Managing Mandates in a World of Ubiquitous Electronic Networks: Is There a Third Way?

A mandate, defined as a contract between two parties, under which one individual or organisation undertakes to perform services on behalf of another individual or organisation, lies at the very core of commercial and social life.

This is well illustrated by a ‘bank mandate’, essentially a document given by a customer of a bank to that bank, requesting that the bank opens an account in the customer’s name and thereafter honours cheques and other orders for payment drawn on the account. The bank mandate specifies the signatures which the bank should accept for such transactions and also contains specimens of those signatures.

For centuries such mandates have been paper- or parchment-based, and the specimen signatures have been written in ink – one by one, between customer and bank. The system has generally worked well, albeit with ever-increasing quantities of paper and faxed materials, whenever a change to the terms and conditions of the mandate is required. However, with the growing internationalisation and complexity of modern multi-banked corporations, coupled with the ever more stringent audit requirements, these manual systems are now under severe pressure.

Managing authorised signatories is important both from a bank perspective aswell as the perspective of the corporate customer. As regulatory oversight and compliance issues are becoming ever more onerous, accountability and transparency (who is responsible for what and when) has to be crystal clear. Both banks and corporates are therefore anxious to ensure that:

1. Transactions from incorrect/unauthorised signatories are rejected.
2. Transactions from valid/authorised signatories are not rejected.

In an environment of instantaneous interactions between and among corporates and banks to and from anywhere around the world, there is no room for error, there is no time to rectify an error after it has taken place, and there can be no grey area. The transaction has to be executed flawlessly and in accordance with the contractual obligations which underpin it.

The availability of these ubiquitous and increasingly free-to-use electronic networks accentuates the associated challenges of privacy, authenticity, message integrity and non-repudiation, while potentially enabling significant process improvement, cost saving and tightening of control and governance around electronic bank account management (eBAM). It has the potential to take paper entirely out of the process, thereby driving operational and cost efficiencies, and drastic improvements to the end-user experience. However, in order to reach this ideal, which both banks and corporates are striving for, the signatures which must accompany the eBAM instruction must themselves be electronic and, most critically, legally binding and enforceable on all parties.

Variety of Options

How are these various challenges being experienced in the market, where multiple corporates seek to connect to multiple banks for multiple different services in multiple countries?

There are two options which to a large extent replicate and streamline paper-based processes, followed by a third and potentially more far-reaching option that seeks to capitalise further on the ubiquity of today’s electronic networks:

1. Each bank develops its own proprietary system, with the bank being responsible for, amongst other things, formatting and messaging, and managing the liability and regulatory compliance aspects of any eBAM instruction. This option is potentially well-suited to a corporate that is mono-banked, but it provides greater challenge to a multi-banked corporate interfacing with different systems and procedures from each bank. The process is a great improvement on its paper-based cousin, but further efficiencies can be drawn out for corporates with multiple key bank relationships.
2. A corporate develops or acquires a system which it runs or hosts itself and which enables it to connect to multiple banks. In this case, the corporate controls its own data and information, but the downside is that the corporate needs to manage multiple points of integration with multiple different banks, across multiple legal and regulatory environments – all potentially amounting to a significant extra administrative burden. This option is therefore limited to only the largest organisations.
3. This option seeks to address the challenges that may arise for certain corporates and banks within the other approaches. This option is based on a ‘hub’ model, provided by an independent entity, which enables corporates to link to multiple banks and banks to link with multiple corporates. It provides greater flexibility in comparison with option 1, for example, greater portability should a corporate seek to change its banker and reduces the internal overhead and complexities that may arise with option 2.

Each option is equally valid – it just depends on the corporate/bank scenario. However, what is clear is that to dematerialise the process fully and extract the maximum value from moving from paper to electronic practices, a legally-binding electronic signature is required to replace the current need to physically signing the BAM instruction. Think about the savings that would result just from eliminating the need to courier documents.

Treasurers want a single identity that they can use with each of their banks to sign eBAM instructions, not one per bank or (as is often the case) multiple tokens from the same bank for different countries or applications. In order for this to be the case, the identity must be based on a framework that allows for interoperability through contract-based rules and which can be used across the corporates’ geographic footprint. Technical interoperability is, of course, critical but a common blueprint is what truly allows the identity to be trusted. The identity blueprint needs to address a number of considerations, for example how liabilities are addressed in a managed way in the event of any dispute, or the criticality of the process of getting the identity into the hands of the user to link and bind them unequivocally to it to ensuring non-repudiation.

Conclusion

Many banks and corporates have eBAM slated as a strategic priority for the coming 12 months. From the bank perspective, adoption will be further accelerated with the forthcoming ISO standard for eBAM messaging. As with any industry standard, this will allow the banks to engineer back-office and back-end practices to a common approach, rather than having to support different processes and approaches for different sectors, geographies or ‘special requirements’ from major corporates.

The future looks very positive: the development of ISO standards for eBAM message formats will allow the various eBAM applications to communicate with each other. whilst the prevalence of a common scheme-based electronic signature solution will allow the corporate end user to use it with multiple eBAM systems, if appropriate, and allow multiple banks to rely on it regardless of which type of eBAM system they chose to deploy to their customers.

The net effect of a ‘third way’ is that risk is lowered, compliance is tightened, processes are streamlined – and best of all, a great many trees are saved from the paper mills.