Helping To Harness EU Regulatory Initiatives
The banking sector in Europe is facing more challenges than the implementation of the single euro payments area (SEPA) alone. It will have to implement the Markets in Financial Instruments Directive (MiFID) and the Anti-Money Laundering Directive (AMD) at the same time as SEPA. Tackling common issues between these projects could speed up their implementation but also lower their cost of implementation significantly. In particular, the alignment of designs for customer identification, the management of bank mandates, the authentication of electronic messages and guidance with regards to ensuring data integrity could lead to savings in the implementation of all these large projects.
Such lower cost of implementation could be beneficial for standardised and commoditised services under SEPA and MiFID, but could also provide unprecedented opportunities for the rapid roll-out of new innovative services to users. The banking sector needs these value adding services to generate additional income that can compensate for the potential loss of revenues for the commoditised services under SEPA and MiFID. In the context of payment services and cash management services, exploratory work is already underway in such areas as contactless cards, mobile phone-based payments, electronic bill presentment and payment, plus e-invoicing and supply-chain financing. As experienced in northern European countries (e.g. e-invoicing, mobile phone-based payments) and in southern European countries (e.g. supply chain financing), these services might be charged at higher rates than the standard SEPA products.
A key benefit of SEPA for corporates is the prospect of raising the level of straight-through processing (STP) for accounts receivable and accounts payable. This can be achieved by standardising payment instructions, standardising the messaging about status of payments and any possible issues, standardising direct debit mandates and standardising remittance information about what is paid by whom and what for. The relevant XML messaging standards for this purpose have been developed by IFX, OAGi, SWIFT and TWIST as part of the ‘ISO 20022 IST harmonisation effort’. This IST payment kernel is mandated by the European Payment Council (EPC) for inter-bank processing of SEPA payments and is recommended for processing between banks and their customers.
The EPC decided not to incorporate the design for remittance information of the IST payment kernel design, given a limitation of 140 characters set by the EPC for the remittance information. TWIST supports the efforts of the EACT in negotiating with the EPC a recommended structure of remittance information to be transported end-to-end with any payment mechanism under SEPA. This has now led to agreed implementation guidance for the situation where only 140 characters are available.
SEPA could be a trigger not only for cost savings in the banking sector but also for corporations if it would further enhance the automation of accounts payable and accounts receivable by the introduction of e-invoicing. Such e-invoicing can be, and often is, arranged between corporations bilaterally, but banks can add low-cost and pervasive e-invoicing services to their portfolio of offerings to corporates, integrating with their payment services.
A combination of SEPA implementation based on open standards between corporates and banks plus an accelerated introduction of e-invoicing offers enormous potential. It would not just deliver a cheaper and more efficient payment mechanism, but also rapidly present opportunities for businesses and the public bodies to take advantage of fully integrated, electronic supply chain management solutions.
Many banks would like to follow examples in Scandinavia, Italy and elsewhere in Europe, where the banking sector offers profitable e-invoicing services to a growing list of customers. These services could be more valuable if an open common framework would be created for e-invoicing that overcomes technical and commercial barriers and fosters effective competition and product development. Realising that significant savings and benefits could be delivered to the wider European economy with e-invoicing, the EU Commission has started to push for collaboration between public administrations, corporations and banks on such an e-invoicing framework.
In 2006, TWIST updated its set of standards for ordering and invoicing as well as for post-shipment financing. This updated set of standards was made interoperable with the most popular e-invoicing standards. In 2007, these existing commercial e-invoicing schemes and technical standards (e.g. Finvoice, TWIST, Isabel, UN/CEFACT, UBL/NES, SWIFT, CEN) have started to join forces to establish and adopt an interoperable scheme for Europe that can leverage on the momentum of the SEPA project. Since the beginning of this year, a number of corporates, public administrations and banks are working together to identify the issues that hamper e-invoicing in Europe, identify best practices and recommend solutions. Part of this work focuses on tax and legal issues plus the applications of legislation in various EU countries. Another part focuses on further enhancing the interoperability of multiple e-invoicing standards, with the gap analysis done by TWIST in 2006 as key input. A third part focuses on issues around authentication and identification plus data integrity. Several members of TWIST are actively involved in this effort and are hopeful of tangible results by the end of this year.
The last decade has seen web-based technology, related technical standards and open source applications mature. This provides significant opportunities for reducing the cost of IT infrastructures, enhancing their stability and speeding up the integration between systems. A good example is the emergence of Asynchronous Message Queuing Protocol (AMQP). AMQP is an open protocol defining the transmission of information between systems using a combination of store-and-forward, publish-and-subscribe and other techniques. If one realises that generally interfacing takes up 10% to 30% of IT project costs, it can be stated that by applying an open standard for system integration like AMQP could lead to a significant reduction in the cost of implementing SEPA. More importantly, AMQP addresses the scenario where there is likely to be some economic impact if a message is lost or improperly processed. This means that implementation of AMQP can address the high costs for the correction of payment instructions, the resolution of data transmission errors and can help reducing the cost of implementing new interfaces with customers. The members of the AMQP Working Group now include: Cisco Systems, Credit Suisse, Envoy Technologies, iMatix Corporation, IONA Technologies, JPMorganChase Bank, Rabbit Technologies, Red Hat, TWIST Process Innovations and 29West. Members of TWIST are actively involved in the design and roll-out of AMQP, expecting a range of middle ware applications to support the protocol before the end of this year.
The European Payment Council (EPC) has currently excluded data transmission from its designs, suggesting this is to be left to individual banks, their providers and their customers. If the EPC does not take message transport into its scope then it is likely that corporate customers will themselves request banks to use standardised interface designs when faced with the need to update their existing interfaces to their banks for SEPA. Whether driven by the banks or by their customers, better interface designs based on open standards can reduce between 10% and 30% in integration costs and improve the predictability of the processing between banks and their partners as well as their clients. It can be expected that the topic of open transport protocols becomes higher on the agenda with the advent of AMQP maturing and the need for more rapid roll-out of updated interfaces between banks and between banks and their customers in the next two to three years.
The EPC has made recommendations for identification of customer accounts but not for the identification of customers. The EU Commission’s Anti-Money Laundering Directive (AMD), which will come in effect later this year, leaves it to individual banks to define how they identify their customers, but makes them responsible for doing so. Many banks will have to review their procedures and possibly will have to update their identification processes, involving their customers with new requirements. For MiFID, the harmonisation of reference data for orders, for custody and money accounts and identifiers for all parties involved in financial transactions is needed. Corporates that are implementing e-invoicing solutions in Europe are facing the same issues around identification of one another when exchanging information electronically.
Many banks in Europe would like to become more efficient operators in wholesale financial markets, offer SEPA direct debit products, implement the AMD efficiently and support corporate customers with e-invoicing services. These services would probably all require customers to adopt new solutions and make adjustments for party identification and message authentication. When approached by multiple banks for implementations for multiple projects, corporate customers will seek consistency between banks and between projects. The resulting drive for harmonisation will lead to increased transparency and predictability plus the clear allocation of accountability between messaging parties. This would lead to significant additional benefits not only for corporate customers, but for their bank providers as well.
TWIST is working on these issues with the development of standards for bank mandates, its involvement in European e-invoicing initiatives and participation in the design of implementation guidance for MiFID. As a practical application of this work, TWIST created and piloted in 2006 standards for multi-bank account opening. With these standards it is now possible for a number of corporates that have piloted them to open a new account in the case of an existing bank relationship and to designate who the signatories are on these accounts. Since then, we have seen growing interest in taking these standards to the next level. More specifically, some of the questions that are being asked are as follows:
With the focus by major banks and the EU Commission on e-invoicing, 2007 may present a broadening of the scope of SEPA plus a maturing of open standard designs. In parallel, the developments in capital markets (MiFID) and the need to update anti-money laundering measures (AMD), there is an opportunity for corporates, public administrations and banks to regard these EU driven projects as an opportunity to reduce their cost base, reduce the cost of their IT infrastructures and more rapidly enable the use of new innovative products. This process is supported by the maturing of open standards, of which TWIST has been an active driver. 2007 should show not only a maturing of designs, but also growing adoption of these open standards, finally leading to the promise of cost reductions and enhanced innovation.