Pushing the Ends of STP

With a goal of improving their working capital positions, multinational corporations are significantly overhauling their internal processes and systems to wring operational efficiencies out of the physical and financial supply chains.

Improving the financial supply chain typically involves consolidation: consolidation of payments and collections processing, for example, into single or regional ‘payment factories’ to reduce costs; and certainly, consolidation of banking relationships into fewer, stronger relationships.

The overall success of corporate programs to reduce costs is largely dependent on achieving STP with a seamless payment flow between buyer and seller through the banking system, all this with minimal manual involvement.

This requires a wider definition than what ‘end-to-end’ payments between corporations and their banks has traditionally meant. Currently, such process includes linking directly to the buyer’s payments generation systems, feeding the payments in the form they are received to allow STP handling, before being formatted for transmission to the bank, processing through the payment and clearing systems, and finally transmitting into the seller’s Account Receivable systems.

In this changing environment, banks must offer non-proprietary products and services with added value, if they are to retain lead relationships with their corporate clients. As corporations are faced with the necessity to interact with several lead banks – as well as regional partner banks – to achieve their working capital objectives, openness in communication and sharing of the payments transactions load is a pre-requisite for the banks.

This article looks at the need for an Intelligent Payments Layer, a payments architecture that can be implemented within existing corporate and bank infrastructures. This architecture is, focused on STP from payment initiation through payment execution, with the main functionalities including:

• Connectivity services to all components in the financial supply chain to provide for the fullest end-to-end processing;
• Intelligence in the form of payment validation, enrichment, and transformation, to guarantee STP throughout the processing flow; and,
• Open, multi-bank communication from the corporate side to allow flexibility on the sort of payments as to which bank payments are sent for processing, based on services offered, geography, service levels, and cost.

Factors Affecting the Changing Corporate Payments Landscape

According to the Boston Consulting Group’s recent Global Payments 2004 Report, “corporate customers are powering the shift from a ‘push’ market driven by providers to a ‘pull’ market driven by customers.” As echoed at industry conferences over the past several years, there are many interdependent factors that, together, are causing significant changes to the arrangements between a multinational corporation and its banks:

These are discussed below.

• Costs – From the corporate side, payments costs continue to be high because of the need to deal with varied bank-provided payment mechanisms, and the relatively high manual intervention required to make, receive, and reconcile these payments. From the bank side, competition for the payments business is driving margins down and, because they typically rely on older legacy systems that are incapable of changing to meet new customer demands, the gap between customers’ expectations and available investment dollars to meet those demands is widening.
• Complexity – From both the corporate and bank perspectives, operational life is becoming increasingly complex. Sarbanes-Oxley, Basel II, and other efforts to mitigate operational and financial risk are causing stringent control structures to be put in place, which add both to complexity and to the cost of operations.
• Re-engineering– Many corporations are implementing new Enterprise Resource Planning (ERP) systems to streamline their physical and financial operations. These systems are forcing changes in the way corporate payments are presented to their banks, meaning the corporations rather than the banks are now dictating formats.
• Standardization – Frustrated with an array of bank-specific communication paradigms, corporations are leading the fight towards standardized approaches, such as TWIST or RosettaNet, that would provide independence and flexibility to access a combination of banks and other providers.
• Centralization – To achieve desired efficiencies, cost savings, and control, corporations are moving to regional and central processing hubs for payments, collections and other treasury and accounting functions, abandoning the dispersed country-by-country model of the past.

The Payments Factory

An important corporate payments development is the Payments Factory, an organizational structure, by which corporations centralize (or regionalize) payments and collections processing. This development supports individual business units as well as treasury operations. The purpose of the payments factory is to diminish operational costs, and financial costs, as well as risk exposure, by reducing staff level and the number of bank accounts through which payments are made, consolidating payment requests – including netting of intra-company payments across business units – and better managing FX exposures.

Such a model is bank-independent and allows ERP systems to feed payments into the payments factory on behalf of the business units. The payments are ultimately executed through the selected banks and subsequent reconciliation and reporting is conducted. A similar process takes place for collections, when payments from the banks are handled through Accounts Receivable.

This payments factory offers banks a significant opportunity to bring added value to their clients customers, and help them meet their cost reduction and workflow simplification objectives.

The Intelligent Payments Layer

To achieve the desired goals of STP in conjunction with corporate efforts to streamline payments processing activities, corporations should explore the option of a synchronized and interconnected corporate and bank payments architecture, referred to as the Intelligent Payments Layer. Such architecture drives STP from the buyer’s payments source with sufficient payment details, to the seller’s accounting system with appropriate reconciliation information, through payments execution by the banking system, to the sellers’ accounting systems.

Within the corporation, a Payments Concentrator supports connectivity to internal systems, automated workflow and multi-bank communications. At the bank, a Payments Hub provides the ability to process a single mixed stream of payments and takes advantage of the automated workflow to connect to internal bank systems and external clearing and settlement systems.

The intelligence provided through the Payments Concentrator and Payments Hub is driven by the following characteristics:

• Rules-based workflow: containing a powerful rules engine that allows payment processing decisions to be made automatically, with flexible workflow routing based on a range of parameters.
• Multi-entity: ability to process payments for multiple entities within a single global corporate structure keeping all accounting, regulatory, access, and database activities separate and distinct.
• Payments universality: ability to process any multi-currency high value and low value payments in single or bulk mode to any destination.
• Web-based user interface: browser GUI interface, to support dispersed user access for transaction entry and for queries.
• Flexible connectivity: flexible interfacing structure to internal and external systems and networks.
• Full audit trail: a full on-screen audit trail indicating all actions taken either by users or automatically via system rules.

The key benefit of this Intelligent Payments Layer resides in its flexibility to integrate with the existing corporate and bank back-office infrastructures, without requiring modification of the many silo-ed systems composing those infrastructures. This is a particularly compelling competitive advantage. Figure 1 illustrates the Intelligent Payments Layer connecting the corporation and its lead bank.

Payments Concentrator

The key facilities of the Payments Concentrator are:

• Connectivity – to the Payments Hub and the ability to interface to ERP and accounting systems, to receive single or batched payments and prepare them for further processing;
• Validation – ability to confirm the authorization levels and correctness of particular payment transactions;
• Enrichment – ability to add missing codes and data that will ensure subsequent STP;
• Aggregation – ability to segment payments such as by type, currency, value date, or by bank destination;
• Netting – ability to net intra-company payments;
• Transformation – ability to transform the payment(s) into the appropriate format required by the receiving network or institution;
• Multi-bank communication – ability to transmit payments to those lead and regional partner banks as designated by the corporation;
• Web support – ready access for payment initiation, exception handling, or status checking anywhere in the corporation using web browser services.

Payments Hub

The key facilities of the Payments Hub are:

• Connectivity – to the Payments Concentrator and the ability to interface to bank back- office systems and to external clearing and settlement systems, and ultimately to the receiving corporation;
• Payments processing – ability to receive and process payments individually or in batch including:
  • Validation for correctness;
  • Enrichment of payment messages;
  • Funds availability checking;
  • Anti-money laundering interdiction;
  • FX pricing;
  • Payment prioritization, scheduling and routing;
  • Fee calculations; and,
  • Account posting.
• Queries and reporting – on-line access to the payments database for investigation and MIS purposes.

Conclusion

The payments landscape continues to change, and we must adapt. Corporations are making their financial supply chains more efficient, similar to what they have achieved in their physical supply chains. In a similar manner, they want their banks to simplify the way they do payments in order to reduce operational costs.

Yet many banks are unready to meet this challenge, in addition to those posed from increased regulatory complexity and greater competition. Banks that want to capture a large share of the payment flows and associated revenues in this new environment will have to lead the process. Unfortunately, they will most likely find that their legacy systems and silo-ed infrastructures will not be sufficient to face this challenge. In order to stay at the top, cash management and treasury offerings will have to be significantly expanded, and bank payments processing will have to be streamlined and rationalized.

To win the day, banks will have to be visionary and go beyond the current requirements for greater efficiency. They will need to rely on systems such as the componentized Intelligent Payments Layer, which enables corporate customer to interconnect an automated, centralized, and standardized payments process. These banks only will be in a position to take on a leading role on the corporate payments market, and offer a truly end-to-end system with the desired STP results.

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