Cash & Liquidity ManagementPaymentsSTP & StandardsWorking Capital Management: TWIST and the Delivery of Benefits

Working Capital Management: TWIST and the Delivery of Benefits

Recently, gtnews has raised the profile of working capital management (WCM) and payment processing. In particular, an article by REL Consulting Group explains how effective WCM can have a very positive impact on a corporates’ activities and its bottom line. In this article, I intend to deal with three questions that relate to the issue of effective working capital management:

  1. What are the benefits that can be obtained by a treasurer in the next few years?
  2. What has been delivered for these benefits to become available?
  3. What else does it take to deliver the benefits from now onwards?

What WCM-related benefits can be obtained by treasurers in the next few years?

The treasurer can add significant value to the effective management of working capital in his or her organisation. Examples of what a treasurer can deliver in the coming years for the organisation in this area include:

  • Enablement of real-time information exchange between corporates about the processing of transactions and in particular their financial and legal settlement;
  • Full integration of payment processes to traditional as well as e-enabled procurement & invoicing with significant efficiencies, reduced errors and improved controls;
  • Fully automated reconciliation of accounts receivable and accounts payable for local and international payments, irrespective of the payment method used;
  • Provision of working capital financing to suppliers in order to reduce spreads for suppliers that are less credit-worthy than the client company, without increasing credit risk for the company;
  • Fully automated FX transactions directly coupled to either purchase orders, invoices or international payment instructions, thus enabling total flexibility in delivering and receiving goods and services in the currency of the client’s or supplier’s choice;
  • Tailor-made international liquidity management based on cash flow forecasts with real-time information about both outgoing and incoming funds;
  • Maintenance of relative independence from both banks, their infrastructure providers and IT providers;
  • Efficient and effective usage of a combination of banks and other niche service providers within one interconnected, but flexible and open infrastructure that fits the overall corporate IT strategy.

In addition to the possible delivery by the treasurer of these benefits to his / her own organisation, similar benefits can also be delivered to the company’s supply chain partners. The collaborative nature of the efforts required means it is possible to obtain these results whilst strengthening the relationship with clients / suppliers.

This may look like any overstated promise from an ambitious solution provider or ‘blue-sky’ consultant and presumably sounds familiar to anyone who has lived through the hype of the Internet boom. Yet this statement is written from the perspective of a non-profit international industry group, TWIST, which is rapidly developing integration standards for straight-through processing (STP) as it pertains to wholesale trade, working capital and payments processing. TWIST is not itself involved in any commercial activity, but aims to bring about profitable change for the market, together with its diverse group of currently 70 participating companies.

What has been delivered for these benefits to become available?

In order to obtain the benefits listed above, a corporate treasurer will need solutions delivered by banks, related service providers and their own IT suppliers. The treasurer needs to ensure real-time processing of data and effective straight through processing where data is input only once, irrespective of the systems and organisations involved in the process chain. These solutions can be acquired if: (1) the technology exists; (2) the legal requirements are met; (3) processes become aligned and interoperable; and (4) the banks and other providers are willing to offer the services concerned.

1. Availability of required technology

The required technology has come of age. The delivery of the solutions that support the benefits mentioned effectively requires low-cost open communication technology, easily connectable databases, low cost processing power and flexible but secure applications. These solutions have now become widely available in most countries as a result of the significant investments made before, during and just after the Internet-boom.

2. Electronic communication legally binding

Secure electronic communication has become as legally binding as paper-based communication. In the U.S. the approval of legislation that allows for the electronic delivery and settlements of cheques across the U.S. (“Check 21 Act”) has been a major step forward. In the EU, the Directive 2001/1220/EC & Directive 2001/115/EC, which came into effect January 1 2004, has been a significant step in harmonizing the rules that facilitate electronic transactions and VAT recognition. In other regions like Latin America similar progress has been made at the legal front, allowing transactions carried out electronically to be legally binding.

3. Complementary and harmonised open standards

Open communication standards between corporates and banks with a consistent and aligned process design will become available in the next few months. Real-time exchange of information and adequate, predictable processing requires alignment of activities between corporates and their providers (e.g. banks). Further, a subsequent definition of the content for electronic messages and an openness in delivering the information where and when required are essential. This in fact means the need for the definition and agreement on standards that are inclusive, flexible and acceptable for any market player, irrespective of their size or market position. These standards need to be designed and agreed to be implemented by a variety of market participants and their technical solution providers.

In the past two years, significant progress has been made with the delivery of such standards and the related implementation plans. In the payment arena, IFX, OAGi, SWIFT and TWIST will deliver standards in Q2 this year that are harmonised where the scope of their activities overlap. The scope of this harmonisation is: electronic funds transfer and cheque payments (payment initiation, status updates, credit and debit advices and bank statements). This harmonisation effort is supported by RosettaNet, which is rolling out the standards in its payment milestone program. Each of the organisations will publish the harmonised standards in tandem with their own complementary standards components. In addition to – and integrated with – the harmonised material, TWIST will publish in Q2 standards for the following bank-to-corporate and corporate-to-corporate communication types: usage of bank beneficiary due date, direct debits, card payments (corporate to corporate), cancellations, remittance advises, investigations and claims, electronic invoices, invoice dispute management, static data maintenance and working capital financing.

With regards to the processing of wholesale financial transactions, message standards groups FpML, FIX, IFX, MDDL, SWIFT and TWIST have delivered standards that cover most components required. With the help of IFX and major industry players, TWIST is structuring a harmonisation effort of these wholesale financial market standards, with the standards for FX transactions as a basis. TWIST is further working on integration of its FX standards with the processing of international payments. Finally, major European and US-based corporates are working together under the umbrella of TWIST on international standards for billing of bank charges.

Assuming there is market demand for corporates to obtain the benefits outlined at the beginning of this article and technical, legal and standardization issues are dealt with, there should be no rational hurdles for banks and other service providers to deliver the related solutions to their clients.

What else does it take to deliver the benefits from now onwards?

Both banks and corporates have recognised the need for change in the payments process and several participants have started with its implementation. So is it now simply a question of how and when other players join the change effort? A sweeping structural shift, as proposed by the adoption of a single global open standard, will require a degree of change not seen since the establishment of SWIFT, over thirty years ago.

However, the opportunities are numerous. Change is inevitable, banks need to recognise that they cannot afford to miss the boat. Creating an interoperable and an improved technology-enabled environment will create the foundations for providing an open standard of communication and improve future bank profitability. Banks’ current payments processes are delivering revenue streams that continue to reduce whilst the costs of maintaining and improving existing legacy systems continues to rise.

In spite of their resistance to a major change that requires investment and review of business propositions, banks are already catching up with leading corporates and have recognised the importance of redesigning their business processes to provide the services that support the commercial activities of the corporates and help realise the many feasible, significant process efficiencies. There is an increased focus by banks on the provision of improved levels of information and the delivery of interoperable services. Real value and long-term gains for banks now lie not in the processing of a payment, from which banks traditionally derived large revenue streams. Banks can retain their margins and even increase them, but they need to focus on their costs, quality of service provision and responsiveness to specific customer needs. Many banks have for too long ignored these customer requirements. They incorrectly assumed that they are part of a different type of industry with different rules of engagement, not driven by widely accepted rules of supply and demand experienced in other service industries. But now a number of major banks have been actively involved in the collaborative efforts in the payments market (e.g. RosettaNet, TWIST, the International Standards Team).

The implementation of the new payment process, designed together by banks and corporates, has already progressed very well since mid-2003. We hope that in 2004 the other banks appreciate the openness with which the corporates have gone about this effort, and truly try to understand the opportunities of this market change and no longer attempt to hide from reality. Both TWIST and RosettaNet have attempted to be inclusive in their design and efforts, involving the leading banks in order to drive the market, but also making sure that the design can be incorporated by other banks with limited levels of investment. Not necessarily the largest banks, but those banks that exhibit a swiftness and eagerness to respond to customer needs (and do not keep hoping that they can “own their customers”) will be the ones, in the long term, who retain corporate business.

This focus on collaboration with the aim of designing improved services and innovation will help determine the success of an open standard and its underlying design. The question will not really lie in the banks’ capability to deliver a single message standard. The true question is: what levels of their customer service and innovation will they deliver, in terms of implementing a flexible set of business processes and message standards? The delivery on these corporate requirements as a true service provider is what will underpin banks’ future ability to win and retain corporate customers.

Banks recognise that for all but the largest, a move to the now harmonized standards enables them to more easily reduce costs and operational risk, whilst freeing up resources to concentrate on improving their services and delivering enhanced innovations to win and retain more business. But it will still take committed customer demand though to ensure banks move into this position. TWIST is pleased to announce that the first major corporates have started to prepare the issuance to their banks of Requests For Proposals (RFP’s) for significant parts of their cash management business. These RFP’s, which include the requirement for TWIST compliance for the services requested from the banks, will be released in Q2, shortly after the final publication of the harmonized and extended TWIST standards.

The new TWIST standards will be published gradually from April onwards on the website

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