Fundamental Shift in Bank-Corporate Connectivity
The broad categories of bank-to-corporate connections and their functionalities are discussed in this article and one of the key observations is that there has been a paradigm shift in the definition of a bank-corporate connection from what used to essentially be the front-end interface or portal to the end-to-end capability of a bank to support the functionality that the customer expects for their core payment processes. While user experience on GUIs (graphical user interfaces), performance, etc continue to be of importance it is the core back-end functionality that may be delivered through the connection that is of overbearing importance.
Banks have realized this and the centralization of IT and operations is not merely from a stand point of better cost-management but also to obtain a better view across the front, middle and back office domains while choosing and offering functionality on their connections with customers. They have begun to invest in message brokers, reporting tools and content-management products that would enhance the overall capability of their front-ends.
Several of the key evolutions in the payments space over the past decade have originated from the adoption of ERP systems by corporate entities and it would be useful to first take a look at this space.
Large corporate customers have now attained comfortable maturity levels with their ERP programmes. Enhanced communication networks have facilitated real-time, network reach for their ERP platforms across their global sites. Both these factors have boosted the rate of implementation of corporate payment factories (CPF).
The CPF can now support processing, authorization, initiation and tracking of payments to be effected from their accounts with banks and their branches across the globe from a single hub. They are even able to provide their business-partners with portals to track the status of payments (including courier delivery of physical instruments).
Past trends related to rationalizing of costs and focusing on core competencies continue to hold true and costs related to payment processing continue to be under the spotlight with increased focus on outsourcing of such operations to banking partners.
As ERPs and CPFs imprint themselves in the payments space, different stakeholders in the corporate workplace have different expectations from these implementations. These expectations translate into functionality that the CPF may offer and that banks must finally cater to through their connections with wholesale customers. A snapshot of some of the functionality that corporate users desire beyond the ‘vanilla’ payment initiations through a host of differing formats are listed below:
While bank’s cash management and liquidity solutions teams have been largely successful in structuring customized and exotic sweeping and pooling solutions, the Treasurer still needs basic access to accurate, real-time and forecasted fund-positions across the globe.
Treasury fund management processes have been refined internally and corporate treasurers have become more demanding in their requirements for information in the real-time realm. This ‘nice to have’ functionality from the past is now simply a necessary feature in any connection that the bank offers its customers.
Also bank-corporate connections that were erstwhile localized are being either phased out or being linked up to global channels that can offer multi-site account management capabilities. Enrichment of account information through features like cash-flow forecasting based on collections and payments in the pipeline are also becoming run of the mill on any channel that banks set up with their customers.
Also, some customers are now keen on viewing such information in their in-house environment and they expect the mirror view of their bank accounts to be updated in real time in their own systems. This requires flow back of account reports from banks to their customers in real time so that they auto-update the position of the balance with the appropriate information like book/value dates, references, narration, etc. along with the amount and currency debited/credited.
While the core treasury functions might use their ERP platform to source the updated view of account balances, many other stakeholders in the corporate workplace may still need to use the bank’s online portal for such information – especially from remote locations where ERP connectivity may not yet be online.
Credit and sales departments too have ambitious targets in terms of reconciling fund-receipts with outstanding invoices in their ERP (accounts receivable) systems in real-time, so that credit limits on their customers are not blocked because of reconciliation-lags that lead to lost sales opportunities and more importantly discontented customers of the corporate.
While the corporate may not turn down further sales with such customers, it does spend significant internal effort in approving such sales beyond credit limits, which are blocked merely due to inability to receive and reconcile information from their banks in a timely and accurate manner.
Procurement divisions wish to track status of initiated payments in real-time to ensure timely delivery of materials and services. While many banks have offered such facilities on their portals, customers now wish to use their own ERP platforms or portals to display such information to their business partners.
They provide their suppliers and vendors with access to such portals to reduce the incessant follow up that they currently face in relation to status of payments.
Procurement teams also now require their banks to generate beneficiary advices directly to their vendors/suppliers to intimate them of the status of payments at various stages of the lifecycle so that the latter may proceed with rendering their services/goods based on the confirmation from the bank that payments to them have in fact been initiated. This means that the corporate now no longer only expects the standard technical file-level acknowledgements related to transmission of their instructions to the bank, but they also expect functional-level statuses related to each instruction as it passes through the payment lifecycle – e.g. status results related to business-rules compliance, account-compliance, balance-checks, ACH confirmation, etc. This represents a distinct mark up in the flow back from banks to their customers to report statuses at a record level rather than the vanilla statement-reporting which is at an account level.
Customers have become less kind to the over-writing or loss of their own reference numbers by banks or in the clearing house environment. This has been a stumbling block in adoption of STP and in offering many of the functionalities listed above. Banks have built internal workarounds and solutions to override this problem and hence the customer is guaranteed auto-reconciliation at an account and transaction level in their ERPs without manual intervention.
Another area of focus for most finance departments has been the billing and charging of bank fees. They seek to gain better control of this process and aim to centrally monitor and manage billing from banks related to payments, statuses and reporting flows, etc. for their accounts across the world. They expect billing details in a single file possibly assigned to internal cost-codes that may be easily reconciled in their ERP and compared with pre-determined rates so that costs can accordingly be auto-allocated to the appropriate business unit.
A further pain-point for finance teams of global corporate customers has been managing the hierarchy of accounts across their legal entities, divisions and offices spread across the globe. Banks are keen on offering account-services management portals through which customers may have a bird-eye’s view of their accounts across the globe with details on grouping, signatory powers, sweeping structures, interest rates, etc. This has been an area of audit focus within the corporate domain since signatories parting with their organization or accounts being left inactive for a while represent significant risks that the finance team would like to better control.
Wholesale customers have been rationalizing their banking relationships based on critical differentiators that include the width and depth of the bank’s product suites that can be offered through their channels, technology-suitability for adopting such channels, geo-spread of the bank’s network, servicing capability, pricing, etc. Large multi-national corporate players (MNCs) have begun phasing out any bank-proprietary software and are adopting standards that will ease multi-bank connectivity. However, this area is still a pain-point with a host of standards still floating around.
From an IT and audit standpoint, corporate customers have become aware of best-practices that they need to adopt to ensure the highest levels of security. The use of direct STP transmission channels for payments, statuses, reports, etc. without manual intervention is increasing. Usage of folder-systems that may be accessed by users on the environment is being dissuaded and use of direct database-exchange is being preferred wherein files are stored in their raw-image format.
While some corporate customers still use bank tools for approving transactions as per their authorizing matrix structures, some are now simply using authorization tools within their own ERP systems and inform their banks that such instructions are pre-authorized.
While direct STP connections are coming into vogue, web-based channels for reporting will continue to co-exist. They will complement the direct STP channels in offering specific reporting and information based functionality while providing contingency options for initiation based functionality. They would also support corporate users not having online access to their ERP platforms.
Single Sign On (SSO) for web-channels across account-services, payments, trade, forex functionality is no longer a ‘nice-to-have’, but an imperative feature. The governance models within such portals have been enhanced so that web-channel service offerings are tightly linked to the corporate user’s access rights based on his department and authorizing powers.
As clearing-house practices and rules continue to evolve corporate customers will have to continue adjusting their internal systems to comply with usage of IBANs or specific account formats, etc. in different countries – they would strongly rely on their banking partners to advice them on such inputs. This point takes special importance in a CPF environment with the hubbed team requiring to comply with regulations across the globe.
Legacy
While banks have realized the need to offer standards-based channels they are quickly finding out that phasing-out of existing proprietary thick client solutions is quite a sticky issue. Due to the inertia of mid-size commercial customers who have fast become the attractive target market of many large commercial banks and have grown comfortable with the legacy thick client connections, Banks are being forced into maintaining these channels along with the new-age connections that they are offering to the higher profile customers.
Banks will have to pass on the higher costs of maintaining such thick client channels to their mid-size commercial customers thereby forcing the latter into adopting the newer-age channels.
Internal business drivers
Optimal cost management had been recognized as one of the key drivers towards improving margins in the wholesale segments of banks due to stagnant credit off-take and shrinking spreads. Fee based revenues in the transaction banking space have also been under pressure recently and the adoption of the SEPA (Single Euro Payments Area) is expected to further put such revenues at risk for banks operating in this area.
Top tier corporate customers are spoilt for choice among banks. By moving towards standards based platforms, they can now freely move between banks, if they so chose, as the erstwhile exit barriers linked to proprietary solutions have been eliminated.
Global banks must also appease local mid-size customers who are an attractive market and must defend them from local banks who operate in these regions. Thus a bank’s transaction acceptance and processing structure must be able to support both audiences. While payment products and ancillary status and report flows are still treated as commodities, never has the pressure been more on banks to offer comprehensive and highly customized services to global MNCs and mid-market commercial clients without increasing their cost-structures.
Centralizing IT and Ops Investments for better management
Given the pressure on optimizing their investments, banks have been seeking to control de-centralized IT and operations spend at regional sites for some time now. They have realized the value of rationalizing redundancies, building economies of scale and migrating best practices by centralizing key applications, processes and even human resources.
Where physical centralization is not feasible, they are trying to achieve centralized management by installing uniform set of application suites at different sites that can be managed centrally. This eases managing of inter-operability and maintenance issues that they face currently at local sites. Such quasi-centralization is being witnessed in the management of their core general ledger systems that cannot be centralized due to regulatory constraints in several countries.
While several regional sites may plead for the continuance of existing stand alone product applications or channels that are sometimes expensive to maintain and manage, on the grounds of country or customer-specific functionalities, banks have to weigh this against the overall context. If they do feel such functionality is in fact desired and can be cross-pollinated to customers in different regions, they may adopt it in their centrally managed systems.
Global banks are fast implementing core centralized payment processing engines or message brokers that route payment messages from various global/localized bank-corporate connections to payment product engines that generate postings into the back-office general ledger applications.
Banks have realized that the efficiency and merits of their bank-corporate connections are limited by the basic capability to route received payment instructions from the multitude of these connections to the several product processing systems and finally to the relevant G/L system before sending them out to the clearing at each site.
Thus, while bank-corporate connections are unique in the sense that they are customer-facing, nevertheless their strategies should not be determined in a silo-ed fashion and should be done with a holistic view of the middle and back office capabilities too.
Managing bank-corporate connections
Due to the legacy de-centralized management, global banks have witnessed high-levels of redundancies in their connections with corporate customers. As explained in the earlier section, localized bank-corporate connections in several countries allow customers to initiate payments from accounts being maintained with that branch only. In this age of the CPF this is a highly constraining factor. While the best option would be to migrate such customers towards the bank’s global connection channels that support multi-branch management, it has been observed that banks are still choosing to actually globalize such local channels and equip them with multi-branch operations instead by hooking them onto the centralized message broker. This is due to the highly regional flavour of such channels, which banks prefer not to change so as to stay attached to the local turf.
Nevertheless, banks are now attempting to better manage this mix of global and local bank-corporate connections with an eye on their middle and back office capabilities.
With the adoption of the centralized message broker that supports routing between several bank-corporate connections to several back office sites, banks have also realized that certain functionality that is being duplicated across these channels or back-offices may now be vested and maintained in this single broker – e.g. checks on technical, business, audit compliance, format-conversions, etc. This takes on strategic importance as they can now reduce the complexity of the actual channel or interface per se.
With this background on the overall trends and impacts on the payments space, a few of the different categories of corporate to bank channels have been listed below:
These are direct interfaces established with the corporate ERP by using non-proprietary or proprietary software. It usually requires opening up of firewalls within the corporate domain for connecting the bank interfaces with tables/folders in the ERP system to pick up or deliver data. Such connections may be web-enabled (thus offering global connectivity) and are scheduler-based with minimal to no manual intervention. They are able to support several standard ERP formats. Such connections are in vogue now and are forming the primary link between customers and their banking partners. Given the STP and high performance parameters large bulk payments across the globe are usually passed through such connections. Such channels are usually globally accessible and can support account management across the globe.
SWIFT’s member-administered closed user group is their first direct offering to corporate users and they may access this through their administering bank. This global connection option is gathering speed among high-profile corporate customers and is a non-blank-proprietary platform giving customers the ideal pad to connect with multiple banks using SWIFT standards. It may be implemented to be in the nature of direct STP.
The security and non-repudiation factors are the critical differentiators for this connection option along with the non-proprietary nature. Banks are striving to offer comprehensive product suites through this channel now. The key benefit for banks from this offering is the fact that they can leverage their existing SWIFT connections and use existing SWIFT formats for transmission of information.
These are in the nature of Web based portal solutions that offer a secondary linkage among higher end customers and their banks. As direct STP connections flourish and pick up the bulk of initiation related flows, such channels will be used more for seeking information and logging incidents so that manual intervention at the bank in terms of customer-servicing teams may be reduced and queries/incidents may be routed directly to the concerned product applications. The key to the success of these channels has been the ability to offer a comprehensive bouquet of services under a SSO umbrella, offer complex authorization and access matrix and governance structures with appropriate security measures to mitigate repudiation fears. User experience and personalization are key features among portal solutions today. While the web-portal offers global connectivity, several bank portals still remain regional in their offerings (due to language, etc.) which means that banks still need to offer multitude of such channels especially to the mid-market segments. Most banks are currently undertaking concentration exercises to realize the SSO requirements of accessing the entire product suite. They are also connecting the localized channels among these to their message brokers to equip them with multi-branch operation capability.
These operate in several countries mainly with mid-market customers and can again be highly localized. They require software to be installed and maintained in most cases as the client sites. They are proving to be cumbersome to maintain and yet are being difficult to phase out. Banks are now connecting some of these highly localized channels to their core message brokers to equip them with multi-branch operational capability. However, on the mid to long term, banks are clear that they need to phase out such channels.
In addition to these, in certain countries it has been observed that the clearing houses have offered direct corporate connectivity for the customer to initiate payments in a non bank-proprietary environment. Thus the clearing house would then send the payment instructions first to the payer bank to check on fund availability (and other checks) and then release payments towards the beneficiary bank. While this offers the customer non bank-proprietary standards it still is applicable only for that region.
The broad categories of bank-corporate connections and their functionalities have been discussed in this article and clearly there has been a paradigm shift in the definition of a bank-corporate connection. The focus is now the end-to-end capability of a bank to support the functionality that the customer expects for its core payment processes. Only a holistic view across the banking domains of initiation, middle office and back office and across geo-sites will help banks develop the optimal strategic suite of bank-corporate connections.