Right Here, Right Now - The Growth of Real-Time Payments Processing
Real time information is a familiar phrase to those in the financial sector, especially to the individuals and institutions whose primary remit constitutes the delivery and execution of trades in the front office. However, as has been noted in the past, a lot of the investment and traditional usage of real time information and data has stopped in the front office. From the moment of trade execution and confirmation, the trade lifecycle will transfer from the second-by-second operating environment prevalent in the front office, to the back office, where the processing, payment and settlement of the trade will occur day-by-day.
As markets pick-up, many of the inefficiencies identified within the banking sector during more recent, leaner times, tend to reside in banks’ back offices and inter-bank infrastructures on which they are dependent. Industry-wide, there is growing consensus that with access to real time information banks will be better positioned to manage liquidity, minimise risk, improve operational efficiencies and drive down costs. Combine this with the predicted upturn in discretionary IT budgets, from 2004 and beyond, and the opportunity to realise significant improvements in back office operations and increased revenues is very real.
Financial institutions have found themselves under increasing pressure to increase cost savings, reduce risk and improve liquidity management. At the same time they face an increasingly regulated environment with the pressure to improve transparency and comply with legislation such as Basel CAD II. This has led to much debate regarding the best method to improve efficiency whilst remaining competitive and delivering product services and innovations that increasingly demanding customers require.
More recently, market changes such as delivery versus payment (DVP) for securities and CLS for foreign exchange settlements have changed the landscape considerably by increasing the demands on intraday liquidity. The emphasis is now on intraday timed payments in order to substantially improve the management of liquidity. As a result, the need from liquidity managers for real time information has escalated beyond guaranteed settlement intraday to the monitoring of transactions on a second-by-second basis. This is just one area where access to real time account information can provide recognisable benefits.
Risk management is another area where access to immediate information on nostro accounts will enable banks to view and manage their exposures against customers and counterparties in real-time, regardless of time zones and geography.
In addition, exception handling can also be significantly improved. Real-time nostro data, accessible at the time a transaction occurred, will enable exception processing to begin at least one day earlier than the present timeframe. Transaction discrepancies and unadvised funds can be identified during a currency’s clearing cycle and remedial action taken that day. This will reduce operational losses and improve funding revenues. The consequential impact on operating costs and the improvement in the quality of customer information creates a real competitive advantage for banks and provides a platform for them to develop a new business model.
In the world of payments for corporate transactions, there has, and always will be, two separate entities, or corporates if you like, at either end of a payment process. In an increasingly global and volatile world, demands upon payments, the processes involved, and execution of transactions have grown substantially as corporates battle to seek new areas of competitive advantage, returns on investment, stakeholder satisfaction and ultimately year-on-year growth.
Banks are becoming increasingly cogniscent of these issues and many already provide customers with real time information on account balances and transactions. However, it should also be borne into consideration that such information is still limited to accounts or transactions when they have been processed by the servicing institution. New services remove such limitations allowing banks to provide data earlier on accounts that is both accurate and in real time. This also serves as a significant value-add to customers.
While there are relatively few corporate payments that are critically time sensitive, what customers need, and what real time information delivers, is visibility on the status of transactions and account balances at any given time. Therefore, the ability to manage the information trail for these payments becomes the core value-add of real time information by enabling swifter account receivable reconciliations, better management of cash flow and reducing the amount of time a company needs to provide credit. These are crucial areas of value for corporates and ones that have yet to be fully addressed.
To many observers, current issues for the corporate community in terms of payments and processes lie in the apparently disparate demands of the corporates compared with the limitations of the current banking system. Payments remain an area in which corporate influence, unlike most other areas of its business, is somewhat limited because corporates must utilise existing banking relationships and infrastructure for the settlement of payments.
Banks still remain, in some parts of the payments processes, far behind their corporate customers in terms of efficiency and automation. Not all of the processes involved along the transaction and payment chain are automated. On top of this, many banks have different types of interfaces, therefore creating multiple versions of the same type of transactional data. This means
corporates have to translate varying and differing messages in order to reconcile and extract relevant data on single payments – a costly and time consuming exercise.
Despite this, in recent times market commentators have observed a sea-change in banking sentiment leading to dramatic changes in the role of the back office. Traditionally, the processing of payments has been seen by some as merely a back-office function, rarely seen nor heard within senior banking environs. Now however, it is seemingly being recognised as a strategically vital asset and a process that actually underpins all other lines of the banking business. Payments represent the bedrock of a bank’s account relationship with its major customers and are seen as the main catalyst supporting its corporate relationships. It is therefore a key avenue through which banks develop and provide further services or products. As a result, banks have identified the importance of payments to their business but also the need to improve this area of their offering in response to increasing demand from customers.
In terms of a solution that addresses the apparent disparity between the needs of corporates and what banks currently provide, many industry players believe that the introduction of a new single and flexible payment messaging standard would be the best answer. These would be open flexible standards through which corporates and banks could share transactional information without the need to multi-message and interpret information from different organisations and differing interfaces. It could also be used globally by any corporate, regardless of size and location and would effectively provide a platform through which corporates and banks can achieve straight through processing (STP) in the payments chain.
The idea behind such a concept, a single core payment standard, is currently being driven through increased engagement and co-operation between several industry bodies; IFX (responsible for standards for business process and services globally), OAGI (leading standards development in ERP marketplace), SWIFT (leading standards in financial services) and TWIST (global treasury management and commercial payments standard) and RosettaNet.
The grouping cites a number of benefits that a single standard could provide. Firstly, for the corporate community it will facilitate STP in terms of acknowledgment of receipt of payment and direct advice in respect to a payment. Secondly, a single and automated standard improves scope for providing remittance advice and counterparty data.
For banks too, the benefits are numerous. Namely, it provides a tailored response to the corporate demand. In addition, it minimises the number of standards currently being developed and which will require expensive and time-consuming maintenance. It will also help achieve significant reductions in costs and improvements to efficiency, therefore providing the necessary scope for improved customer service.
Tom Buschman, development manager at Shell Treasury and co-ordinator of TWIST, says:
“We envisage significant change in the payments industry over the next couple of years. Banks are catching up with corporates and have recognised the importance of re-designing their business processes to provide the services that support the commercial activities of the corporates and help realise many feasible and significant process efficiencies.”
“Increased focus, through various market demands, is firmly centred upon the provision of improved levels of information and the delivery of interoperable services. Real value and long term gains for banks now lie beyond just 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.”
“A number of major banks have been actively involved in the collaborative efforts in the payments market (e.g. RosettaNet, TWIST, standards harmonisation). The implementation of the new payment process, designed together by banks and corporates, is already progressing very well since mid 2003. We hope that in 2004, other banks will appreciate the openness with which the corporates have gone about this effort and truly try to understand the opportunities of this market change and accept the reality of this changing environment. 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, towards designing improved services and innovation, will help determine the success of an open standard. The question does 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, related to the implementation of such 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.”
Both banks and corporates have recognised the need for change in the payments process and several have already begun implementing change. Now it is simply a question for the other players of how and when to join.
Such sweeping structural change, as proposed by a single global open standard, will require a degree of change not seen since the establishment of SWIFT, over thirty years ago. The importance of its implementation to both banks and their customers cannot be underestimated.
In addition to this, there will always be questions regarding the governance of such standards, fear of losing clients and protectiveness towards existing back-office legacy systems that have seen millions in terms of investment over the years.
However, the opportunities are numerous. Banks need to recognise that change is inevitable and they risk missing the boat if they do not act soon. Creating an interoperable and improved technology-enabled environment will create the foundations for providing an open standard of communication and improve future profitability. Banks’ current payments processes are delivering dwindling revenue streams whilst the cost of maintaining and improving existing legacy systems continues to rise.
Banks recognise that, for all but the largest, a move to common standards enables them to reduce costs and operational risk, whilst freeing resources to improve services and deliver enhanced innovation.
Eric Sepkes, director of global financial institutions strategy at Citigroup Global Transaction Services concludes:
“The banks and corporates need to find a win-win solution which improves processes, delivers value and reduces costs. Whether we are talking bank-to-bank or bank-to-corporate, we need to speed up the adoption of real time information based on common standards. The adoption of IP delivered data in a cost-efficient environment allows this to happen. The engagement of the banking community to IP messaging delivered via SWIFTNet provides the catalyst to meet these important business objectives”.