BankingCorporate to Bank RelationshipsPayments in Need of Standardisation

Payments in Need of Standardisation

A recent EuroFinance survey1 on market trends among the UK’s global senior treasury professionals found that liquidity and risk management are treasurers’ biggest concerns. Given the current economic climate, this is hardly surprising. However, technology comes in fairly highly too – at number eight. Although not renowned for their technical prowess, the survey shows that treasurers are beginning to recognise that technology can help them overcome a number of the business challenges they face. With specific regard to payments, corporate treasurers are facing pressures to centralise, consolidate and standardise their systems and processes. How can technology help corporate treasurers in the drive towards efficiency and cost reduction?

Currently, resources represent an enormous expense for corporate treasurers. In fact, according to a recent Experian Payments study, 70% of operational costs lie with treasurers’ resources. Why? The reason is down to the proliferation of IT systems and business processes involved in the payments lifecycle. This has been caused by three primary factors:

  1. Expansion into new markets by many companies has resulted in a high degree of inefficiency.
  2. Increased merger and acquisition activity has led to poor integration and duplication.
  3. The number of banking relationships that corporates currently have to maintain means that different processes need to be adopted for the different banks as they all do business in different ways.

In fact, according to SWIFT, corporates with an annual turnover of more than €10bn tend to have at least 10 to 15 main banking relationships to maintain and service through different payment systems and processes.

The Need for Standardisation

The existence of multiple systems and processes involved in a payment’s journey means that inefficiencies in payments sit in a number of different areas within corporate treasurers’ business. These range from data capture and quality through to authorisation and reporting, and also communication with their banks. There is a clear need among corporate treasurers for technology systems which encourage consolidation, standardisation and centralisation. Ultimately, treasurers should aspire to run a single set of data standards and business processes which will result in a reduction in costs and greater efficiency.

Using SWIFT for corporates is one solution for standardising electronic messaging and the way in which corporate treasurers communicate with their numerous banks. Standardisation is one of the major SWIFT business drivers as it offers the possibility for systems rationalisation. Its electronic messaging platform enables communication with multiple banks, while providing enhanced compliance and improved control over how payments are made in various locations and increasing financial transaction security. One of SWIFT’s biggest attractions for treasurers lies in the fact that the standardisation it enables can reduce costly errors.

Using the same set of business processes and systems at the front-end to capture and validate payment information is another area where efficiencies can be achieved. In addition, rationalising the number of treasury applications dealing directly with the banks so that there is a central point for managing information will improve visibility and working capital. In essence, corporate treasurers should be striving to consolidate corporate-to-bank communications, rationalise the number of treasury applications and reduce the number of bank accounts by using SWIFT for corporates.

Industry initiatives, such as the single euro payments area (SEPA), should support corporate treasurers in their efficiency drive. Despite the fact that SEPA will bring no direct benefits to corporates, the aim of the framework is to drive standardisation so corporate treasurers should be able to rationalise their banking relationships more easily under SEPA. Prior to the SEPA environment, a corporate may have needed to establish up to three banking relationships in order to conduct business in one of the smaller Eastern European countries, for example. However, with the introduction of SEPA, corporates will be able to make euro payments to any beneficiary located anywhere in the euro area using a single bank account and a single set of payment instruments. As a result, corporates will be able to do business more efficiently both in existing and new markets, as well as consolidating their payment processes.

Supporting Data Accuracy – SEPA as an Opportunity

While SEPA will realise a number of efficiency gains for corporate treasurers (and banks), the framework should be seen as an important opportunity to make significant gains in one area in particular: the ability to absolutely confirm the accuracy of payment data before submission. If corporates could be completely sure that a payment would reach its destination before sending, then a number of savings could be made, not least in the costs of customer service to communicate the issue and chase the failed payment.

The ability to confirm the accuracy of payment data before submission will become even more crucial within the SEPA environment. Data validation prior to submission will enable corporates to avoid penalty fees for failed payments, which have the potential to negate the efficiency savings achieved under SEPA for cross-border transactions. The mandatory use of BIC and IBAN in all EU cross-border euro credit transfers can significantly increase the cost of international payments processing. This is through both the charges levied by banks for submitting invalid data and the cost of correcting rejected payment information.

It is still unclear how corporate customers want to interact with SEPA. Do they want value-added services that will improve their efficiency but keep them at arms length from the reality of payments data and processing? Or would they rather have more direct control over submission and – consequently – more accountability?

The answer is surely to be found in their appetite for risk and their approach to centralisation of the payments function. Those corporate treasurers who feel a distributed approach is beneficial will probably opt for a value-added approach where the bank can provide the needed experience and knowledge to ensure efficiency. On the other hand, those organisations striving for centralisation and consolidation will want to go down the payments factory or shared service centre route and thereby take more control and more responsibility for the quality (or otherwise) of their payments.

Supporting this approach are the services promised by some of the SEPA-compliant ACH competitors, such as VocaLink. Success will lie in how well the banks take up their offer to handle corporate payment data and thereby save money on the operation of their systems. This is not an issue of disintermediation but of outsourcing, but some banks believe that they can be as good software vendors as they are providers of payment services.

However, pure data services are not going to give corporate treasurers the confidence in the data that they need for checking that international bank account numbers are consistent with the UK format, for example. Problems with data integrity can lead to corporate treasurers receiving penalty charges from their banks and if payments are failing regularly, there is a risk of working capital forecasts being undermined so they may find themselves unintentionally falling into debt or not being able to make the best use of credit balances.

In addition, the historical corporate-to-bank cash management applications that sit with the corporates and allow them to do business with the banks are becoming outdated due to the introduction of SEPA and the drive for standardisation. Such cash management applications work in isolation and deal with payment data in different ways so corporates will find it difficult to harmonise business processes and deal with their banks in the same way.

Corporates are however beginning to sign up for SWIFT’s SCORE (Standardised Corporate Environment) service which allows each corporate member to interact with any bank that is also a member. However, the banks face the challenge of making all the services available via SWIFT that corporates previously enjoyed via their cash management tools. Banks clearly need to take a phased approach to the migration of services based on corporate customer demand. The banks have typically built up considerable value in the services that they offer, so it will naturally take time and money to migrate those services. As a result, they require corporates to sign up to the individual services in order to justify the business case. Corporates, on the other hand, are keen to see all of their previously available services on offer immediately via SCORE. This is one of the significant technology infrastructure challenges that banks face in meeting demand from corporate treasurers.

However, it seems as if the industry is about to reach a tipping point. Even if just a handful of banks start offering a critical mass of core services over SWIFT’s SCORE, then it is likely that a good proportion of Europe’s corporates will jump on board. Even by the end of the year we should see a large increase in the amount of traffic through SWIFT. As corporates move across to a core set of standard banking services and connect with their banks via a standardised communications interface, the efficiency savings should start to become apparent for both the corporate treasurers and their banks and technology may start to creep up corporates’ priority list.

1EuroFinance, 2007, The Annual EuroFinance Global Treasury Survey

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