SEPA: Benefits of ISO's Structured Creditor Reference
The International Organization for Standardization (ISO) is currently in the process of drafting a global reference number standard, to be used for both cross-border and domestic payment transactions. One of the driving forces behind this was the introduction of the single euro payments area (SEPA) because, at the moment, there is no international standard for featuring the creditor reference. At the same time, as interest in the ISO 20022 standard increases outside Europe, the banking sector and other companies are also beginning to appreciate the opportunities that standardised referencing provides to make payment transactions and financial management more effective.
The ISO RF Creditor Reference standard may be ready as soon as 2009. For the moment, however, it is likely that the standard will be incorporated into the SEPA Rulebook in 2010.
The Structured Creditor Reference is coded information about a supplier’s invoice. It is not the same as the invoice or customer number, but these may be part of it. In any case, each invoice has its own completely unique reference code, which makes itemising the invoices in a recipient’s money transaction easy.
The proposed ISO RF Creditor Reference is 25 characters long and alphanumeric. A reference number based on the standard’s specifications would begin with the letters ‘RF’ and contain two check digits, which would considerably reduce the chances of mistakes being made. In all other respects, the contents of the creditor reference will entirely depend on the nature of the company’s business, such as how many business units it comprises and whether it is engaged in B2C or B2B business. Thus, the creditor reference could, for example, be built as follows: first the code for the business unit, followed by the payer’s customer number, and finally sequential numbering.
The key to rapid adoption of the Structured Creditor Reference is that companies appreciate the vast cost savings that processes automated with the help of the reference number can bring. Also, the development of e-invoicing and direct debit, both within SEPA and globally, will speed up the adoption of the global reference standard. The benefits provided by the creditor reference are, for example, currently being actively discussed by the SWIFT community.
Creditor reference can provide considerable cost savings both to the supplier and to the customer, as it enables the introduction of a genuine straight-through process for a company’s incoming and outgoing payment transactions. The figure below illustrates this:
The reference number will itemise payments that have arrived on the account and associate them with the correct customer and transaction. Nearly 100% of payments that include a creditor reference can be matched automatically against a sales ledger. For companies, this means not only less time-consuming work but also fewer mistakes. A bank will collate a separate creditor reference batch from the referenced invoices paid into the invoicer’s account, usually one batch per account per day. The bank statement will, thus, display the total sum of referenced payments, not the individual payments.
Effective, automated processing of referenced payments means fewer enquiries and adjustments with the payer. The information in the sales ledger is more reliable and up to date, and control of a company’s receivables will improved.
In addition, the payer will benefit from the use of the creditor reference, since it too enhances the payments process by reducing mistakes and, first and foremost, ensuring that the recipient processes the payment transaction quickly and correctly.
As a result of SEPA, corporate interest in centralised money transactions and the number of in-house bank implementations is increasing. The global reference number standard can also significantly improve the effectiveness of a company’s in-house bank or shared service centres in a multi-bank environment.
Well-structured reference coding aids and accelerates implementation of an in-house bank. For example, if a company has several business units and they use a large number of different ledger or operations control systems, it pays to specify an individual reference code structure for each sales ledger. Payment information then can be allocated easily to the business units according to information in the reference number. The supplier can then automate the entire process. Referenced payment transactions from the chosen banks are, for instance, received by the company’s in-house bank and allocated automatically to the correct business units. This is then matched in each unit’s sales ledger – or, the other way round, the payer can develop its in-house bank function with the help of the creditor reference.
With the creditor reference, money moves from the payer to the recipient more quickly and reliably. This translates into improved liquidity and working capital management for both the payer and recipient; for instance, the recipient’s cash flow forecasts will be more accurate, which, in turn, will help to free up idle money from the company’s accounts for better use.