Collaboration on Standards: An Opportunity for Banks to Move Up the Value Chain?

From the increasing activity and awareness within the financial marketplace, it is evident that the drive for standards is now gaining momentum. Initially driven by a section of the corporate community under the RosettaNet PMP¹ (Payment Milestone Program), this has now embraced the contribution from the other major stakeholders – banks and vendors. With the primary objective of driving a single payment standard that can be used globally by any corporate, irrespective of size and sector and by any servicing bank regardless of location, the phase one deliverables have now been agreed and piloted and include:

• C2B (Corporate to Bank) ‘XML’ payment initiation message
• ‘XML’ Credit Advice
• ‘XML’ Statement

Recognising the significant progress that has been made in achieving the above deliverables, it is clear that if this level of collaboration continues with the same level of commitment and focus, it has the potential to revolutionise the payments landscape. However, as they say, Rome was not built in a day, and the speed of change and adoption will primarily be dependent on the business case each stakeholder can build to justify implementing this new standard. This article endeavours to look at the issues surrounding the corporate community, the benefits that the above standards will deliver, the possible next steps and the opportunities that the banks will now have to finally move up the financial supply chain.

From a corporate perspective, the mandate to improve shareholder value through a combination of reducing costs and increasing income streams to ultimately improve profitability remains a core objective. From a cash management perspective, this translates into improvements in operational efficiencies, achievement of STP (straight-through processing), and better use of the corporate’s cash. At a detail level, the challenges that corporates currently face in the cash management space are noted in the following diagram:

In summary, the above landscape encompasses the following challenges for the corporate client:

• Multiple bank connections typically using proprietary protocols and security.
• Multiple file formats respecting the needs of the banks and local clearing systems.
• Difficulties in achieving standard workflow control.
• Lack of STP processing, thereby increasing the underlying processing costs.
• Manual, off-line reconciliation.
• No big picture, resulting in an ineffective position management.

From the above, it is clear that the payments landscape is extremely complex, however, positive progress has been made with the introduction of a new XML based standards around payment initiation, the associated advices and finally, the bank statement. These changes actively address the issues surrounding the client-to-bank file format and offer the additional opportunity to achieve STP. Furthermore, adoption of these changes will provide the required data consistency around debit advices and financial statements. Finally, it will provide the opportunity to automate the reconciliation process through the receipt of the unique reference indicator and associated remittance details. Collectively, these changes will enable corporates to achieve operational efficiencies through the elimination of the manual reconciliation process, which typically can take between three to five days to apply funds. According to a study undertaken by Killen & Associates, the issues surrounding seller reconciliation costs a USD1 billion company USD27 million annually. These improvements will provide the initial incentive to corporate adoption. The following diagram provides an overview of the current solution.

This is the story so far, but there are still key challenges that remain, if open standards are going to achieve the critical mass that will enable maximum benefit for all the stakeholders. Two areas that offer significant potential relate to the client-to-bank connection and the underlying PKI² (public key infrastructure). Whilst these items were specifically excluded from the phase one deliverables of the RosettaNet PMP, technology has moved forward and an opportunity now exists for corporates to utilise the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network via the recently created Member Administered Closed User Group (MACUG). As SWIFT have operated a secure, global network for banks to exchange a range of messages covering payments, securities, trade and reporting, it provides the first real opportunity for corporates to embrace a truly open standard, with the added benefit of a generic PKI solution. By extending the scope of standards work to include a SWIFT communications interface, the corporate will benefit from SWIFTs unrivalled reputation for resilience, availability, security and guaranteed delivery. The attached diagram provides an overview of the potential architecture.

Another area that will also be covered as part of the standards mandate will be the processing of remittance information. Under the existing RosettaNet model, the buyer forwards this information directly to the seller, in an agreed format (3C6 message)³ via their proprietary connectivity interface RNIF⁴. The benefit of extending the existing definition around the C2B payment initiation message to now include the remittance information, is that corporates will now have the opportunity to dispense with the process of detaching this information at source and the associated manual processes that typically sit behind this particular task.

The final section of this article moves away from the collaborative space that the open standards have focused upon and considers the potential opportunities that banks now have to develop a competitive advantage. The following diagram focuses on the financial supply chain, from a buyer and seller perspective.

Supply Chain Model

Considering the above process flow, the banks now have a number of opportunities to introduce a range of value-added services that ensure they move away from becoming simply ‘transaction processors’. The banks that move first will have the opportunity to attract new customers and achieve customer loyalty through product differentiation combined with quality service. Looking at the various stages of the financial supply chain, the following possibilities arise.

• Purchase Order: In addition to collaborating on design, development and introduction of generic XML standards, which will assist in the automation of the PO process, there are also opportunities to provide financing and FX facilities.
• Receive Invoice: One of the main challenges facing the seller is the automation of the invoice process. This area is hampered by the variations in both the underlying invoice formats and the delivery mechanisms (fax, post, e-mail and EDI), which reflects the diversity of the supplier population from the SME (Small to Medium Enterprises) to the multi-national corporates. As banks already have the technology and expertise in mapping payments from a generic format into the required local in-country formats, there is now an opportunity to extend this capability to include the receipt, mapping and delivery of invoices. Furthermore, this information can be made available to the buyer, via their preferred banking interface (host to host or the internet). In addition to this possible value added service, banks can also look at the financing and FX facilities that may be required by either party.
• Payment: Whilst the agreed C2B XML payment standards offer the ability to improve STP, reduce or eliminate manual intervention and move towards lights out processing, the banks role can be extended to encompass the processing of the remittance information. As this information can be supplied with the underlying payments message, the bank can separate this information and provide it directly to the ultimate seller via e-mail, fax or post. Alternatively, the bank can also look to provide this information via the preferred banking interface. The timely receipt of this information will assist the seller in automating the reconciliation process, thereby enabling the earlier release of credit lines and improved cash management. In addition to this possible enhancement, the banks can once again look at providing financing to the supplier on the back of the payment instruction.

Whilst some of the above services have been provided for a number of years, the competitive advantage will be through the provision of an integrated ‘one-stop’ solution that covers the entire financial supply chain. Whilst it is clear that the banks are now collectively working with corporates to address a number of challenges, the speed of change will probably be driven by the banks ability to build the appropriate business case, which in turn will be linked to the appetite of the corporate community.

Notes:

¹ The RosettaNet organisation is a self-funded, non-profit 520 member consortium dedicated to creating and implementing open and industry wide e-business process standards in information technology, electronic components and semiconductor manufacturing. This program is aimed at reducing processing costs through automating accounts receivable reconciliation and improving the flow of payment information to facilitate the efficient and timely use of available funds.
² Public-key infrastructure (PKI) is the combination of software, encryption technologies, and services that enables enterprises to protect the security of their communications and business transactions on the internet.
³ The 3C6 message is the proprietary RosettaNet remittance information message that is sent directly from the buyer to the seller.

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