The Latest Shift in Payments

The wholesale payments industry is in the midst of radical changes. This has had a significant impact on the way different entities within the payments landscape, such as corporates, financial institutions and clearing houses, operate. The changes are driven by a number of factors including declining profitability, increasing customer churn, as well as regulatory and compliance challenges.

Some of the recent developments in the payments space have come as a huge boost for corporates. Until now, corporate clients were dependent on operating parameters set by banks for their payments business. However, in the current scenario, initiatives such as the single euro payments area (SEPA) and the corporate access to SWIFT are bound to have a profound impact on corporate treasuries, thus keeping corporate CFOs interested in the developments.

Regulations and Compliance

While SEPA strives to standardise payment instruments in the eurozone, corporate access to SWIFT seeks to provide a uniform access standard for corporates to transmit information to financial institutions. The primary areas where corporates could benefit from these initiatives are:

• Efficient liquidity management
• Decreased operational risk
• Increased transparency
• Cost efficiency

The following example attempts to display the benefits that corporates will gain from these two initiatives by comparing the environment before SEPA and corporate access to SWIFT.

Pre-SEPA and Pre-Corporate Access to SWIFT

Consider a company that has subsidiaries in Netherlands, Belgium, France, and Germany. For clarity, the following assumptions can be made:

1. The concentration account is the Dutch account and the subsidiary accounts are in the other three countries.
2. The company has a multi-banking relationship, i.e. the different units of the company have relationships with different banks.
3. The German and the Dutch units have a positive cash balance, while the Belgian and French have a negative cash balance.

The company treasurer needs to transfer cash balances within different units to optimally invest the surplus funds and provide adequate cover to the units facing a deficit as well as have centralised control over the liquidity position of the company. These measures would lead to optimal utilisation of funds by the treasurer of the company.

In the pre-SEPA and pre-corporate access to SWIFT world, the company would incur the following charges for transacting these payments:

• Charges levied by banks for executing cross-border payments, e.g. value dating and float.
• Managing separate interfaces with different banks with which the company has accounts.
• Costs incurred for maintaining different accounts in separate banks.

Post-SEPA and Post-Corporate Access to SWIFT

Post-SEPA cross-border transactions within the eurozone will be treated as domestic payments. This means that banks will no longer be able to impose cross-border fees on the transactions or incorporate any hidden fees and expense into the service, as the pricing is now totally transparent. (This means the total absence of value dating expenses and float income.) Fixed settlement cycles of T+3 days would enable the prediction of more accurate cash flows leading to improved liquidity management.

Corporates will be able to consolidate their accounts and select the financial services provider that suits them the best. Consequently, they would have the option of maintaining the minimum required number of banking relationships instead of multiple banking relationships. This would lead to a significant reduction of expenses related to the maintenance of multiple accounts.

Similarly, corporate access to SWIFT allows corporates to maintain just a single interface with different banks due to the standardisation of communication protocols. This is just one example of the potential benefits available to corporates.

Increasing Competition

Similarly, as the products and services in the payments industry become increasingly commoditised, adversely affecting the profitability margins of banks, they are on the lookout for innovative services to offer differentiated products to their clients. Some of the key areas where banks have taken the lead in ‘wooing’ clients are:

Use of open networks and uniform standards

This allows corporates to decrease the costs associated in maintaining proprietary systems for connecting to the payment applications of their banks. Uniformity of standards also ensures that the ERP systems of the corporates can be seamlessly linked to the banking systems. The advent of XML-based standards, such as ISO20022, can go a long way to increase the STP rates for payments-related transactions.

Innovative pricing techniques

Banks are making a concentrated effort to move from a transaction-based pricing model to a relationship-based model. Banks closely follow the transactions pattern of clients and try to create models that best suit them.

Value-added services

Leading banks are making continuous efforts to shift from the routine payment provider model to a partnership-based model with their clients. This has resulted in solution offerings such as:

• Complex liquidity solutions: Banks offer liquidity management techniques, such as netting, pooling and sweeping, to their corporate clients. Reports such as cross currency pooling and shadow balances offer CFOs a snapshot view of the liquidity positions of the company.
• Transaction repair services: This offering assumes more importance in the wake of SEPA. SEPA mandates the usage of IBAN and BIC for a payment transaction. Today, many corporates may not have this information for many of their counterparties. To address this, banks have come up with services such as IBAN BIC enrichment and validation. The incomplete transaction is ‘repaired’ by appending these fields to enable successful processing of the transaction
• Customised payment solutions: As the customer base of banks increases so do the associated requirements. To increase customer stickiness, banks are configuring their payment systems to customers across geographies. Also reporting solutions are being made flexible to accommodate a variety of industry, country and customer specific formats.

Conclusion

After years of being offered plain vanilla services, corporates today now have a bouquet of service offerings from different banks – each trying to outdo the other. The ideal scenario would be when corporates can work with banks and financial institutions in developing solutions and processes for the wholesale payments industry. There is already a shift towards this direction with the increasing interaction of the corporate treasurer with banks payments division. If current events are an indicator, then these trends are likely to increase.