Cash & Liquidity ManagementPaymentsSTP & StandardsWhy XML Will Succeed Where EDIFACT Failed

Why XML Will Succeed Where EDIFACT Failed

Global accounts receivables (AR) reconciliation remains strained and automating the process is virtually impossible due to national clearing systems restrictions and the differing approaches adopted by banks to deal with such limitations. In addition, banks need to support multiple incoming payment formats that require a high level of internal conversion, which in itself is not standardised across banks and, despite the rules around each format, still leaves room for individual interpretation.

Introducing a generic global process with a Unique Remittance Identifier (URI)

To address these issues, an informal group of banks1 and standardisation bodies2 have come to the table to work on a generic global and industryindependent solution. The crafting of the solution takes into consideration the clearing system limitations and focuses on the number of characters that each national clearing system can support for payment references. Having conducted a global review of the numerous clearing systems, the banks found that nearly all can process and transmit up to 18 characters of data to the beneficiary. The banks employed this knowledge in defining a generic process that can be used globally for processing paymentrelated information, which is fundamental to auto-reconciliation. This data will be used to pass on a reference number, the URI, enabling a beneficiary to easily reconcile incoming funds against the extended remittance details that are received separately.

XML as the format of choice

The solution format is an XML payment kernel based on the SWIFT Corporate-to-Bank (C2B) XML standard. This affords transaction initiation (payments and direct debits), transaction control and reconciliation messages (credit and debit advices) required to execute and track transactions. Extended remittance details are not part of the XML kernel and can be defined by various industry standard bodies independently. However, these can be linked to the transaction message via a URI.

The group of banks and standardisation bodies have worked jointly, and will continue to do so, with SWIFT to ensure SWIFT C2B compliance with the SWIFT Interbank Bulk XML and Cash Management XML, as well as the SWIFT MT103 messages. This creates consistency with other important interbank message types. Moreover, going forward, SWIFT will be the authority maintaining this XML message including the documentation (schemas, handbooks) accompanying it.

Implementation of one process for banks and corporates

The group additionally created an STP Implementation Guide, describing in detail how the URI will be passed between banks. This is unique in the history of banking and moves the entire financial supply chain one significant step forward.

The key objective is to pass the URI through the banking chain so that corporates can easily reconcile incoming funds using this URI. Theoretically, any format could be used but as XML is currently the least mature format, it can be shaped to fit global process requirements, thus making it the format of choice for banks and corporates alike.

RosettaNet3 is the first industry consortium to make use of this new generic global process. The five sponsors of the RosettaNet Payment Milestone Program and their banks will pilot the new workflow and the SWIFT C2B XML messages. Other industries may choose to follow suit, perhaps using the 18 characters differently than RosettaNet because the process itself is generic and applicable to all industries, not just high-tech companies.

In the case of RosettaNet, the first 9 digits of the URI is the Dun&Bradstreet corporate identifier and the second 9 digits reflect the numbers unique to the extended remittance details, which are typically transmitted separately peer-to-peer in a remittance advice. Furthermore, RosettaNet employs a PIP, a Partner Interface Process, in its language to define a message set. A 3 digit code, e.g. 3C6, defines the category and message type; in the case of a 3C6 it is a remittance advice.

The impact on the banking community

In the short-term, banks will view any work done towards establishing an XML payment standard as an additional investment. Even if sophisticated customers switch quickly to XML, banks will have to support existing formats for some time, until the very last customer has migrated.

Long-term, the trend is for banks to shift their investments away from the front-end to focus on processing and back-end capabilities, which will become the key differentiators of the future. Of course, banks may choose to offer other formats – in addition to a global XML payment standard – which would then fall into the competitive space. Apart from direct investments into accepting the global XML payment standard, banks are likely to upgrade their existing IT infrastructure, increasingly bringing in more systems capable of dealing with XML directly. The same is true for any other technology upgrade, e.g. interbank clearing systems.4 When this is achieved, the true benefits of end-toend XML processing can be realised. There will be seamless transmission of files from one system to another without format changes (including systems employed by corporates, banks, and clearing systems) i.e. from the buyer to the seller and back.

A word of caution, however, is that the XML format generally requires 10-20 times more data volume than comparable EDI messages. This is mainly due to the nature of incorporating tag (field) names before and after each field. However, compression technologies are available that can result in a reduction of up to 95% in the size of the file for processing and storage.

The likelihood of success in the corporate community

Many readers – banks and corporates alike – may think they’ve seen this all before, especially when reflecting back to the early days of EDIFACT, which started out with similar glorified objectives. It is our opinion at Deutsche Bank, however, that there is a high likelihood of success with XML. Some of that success stems from the differences to EDIFACT.

Firstly, this initiative is more narrowly focussed in scope than EDIFACT. It looks only at payment standards that are more readily standardised than invoices or remittance advice information that can differ by industry. Additionally, XML as a technology has already gained acceptance in the market, as most ERP/TMS vendors have XML-capable engines. This means that they can easily include a global XML format in their applications as a standard output. When corporates, and their banks, state a clear interest in using this new format, then the system providers will follow. Some have, in fact, already committed to delivery dates.

Conversely, EDIFACT has never been a standard output, as there are always translator applications involved.

The good news is that the current environment is also making the XML payment standard less expensive to create than EDIFACT. There are no additional costs for translation software (although there may be license fees involved, depending on how the system providers make the functionality available to their customer base). In terms of market penetration, the projection is that SWIFT C2B XML will (over time) result in a passive coverage of nearly 90% of standard ERP/TMS users.

References

1 Besides Deutsche Bank the following banks participate: ABN Amro, Bank of America, Citibank, HSBC, JPMorgan Chase, Nordea, Standard Chartered, Wells Fargo.
2 Members of the standardised bodies are: IFX, OAGi, SWIFT and TWIST.
3 RosettaNet is a consortium of corporates in the high-tech industry that looks at automating B2B data exchange and started in 2002 to look at the financial supply chain.
4 EBA Step 2 is one of the first clearing systems that has an XML enabled engine.

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