The prospects for corporates to reap major cost and operational efficiency benefits in the next few years look good. From a business perspective corporates stand to be the biggest beneficiaries of the introduction of the single euro payments area (SEPA), as the cost of cross-border payments is brought down to be in line with the cost of domestic payments and the opportunity is created for corporates to rationalise their banking relationships to make cost and efficiency gains. From the perspective of straight-through processing (STP), recent changes made by bank-owned messaging platform provider Swift have given corporates better and easier access to the historically interbank network, opening up the opportunity for them to streamline communication with their banks and capitalise on operational efficiency improvements.
However, the environment through which corporates must navigate during the coming years is more complex than this headline good news suggests. Having improved access to SwiftNet certainly creates opportunities for corporates to increase STP rates, but restrictions remain on the use they can make of Swift communication, most notably the fact that corporate-to-corporate messaging over Swift is still prohibited. And corporates do indeed stand to gain from the introduction of SEPA, but ongoing uncertainty about some of the details of its implementation, plus a lack of awareness of and strategic planning for SEPA within many corporates, are just two of the challenges that need to be addressed if the full potential of SEPA is to be realised by the corporate community.
SWIFT’s New Corporate Access Models
At its Sibos event in Sydney this October, Swift announced the launch of a pilot programme for a new corporate access model, designed to afford corporates better standardisation and easier interaction with multiple banks. Corporates have actually been able to use Swift to interact with banks since 1998, initially through the treasury counterparty (TRCO) model and more recently through the member-administered closed user group (MA-CUG) model. But there were serious limitations on the use corporates could make of Swift, in particular the fact that they could only communicate with one bank per MA-CUG; corporates wanting to interact with multiple banks had to join multiple CUGs, with all the cost and management overheads that implied.
At the June 2006 AGM, Swift’s shareholders approved the creation of the new model, under which corporates can join a single CUG and interact with all participating financial institutions. Called SCORE – the Standardised Corporate Environment – the new model is being piloted by corporates including Alstom, Arcelor Mittal, CIBA, Danone, Gaz de France, General Electric and Microsoft, and banks ABN Amro, Bank of America, Barclays, BNP Paribas, Citigroup, Deutsche Bank, HSBC, ING, JPMorgan Chase, Nordea, Societe Generale and UBS. The new model will be launched in January 2007, and the initial focus of the pilot will be cash management and treasury, with services such as exceptions and investigations, trade services and securities services expected to follow.
The new model for accessing Swift is clearly a far better option than the corporates have had before. But it is not yet perfect. Only corporates listed on a regulated stock exchange in a Financial Action Task Force (FATF) member country are eligible to join. The rest – including many huge multinationals with complex banking relationships – can still only use Swift via one of the older access models. That said, the market has viewed the creation of the new corporate access model as a very good first step towards enabling the corporates to leverage the value of Swift, and the expectation is that it will evolve further over time.
For now though, corporates cannot communicate with each other via Swift and will therefore have to maintain separate connectivity for communication with other corporates for invoicing, for example. They will have a single window for communication with the banks, but not for other counterparties. This probably means corporates will have to maintain Swift connectivity alongside Internet based connectivity – two similar technology set-ups and network infrastructures, with different security issues – and they must keep that in mind when looking for messaging solutions.
Corporates seeking to take advantage of access to SwiftNet will need to make some technology decisions. They must avoid a situation whereby they are managing multiple interfaces to Swift. To extract the maximum benefit from Swift access, corporates will want to enable communication with banks by a number of different departments – accounts payable and receivable, treasury and FX. Therefore corporates need to choose systems that enable a single Swift gateway to handle all these connectivity needs. Swift changes its messages frequently and, as the banks have learned to their cost over the years, if Swift connectivity is embedded in numerous systems the burden of keeping up with those changes becomes unbearable. Solutions that keep Swift activity separate from back office processing systems and enterprise resource planning solutions, while at the same time enabling ease of integration with those systems, help to alleviate this burden, because changes that need to be made to Swift messages can be implemented without disruption to the core infrastructure.
The implementation of an intelligent middleware solution also supports the corporates’ ongoing requirement to manage Swift connectivity for corporate-to-bank communication and Internet based messaging for communication with other corporates. The most efficient way to handle this dual requirement is to implement one system with the intelligence to manage both connectivity with the banks via Swift and also to automatically route messages related to invoicing, for example, to other corporates.
If corporates are to take maximum advantage of their new ability to access SwiftNet, then, they must invest in the right technology capabilities. This should prove well worth the effort though, especially when the efficiency gains of having single window access to all their banks are coupled with the benefits corporates are expected to reap under SEPA. Again, however, there are issues to consider and challenges to be overcome if corporates are to maximize the potential gains from SEPA.
SEPA: Opportunities and Challenges
One major challenge that will need to be addressed if the full vision of SEPA is to be realized is the lack of a messaging standard for use by both banks and corporates to support true STP in this brave new payments world. In anticipation of the creation of messages under a new standard – ISO 20022 XML – a new data model has been outlined, but the bulk of the focus has been on the bank-to-bank space rather than on the corporate to bank space.
Co-operation is under way between corporates and banks on ISO 20022 for cash management and payment initiation standards in the corporate-to-bank space. Indeed, in conjunction with standards bodies TWIST, IFX, OAGi and Swift, five corporates – Arcelor Mittal, Danone, Gaz de France, General Electric and Microsoft – and 13 banks have joined forces to define best practices around the implementation and use of the XML based standards, with the aim of piloting them in the second half of 2007.
However, it should be noted IFX, OAGi, Swift and TWIST signed a memorandum of understanding on the creation of a single international standard as long ago as November 2003: the process of creating standards is never rapid. Though the industry has recognized there is a gap in ISO 20022 XML when it comes to meeting the requirements of corporates, it is unlikely that a full solution to cover that gap will be available any time very soon, and therefore by far the most likely outcome is that corporates’ adoption of the new standard will evolve over time rather than happening overnight. And meanwhile other standards are well entrenched for corporate to corporate communication – for example EDIFACT, which has particularly strong presence in markets like Germany. This standards challenge reinforces the argument for the adoption of intelligent middleware solutions, capable of routing XML messages to the banks and messages in other formats such as EDIFACT to other corporates.
Another technology and standards related challenge corporates are likely to face in a SEPA environment relates to the need to be able to manage transactions end to end, including the process of reconciliation of the payment against the relevant invoice. A remittance information field has been added to the XML messages, but it has not yet been clearly specified how it will be used. Typically, one payment will cover numerous invoices, and therefore corporates will need systems with the intelligence to understand free format text – systems which not only reconcile but also match based on an intelligent understanding of free format text, in order to establish which payments refer to which underlying invoices.
From a business perspective, the SEPA situation is also more complex for corporates than it at first appears. One issue is ongoing uncertainty about what the introduction of SEPA will actually mean in certain areas. It will apply to all 25 countries in the European Union, but only 12 of those have adopted the euro so far. How SEPA will be applied in non-euro countries is not 100% clear as yet, and this degree of ambiguity must be addressed if corporates are to optimize their approaches for the new environment. A further degree of ambiguity exists around some of the value added payments products offered by banks in different local markets – and which differ from domestic market to domestic market. These won’t be covered by SEPA as standard and although this issue has been recognized by the regulators and the European Payment Council (EPC) and the banks, until it has been resolved successfully it remains an impediment for corporates seeking to determine their strategies for SEPA.
In addition, the corporate community is very broad, comprising numerous different types of company. It is likely that different corporate types – for example insurance companies, electronics companies, manufacturing companies – will each have their own issues when it comes to SEPA, and this is a further challenge when it comes to establishing the best way forward for corporates trying to prepare for the transition to the new environment.
Similarly, while on the surface it appears there is a major opportunity for corporates to significantly rationalize the number of banking relationships they have to have in place – with some perhaps able to centralize their activities with one bank in one country to cover the whole of Europe – in reality the situation is not so straightforward. Various legal and regulatory issues come into play. For licensing reasons it will sometimes be necessary for corporates to retain accounts in certain countries, and insurance companies, for example, will need to retain separate accounts for different purposes, say internal and external transactions. There is still a huge opportunity for corporates to reduce their number of banking relationships and they will certainly still benefit from reductions in the cost of cross-border payments, but the options for corporates are not as simple as they first appear. As a starting point, companies must seek to understand the banking relationships they have across Europe today, in order to establish exactly what they can do to capitalize on the opportunities SEPA will create in this regard.
Corporates Need a Voice
Perhaps the most important challenge to be overcome though is the fact that within many corporates across Europe at the moment, awareness of SEPA issues remains low. Numerous observers have identified this problem, and though understanding of the opportunities and challenges of the new environment among the corporates is growing, it is clear a gap remains. In part, it is for the regulators, bodies such as the EPC and the banks to address this issue by informing Europe’s corporates about what they need to do and how they can gain from SEPA. But the corporates themselves need to develop their own voice on this issue. Standards body TWIST has done some good work in this area, and has created a list of the requirements corporates have for the new environment – including wanting free choice to access payment services, whether domestic or cross-border, available in the market, requiring open standards enabling end to end cross-border supply chain automation, and demanding transparent pricing and billing from payment service providers. But just as the corporates’ voice in the Swift community has taken some time to be heard, meaning the benefits of SwiftNet connectivity are only now becoming truly available to them, it will take time for the corporates’ views on SEPA to come to the fore, in order to redress the balance and shift the market’s focus on SEPA away from the strong bank-to-bank orientation it has had to date.