Open Standards: How Banks are Responding to the Challenge

In the ideal world, there would be one standard that all corporates, software vendors, banks and local clearing systems could support, which would facilitate effective cash management. However, the payments arena, in line with other industry sectors, has evolved through a combination of factors:

• Corporate treasuries continue to seek operational and financial efficiencies, which ultimately improve the profitability of the company. This is achieved through a combination of internal development (in-house packages) and the purchase and customisation of vendor packages. In recognising the importance of existing relationships – and the relationship approach that is typically adopted by the banking community – the banks have generally agreed to support the corporates’ preferred file format, communication and/or security protocols. Banks take this approach in the hope of promoting and extending usage of solutions to other corporate clients in the future, thereby generating an additional income stream.
• Software vendors are continually upgrading their own product set to provide value-added solutions, which maintain and increase their income streams.
• ERP (Enterprise Resource Planning) vendors have introduced their own proprietary file format. These typically have the flexibility to support local customisation, where a corporate has a particular set of requirements.
• The numerous standards organisations have understandably focused on the design, development and commercialisation of their own particular flavour. Linked to this is the additional customisation that has inevitably occurred within the agreed published standards where corporates have taken their own view and the divergence on standards continues.

Bearing in mind this operating environment, it is clear that the banks had little choice other than to simply agree to support the requirements of its clients on purely relationship grounds. By their actions, the banks effectively accepted the introduction of a plethora of standards. Banks are service providers; they recognise that corporates will always have a choice of provider and therefore will always be keen to minimise any risk to the relationship. Understandably, once a bank has committed to support a new standard, in common with other solution providers, will seek other opportunities to reuse the initial development.

However, whilst the standards have clearly begun to evolve, the current plethora of standards still causes a lot of problems for corporates, vendors and banks, as the following diagram illustrates.

The current status

The payments landscape contains a complex and diverse range of corporate requirements, file formats, software applications, interfaces, banking channels, in-country clearing systems and local regulations. This level of complexity creates additional costs and challenges for the main stakeholders – corporates, vendors and banks. This level of complexity is illustrated through the various colours above, with each colour representing a potentially different set of requirements. For example, Company D can or will only support format and interface B, which the various banks have agreed to accept in addition to the other formats and interfaces requested by the other companies.

However, there is a new dawn in sight: recognising the issues associated with the infrastructure described above the key market participants have been actively working towards the formalisation of a new standard for the initiation of commercial payments, based upon XML technology. The corporate community has once again driven this change, with the main impetus coming from the Rosettanet PMP (Payment Milestone Program) and the TWIST initiative.

The commitment and objectives from the initial players are crystal clear (see other articles on open standards published this week on gtnews) as they seek to achieve standardisation which will improve the level of automation and achievement of STP within the financial supply chain, thus providing the required operational and financial efficiencies.

From a supplier’s perspective, the banks that have been involved in the initial design discussions have confirmed their commitment to achieving a global payments standard. The following extract from the banks’ convergence statements in October 2003 reinforces this position and recognises that the banks see standards as fitting within the collaborative and not competitive space.

Objectives

…drive a single Core Payment XML ‘Kernel’ that can be used globally by any corporate, irrespective of size and sector and by any servicing bank regardless of location…

Tactics

• Identify and resolve content differences between the messages so a single set of content can be used
• Recommend a common core payment that can be accepted into each of the standards bodies for use
• Establish a method of interoperability that allows the Core Payment Kernel to have extended or related messages packaged with it

Purpose

A Single Core Payment XML Kernel facilitates

• Straight-through processing
• reconciliation for corporates
• enhance the transparency of payments and
• reduce the costs of a host-to-host file delivery implementation.

Support is Imperative

It is essential that the application vendor community (ERPs, EAIs and treasury workstations) support this direction and the Kernel itself.
[Excerpts from the Convergence Statement, October 2003]

The drive toward standardisation will change the payments landscape by reducing the complexity and addressing some of the challenges that currently exist. The diagram below provides an insight into what could be achieved through widespread adoption of a single standard that all vendors, corporates and banks can support.

The Future

The issues that each stakeholder has faced due to the current balkanisation of payments standards would in theory be addressed through the common standard.

Banks see the Core Payment Kernel as a significant step into the future, It provides the foundation for a ‘win-win’ scenario for the corporates, vendors and banks and provides new opportunities for the banks to differentiate themselves through the introduction of new value added services which form part of an integrated banking solution.

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