Transaction banking: a year of fundamental change

SEPA – at last

To describe SEPA as long-awaited is something of an understatement. The SEPA Credit Transfer (SCT) was launched in January 2008, followed by the SEPA Direct Debit (SDD) in November 2009. Take-up of both has been poor. Now, with a deadline of February 2014 for a mandatory switch from national payment instruments to SEPA instruments, the banking industry has shifted into a higher gear.

The introduction of SEPA is one of the biggest changes the industry has seen in the past decade. “The change will affect all businesses that make and collect monies through automated clearing houses (ACHs), irrespective of their size, and ultimately all consumers across Europe that receive payments such as salaries and pensions or pay bills via direct debit,” explains Lesley White, head of treasury products, EMEA, Bank of America Merrill Lynch.

SEPA offers opportunities for corporates to improve efficiency and standardization, and to take advantage of the lowering of barriers between European countries. Unfortunately, corporate readiness – or even awareness – remains low. “We recently carried out a poll of companies that revealed 43% of voters had not yet set any migration objectives, and 35% had yet to determine how they intended to create payment and debit instructions,” says Susan Dean, head of transaction services in EMEA at JP Morgan.

However, Dean says that it is important to treat SEPA as a programme, not a format compliance exercise. “The process is a continuum, and progress will depend on the stage that the client is at, the resources they can commit and their end goals,” she adds.

Ray Fattell, global head of product, payments and cash management at HSBC, agrees: “Once SEPA has replaced national instruments, clients using electronic payments and collections (note cash and paper instruments are out of SEPA scope) may decide to rationalize and centralize their banking relationships in one European country, rather than a costly plethora of relationships spread across many countries.” Traditionally, multinationals have tried to centralize their treasury operations into a payments factory or shared service centre. “With the introduction of SEPA we can expect to see many other companies seeking to centralize their banking operations, as the need for in-country services diminishes,” adds Fattell.

The impact on banks

SEPA will also bring significant benefits for banks – especially those that made large investments but have yet to enjoy increased volumes. “The inherent differences between the legacy country payment infrastructures brought inefficiency and complexity to bank payment processing,” says Anupam Sinha, EMEA head of corporate payments, Citi Transaction Services. “While the Payment Service Directive has been able to standardize the rules and regulations governing the payments, banks are still required to maintain multiple infrastructures or counterparty relations to process one currency – the euro. Higher costs and duplicate processes are inherent.”

The switch to SEPA means that banks need to modernize their legacy systems to cater for richer XML-based SEPA formats. Current systems use and connect to local clearing using local formats. “Banks therefore have to decide whether to retire and replace or enhance their current platforms to cope with this change,” says Dean at JP Morgan. “The platform must be ready for clients’ volumes and demands for the full use of XML.” Banks will also face the challenge of how to use legacy platforms to continue to process the ‘niche’ products, which will still exist post-February 2014.”

SEPA will accelerate the consolidation of euro payment activity through major pan-European banks. On the clearing side, there will be fewer clearing houses after 2014 as some markets migrate to central pan-European clearing while others will outsource core processing to larger players. “Overall, these developments are leading to a more streamlined and harmonized banking landscape which will continue to evolve as banks and payment institutions seek to differentiate their services,” says Sinha. “Competition has already increased as SEPA enables all banks within the SEPA zone to offer SEPA services – traditional territories are being encroached upon while non-bank payment providers use SEPA as a means to widen service offerings.”

Innovation remains crucial

While SEPA may be hogging the headlines, innovation remains the driving force in the payments business. According to Jean-François Denis, head of payments and local offers at BNP Paribas, innovation in the payments space must be more than just an initiative that an organization thinks it ought to embrace. “[For BNP Paribas, it] is a genuine focus throughout the organization, from top management down.”

White says that Bank of America Merrill Lynch continuously invests in its systems. “It’s an absolute necessity to help ensure we can meet our clients’ changing needs and enable them to do business effectively,” she notes. “One growing trend in the last few years is for banks to work with each other and with third-party providers to create fully integrated and best-in-class propositions for their clients.”

At Citi, one focus of innovation has been wholesale and prepaid cards for corporate and public sector clients. “Citi can provide globally consistent card programmes to our clients while tailoring the cardholder experience to their local market,” says Sinha. “This is enabled via global platforms which underpin our cards infrastructure. Recent innovations in our mobile offering have delivered flexibility and convenience for card holders and improved communication and visibility for programme managers, while new methods of card payment initiation for our public sector clients have helped governments with their social welfare payments in a flexible and customised manner.”

For Deutsche Bank, the inefficiencies and risks inherent in paper-based payments, such as cash or cheque, are also spurring a push into prepaid cards. “Corporate prepaid cards are a good example of how technology innovation can successfully leverage familiar concepts to increase transaction efficiency,” says Ron van Wezel, global head of emerging payment streams at Deutsche Bank. “Prepaid cards can provide corporates with greater control over expenditure while reducing paperwork and disbursement costs – and they may also be issued and used digitally (via smart phones and tablets) to further increase efficiency.”

Similarly, HSBC's virtual card solution allows corporations to make invoice payments by card. “It is based on the idea of converting cheque payments to ACH or card, which means the original file looks just like a cheque print file,” says Fattel. “Clients are not required to specify payment type in the file. Instead, HSBC captures vendor payment preference through an outreach campaign and settles transactions by cheque, ACH or card based on those preferences.”

HSBC can receive any file format, reducing the burden on the customer. In addition to a unique card number assigned to each payment, there is a unique payment reference number, like a cheque number, that follows the transaction throughout allowing customers to easily reconcile the transaction back to their payment file, again, regardless of ultimate settlement method.

Other trends

According to Ashutosh Kumar, global head of corporate cash and trade at Standard Chartered, a clear trend is increased demand for end-to-end visibility, transparency, accuracy and real-time information. “Clients want to be able to monitor their transactions in an end-to-end manner, which pushes banks to design their payment processes in a standardized, simplified and straight-through fashion,” he says. “Treasurers also expect banks to provide solutions that help improve efficiencies within their organizations while demonstrating transparency: [they are] increasingly seeking to understand how banks can add value.”

Accessing data on payments – often relating multiple currencies across multiple regions – in real time has led to banks adopting electronic processes and providing analytic tools so that clients can effectively access and use the information available, notes Kumar. “Current moves to streamline business processes and replace paper-based procedures with electronic ones will lead to the increased usage of e-invoicing, commercial purchasing cards and other fully digital market place solutions,” he adds.

Others trends include the acceleration of payments, with an increasing array of offerings having 24/7 availability, near-instant payment (Faster Payments in the UK, 3G in Singapore and other jurisdictions), cross-border settlement in pan-regional currencies and low value clearings (SEPA), according to HSBC’s Fattel. “This can lower transaction costs for clients with higher volumes of payments that are time-sensitive (versus immediate priority), higher value and data enriched, historically the domain of higher cost real time gross settlement systems (RTGS).”

White at Bank of America Merrill Lynch agrees that there has been significant growth in same-day payment for low-value trnasactions. “[Users have] become accustomed to real-time transactions online and internet banking [in their consumer banking], and want the same immediacy in their other payments,” she notes. “SEPA is also playing a role as it makes same-day, or at least end-of-day, payments possible where, in the past, you would have needed to use a wire transfer. We’re seeing this development not only in Europe but in Australia and Singapore too, and the US is studying how it can adopt a similar same-day system in the coming years.”

However, at the other end of the value scale, risk management is increasingly coming to the fore. “In the UK there has been an increasing focus on how market participants access the high value RTGS and the volume and value of payments banks put through these central systems, both directly and indirectly,” says White. “The ultimate objective is to minimize risk by managing market participants’ usage more closely, improving visibility for regulators and central banks and minimizing the potential for a domino effect from the failure of an undercapitalized financial institution.”

Going mobile

One important area of focus for many banks in the past year has been the increasing treasury use of smartphones and tablets. Barclays Pingit for Corporates launched in May 2012 and was the UK’s first instant mobile payments app for smartphones. It facilitates quick, simple and secure payments without requiring traditional account details during the payment process, so people can make secure electronic payments to Barclays’s registered corporate clients.

“Corporate users can register for a corporate ID, providing their customers with a way to make payments with improved speed and certainty, via a highly accessible medium,” says Mike Walters, head of corporate payments product management at Barclays. “All payments are processed via the Faster Payments Service, improving cash flow as well as reducing costs associated with manual and paper-based processes. Pingit also offers the option to create QR codes, which can be personalized for each customer to include the reference and amount relevant to each bill, eliminating the need for payers to input the payment details. “They simply scan the code from within the app to auto-populate the payment screen and confirm the payment,” says Walters. “Importantly, the data needed to allocate funds upon receipt is always captured, bringing efficiencies and cost savings to the back office.”

While Pingit has gained plaudits – including from Apple, which said it would reshape and redefine the finance industry – most banks’ emphasis on mobile technology is on monitoring and authorizing payments, rather than instigating them.

“Smartphones and tablets are becoming almost ubiquitous, and we developed CashPro Mobile to enable treasurers to monitor their payments and cash positions with greater ease and convenience through these devices,” says White. CashPro Mobile enables SMS alerts to be sent according to different criteria, such as when an account reaches a certain trigger point.

Citi has also invested heavily in mobile, including launching CitiDirect BE Mobile, and it believes mobile will increasingly influence the payments industry. CitiDirect BE Mobile enables clients to improve their efficiency and has facilitated a much faster end-to-end execution of processes, according to Sinha. Citi is in the process of developing CitiDirect BE Tablet to enable clients to better understand their financial positions and flows. “Tablets lend themselves to targeted niche functionality,” adds Sinha.

Deutsche Bank’s cashless collections solution allows corporates to present, inspect and approve their invoices electronically via a mobile communication channel such as SMS. “Not only does this allow treasurers to manage their collections anytime and anywhere, but the increase in speed, reliability and security – when compared to paper-based collections – goes a long way to address the growing need to minimize costs, increase automation and enhance risk mitigation,” says van Wezel at Deutsche Bank.

HSBC launched HSBCnet Mobile just over a year ago, and now has 8,000 clients who use mobile phones or smartphones to authorize payments: since launch over $10 billion in payments have been made. “In 2013, we’re looking to build more extensively on the rich functionality available on mobile devices to further develop this service,” says Marcus Treacher, global head of eCommerce for payments and cash management at HSBC.

In adapting to mobile and smartphone use, banks need to balance innovation with the fundamental requirement of robust security. “Customer demand differs a lot in terms of what services shall be provided via mobile devices and which services shall only be offered via highly secured channels,” explains Markus Straußfeld, head of international cash management sales at UniCredit.

Clients need to know that their transactions are completely secure, and this may mean that banks are more cautious in adopting new mobile technology than other industries, agrees Treacher. “It is also important to design and deploy mobile services for the full range of devices including tablets, and not just focus on a small number of leading devices. This is of particular importance given the rapid market evolution in this fast-moving sector.”

This article was originally published in The 2013 guide to Technology in Treasury Management.