop common business process to improve payment initiation and accounts receivable automation, including RELIABLE transfer of remittance advice or remittance advice reference through the banking chain

For Corporates wishing to use a H2H or File Transfer Protocol:

  • Use Open SWIFT XML standards for the message layer covering payment initiation and cash reporting, encouraging convergence with other EDI or XML payment standards and requirements
  • Use Bank-approved security for the transport layer. Individual solutions are proposed in the absence of a common, bank-wide solution
  • Use messaging transport protocol agreed between customer and banks

Competitive differentiation between the banks will clearly exist and be on the basis of those that have enabled themselves to these standards. Amongst those that have enabled themselves, differentiation will occur over coverage (includes geographic as well as payments systems), pricing, service standards, customer service and value added information services (to include remittance advice processing on behalf of the counterparties, reconciliation processing and format conversion).

And as the corporate players include these requirements into their cash management RFP’s, one might expect to see greater convergence in the banking industry. Hopefully, we will not see in the words of a RosettaNet IT Board Member in 2000, the following:

“Standards have the capacity to level the playing field, but rarely they do. The good get better and the market differentiates. It may be the standards accelerate the differentiating of good from bad – of executing well versus not.”

Clearly corporates would like to see interoperable security and transport layer protocols with security being the most challenging in light of the various new regulations being placed upon the financial industry. Until an agreed standard amongst the players has emerged and a compelling business case is articulated there is limited appetite for banks to engage. This requirement will need to be addressed at a later time. Indeed there may well be a place for SWIFT in this space should corporates participate in a MACUG (Member Administered Client User Groups) and communicate with their bankers and counterparties over SWIFTNET using SWIFT XML standards and PKI.

The diagram and the details on each step in the process are covered as follows:

1. Sales Negotiation

  • Buyer and Seller agree on transaction and price.

2. Remittance Advice

  • Buyer sends Remittance Advice with a Unique Remittance Identifier (URI) to Seller. Both the Buyer and Seller expect the URI to be passed through the entire payment chain and be advised to the seller in the Credit Advice Notification. The URI is the unique link to the invoice level details that are passed outside the payment chain and which will enable full reconciliation.

3. Payment Initiation

  • Buyer initiates payment instruction to the Buyer’s Bank using their channel of choice (paper, fax, internet, workstation, H2H). A RosettaNet or TWIST corporate will tend to use the H2H Channel and adopt the XML schema for the message layer.

4. Payment Initiation Status

  • Buyer’s Bank debits account of Buyer.
  • Buyer’s Bank confirms payment status to Buyer, i.e. Instruction received and processed.

5. Payment Instruction to Seller’s Bank

  • Buyer’s Bank sends payment instruction through Clearing System.
  • Buyers Bank ensures that the URI is mapped correctly into the Payment Message.

6. Seller’s Bank Credit Advice

  • Seller’s Bank credits account of Seller.
  • Seller’s Bank extracts URI from payment message and advises Seller in the Credit Advice. A RosettaNet or TWIST corporate will tend to use the H2H Channel and adopt the XML schema for the message layer in communication.
  • Seller reconciles Full Remittance Advice from Buyer with Credit Advice from Bank using the URI.

The URI serves to unlock the full invoice level details of the payment that is advised outside of the payment chain, thereby facilitating reconciliation. This would help to mitigate the issues with narrative field length available in payment platforms, which normally results in truncation issues and loss of important data.

While Banks will provide alternative communications channels to their clients for payment initiation and reporting, the more sophisticated are most likely to use a Host-to-Host arrangement.

There is considerable effort involved by the Banks to ensure that the Unique Remittance Identifier is carried all the way through the payment process. Banks or Payment Service Providers will need to ensure that they have correctly mapped the field narratives from all their channels to their Back Office Processing Systems through to all the Payment Instruments offered. This exercise will have to be repeated on the inward leg also to ensure correct reporting to the Beneficiary of the Payment.

It is very possible that truncation of narrative fields will occur outside of the control of the Banks, perhaps because the field lengths in the various payment clearing systems are inadequate. An example is the Hong Kong ACH system that only allows for a Narrative Field Length of 6 characters although there is an additional field for Reference Number. In such instances the counterparties will need to work around this problem, perhaps by reducing the tag identification number to an appropriate length that will still enable reconciliation or mapping to another field that is of an appropriate length.

Over time, one might expect the owners of the Payment Clearing Platforms (in some instances they are the banks themselves) to respond appropriately to provide the required messaging standards demanded by the participants. This may just be limited to increasing the field lengths available under the appropriate field tags, or stretch to building a whole new messaging standard based, perhaps, on XML, with potentially unlimited character space to allow for buyers and sellers to transmit full invoice level detail, and include an appropriate Transport and Security layer.

At what pace will this Payment Initiative be adopted and how broad will it likely be? Clearly, banks value the transaction activity of their clients, particularly where there are attractive fees and float to be derived from this activity. In the opinion of the author the pace and broadness of adoption will depend in large part upon the Corporates themselves. Clearly they hold it in their power to request compliance to these standards in their Cash Management RFP’s and compliance will ensure that the bank has a fair chance to reach the short list. But the corporate in turn must build a compelling business case and if they value this quality of information and the investment that is required by the players to provide, they must be willing to pay for it. After all they could stand to save billions as a result of improvements in reconciliation.

This is an updated article first published in the HSBC’s Guide to Cash and Treasury Management in the Asia Pacific in 2004.

1 To write this article and to accurately reflect a consensus view where appropriate, the Author has drawn extensively on the ideas and materials raised during the discussions leading to the Banks’ response to the TWIST and RosettaNet Payment Program Requirements. Leading Cash Management Banks and SWIFT have participated in this Initiative.

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