Bank-to-Corporate Connectivity: Options and Challenges
The functionalities offered by electronic banking systems provide considerable value to corporates on a daily basis but it is important to also consider other alternatives that are available in terms of cost and value to the business. The main function of an electronic banking system is to support the financial message flows (e.g. amount of payment, beneficiary account and bank account statements) to and from the bank where these messages are independent of the actual payment. Unbundling the financial message flow and the actual payment by not using an electronic banking system can provide companies with greater negotiating power with their bank(s) as well as enhanced flexibility.
There are currently four market-available alternatives to using an electronic banking system to facilitate the financial message flows between banks and corporates:
Choosing the right option will depend on the characteristics of your organisation and the following factors are worth considering:
Number of locations and revenue: Small domestic companies can also investigate bank independent payment channels as an alternative to traditional payment channels. Cost-efficient alternatives to electronic banking systems are not only available to the fortune 500 companies, but also to companies with sales of €50m or more, depending on other factors such as the volume of payments.
ERP capabilities across the organisation: ERP systems have different functionalities and format handling capabilities. Even if the whole organisation uses the same ERP system, variations can exist due to different versions or modules being installed. With multinational companies, different ERP systems are often the result of mergers and acquisitions. For every link between a payment channel and an ERP system, an interface has to be built and maintained, which can be a costly process.
Transaction volume, size and type: A large mining company working with long-term contracts generally has few (high volume) payments and collections, while a small insurance company usually has many low-value payments and collections. The price per transaction is not that important when making few (high-value) payments but other (more qualitative) factors might be more important, such as security and reporting. It is not only the volume and size of the payment that is important but also the type of payment, as transaction fees differ widely between different payments.
Number of banks and electronic banking systems: Having a lot of bank relationships in place requires time and effort, and can result in less control over cash. In addition, multiple interfaces have to be built and maintained, which is not cheap. Reducing the number of bank relationships to a minimum will allow companies to negotiate better pricing with their remaining bank relationship/s. Having multiple bank relationships generally implies multiple electronic banking systems, but this relationship is not necessarily one-to-one. If you have many subsidiaries that all operate their own electronic banking system and connect to the domestic branch of the bank, you could have one bank but at the same time 10 electronic banking systems to connect to. If you were able to replace these 10 systems with just one, there are potential cost savings.
Audit and compliance obligations: Reducing the number of local systems used also provides more control over the authorisation process and a better audit trail. Using multiple systems requires more time on the part of accountants in reconciling payments and collections with corresponding purchase and sales orders. As we all know, accountants are expensive professionals so it is best to keep the time accountants spend at your company to a minimum. The possible cost savings can be leveraged when your organisation deals with strict compliance requirements (especially SOX).
Security: Security is usually a big issue although many systems today have adequate security features, however, many organisations want extra security measurers when transferring funds. Using multiple systems requires security measures to be implemented and updated for each system, thereby creating unnecessary costs and complexity.
Today, a company’s organisation structure is no longer a determining factor when investigating whether a bank-independent payment channel is suitable for your organisation. If you used a bank-independent channel a decade ago you needed full installation of the particular application with every subsidiary that made payments. This was a costly and time-consuming proposition to implement for more than one – let alone dozens of – subsidiaries; hence, a bank-independent payment channel required a centralised organisation structure. With today’s web-based applications, or applications that allow remote access, minimal (or no) installation is required at local sites. Using a web-based system, one can use a bank-independent alternative in a cost-efficient way even when you have a decentralised organisation structure.
Depending on the characteristics of your organisation as described above, how do you decide which bank-independent payment channel is right for you? The following sections offer advice in making the right decision.
All well-known ERP systems can deliver output in various formats including (local) payment formats and offer the potential to add new formats. The latter can be a costly and time-consuming operation if there are many formats to add. Almost all multinational companies, as well as many medium-sized companies, have an ERP system. Facilitating payments directly from the ERP system is a good option if your company fits the following criteria:
A bank independent electronic banking system can handle and send information to and from multiple banks. With a bank-independent electronic banking system, payments can be checked, authorised, repaired, validated and sent. This type of system can handle different formats in and out of the system. A bank-independent electronic banking system is particularly relevant if your company fits the following criteria:
Corporate access to SWIFT is one of the hottest topics in the world of treasury management today and it has been possible for a couple of years by joining a Member Administered Closed User Group (MA-CUG) where corporates can communicate with all of their banks via SWIFT. One of the disadvantages of the MA-CUG model, however, is that corporates have to set-up a MA-CUG contract with each bank individually. In October 2006, SWIFT introduced its new access model, Standardised Corporate Environment (SCORE), whereby corporates can join a single closed user group that connects them to all SCORE-member banks. With the introduction of the new model, more companies than ever before can now access SWIFT. This is important because SWIFT access can provide a high degree of efficiency by increasing STP as well as the fact that fees per transaction are low. However, the high initial investment and maintenance costs prevent SWIFT access being a viable alternative for all but the biggest corporations in the world (generally sales of €10bn or more). Corporate SWIFT access is an option for your organisation, if you meet the following criteria:
Payment service bureaus can be used to outsource payments. Corporates provide the raw payment data to the payment service bureau, which will then change each payment into the right format and send it directly to the automated clearing house (ACH). For many medium-sized companies (sales of €50-100m), it is hard to organize the payments department in a cost-efficient way. Modifying your ERP system to facilitate payments can improve efficiency and STP but it comes at a cost. If the volume of payments is not large enough to justify the investment in one of the other alternatives, but you do want to increase payment efficiency, you could use a payment service bureau. This way you can share the maintenance and IT costs with other users and reduce internal staff members. A payment service bureau can be a cost-saving alternative if your company has the following characteristics:
Some readers might be wondering why payment factories have not mentioned as a bank-independent payment channel. A payment factory is the standardisation of the payment workflow, but this workflow is independent of the delivery channel to the bank (or ACH). None of the four alternatives described above require a payment factory process to be in place, but using a payment factory will increase the efficiency of the payment workflow before it is sent to the bank.
Whether a bank-independent solution is the right proposition for your organisation depends on your company’s requirements and characteristic as described above. These requirements have to be assessed on a case-by-case basis, but the following table provides a good indication about what alternatives are worth investigating.
