How to Reduce Bank Costs with Straight-through Processing

A payment can be considered ‘non-STP’ and levied a surcharge for any of the following reasons:

• The instructions for payment execution are submitted to the bank on paper, by fax or via a telephone operator.
• The identification of the bank is ‘free text’ or in the wrong field of the payment message.
• The account of the beneficiary is not correctly stated.
• The bank routing code of the beneficiary’s bank is not provided or is stated incorrectly.

As electronic payments increase, demand grows to achieve improved payment STP. Large corporates cannot afford to sit back and wait for financial service providers to offer up the solutions. Many are taking matters into their own hands.

Why Corporations Aren’t Waiting for Banks

Banks continue to grapple with multiple, often proprietary, payment systems. At present, it is not uncommon for banks to support different systems for high-value and ACH bulk payments. Furthermore, some have entirely different systems exclusively for cross-border transactions. Banks recognise the inefficiencies inherent in these disparate systems. However, they, too, have external pressures that they must contend with which compromise their ability to move quickly. For example, the almost forced spending for deploying tools to meet anti-terrorist legislation or other AML regulations has severely crippled banks’ abilities to improve the efficiencies of their payment operations.

As a result, banks are not meeting all of their corporate customers’ needs and seem to be making progress in only two regards: improving connectivity with their corporate customers and creating bank-managed user access groups to the messaging systems. Banks are integrating their systems with treasury workstations and ERP systems, replacing the leased lines that were once the standard. These secure Internet connections are more flexible and less expensive. The creation of Member Administered Customer User Groups (MA-CUGS) provides secure platforms for exchange of payment information and consolidates messaging standards, which translates into a reduction in costs.

SEPA and the Impact on Corporates

Regulation (EC) No 2560/2001 on cross-border payments in euro eliminates the price difference between cross-border and national payments. It applies to credit transfers, cash withdrawals at ATMs and payments by means of debit and credit cards. This regulation facilitates the realisation of a single euro payments area (SEPA). Unfortunately, the various countries that compose SEPA have numerous basic bank account number (BBAN) systems. Cross-border, intra-EU payment transactions are inherently challenging and susceptible to handling charges or rejections. This regulation, however, was aimed at normalising pricing, not creating efficiencies and, therefore, its benefits for corporations are a bit less clear.

But SEPA does have its perks for corporates. First, if SEPA can truly deliver 100% payment STP, businesses will realise lower fees for their transactions. Fees for ‘domestic’ or ACH payments are approximately €0.05 to €0.10 each. Compare this with €2 to €10 fees for traditional cross-border payments and the value is apparent. Second, transactions that settle without delay or reject are ultimately very predictable. Corporate customers can more effectively manage their cash flows – for example, they can be prudent in the manner in which they remit on invoices to their suppliers. Finally, the corporate customer could simplify its operations by reducing the numbers of bank relationships required to do business in the EU. And, a seamless processing environment that is more ubiquitous truly levels the field. Corporate customers would conceivably no longer receive disparate levels of service or pricing from banks within the EU. With these things as potential benefits, SEPA compliance is in a corporation’s best interest.

How Corporates Are Taking Control

Corporations are taking strides in a number of areas to more actively control the efficiencies in payment operations. Here are a few:

Centralisation: Many businesses have moved their payments to central ‘hubs’. These hubs are able to realise economies of scale and can more effectively retain key operations personnel. But, perhaps more importantly, the company’s treasury department can manage cash flow more completely.

Consolidation of payment platforms: With the collapse of operation departments, corporations can also migrate to single payment systems. This improves maintenance and reporting requirements. It also makes it easier to deploy software enhancements.

Quality of payment instructions sent to banks: Businesses are recognising the need to improve the quality of the output from their payment platforms. As banks increase fee activity for non-STP payments, corporates are exploring ways of improving their origination of payment instructions.

Middleware offered from banks may not be the answer, unfortunately. Frequently, these systems require integration work so that the payment batches coming from the ERP can be interfaced with the software. And, more often than not, these solutions focus on reformatting of messages so the bank can more seamlessly process them. The software doesn’t necessarily address the quality of the message content.

As a result, many companies are using integrated databases within their ERP systems that validate SWIFT/BICs and bank routing codes, such as UK sort codes or ABA routing numbers. Unfortunately, these data solutions are not generally available from the banks. So, companies are licensing solutions directly from vendors that focus on providing, maintaining and updating bank routing details.

While traditionally something that banks themselves seek out, high-quality payment routing data is a valuable resource that can help reduce a corporation’s bank costs. As the payment processing landscape becomes more and more complex, this concept of traditional banking tools and information being re-purposed and put to use by the banks’ own customers is likely to become the rule rather than the exception.