Managing complexity in a multi bank environment

The current credit and risk focused climate means that managing risk and ensuring transparency, control and access to cash remain top priorities for treasurers. At the same time, the operating environment has changed.

There is weak or negative growth across mature markets in Europe and the US. Corporates are faced with opportunities for expansion and divestment while customer segments and value chain opportunities in developing markets are becoming more important. All of these factors are contributing to enterprise-wide complexity, which the CFO or treasury function has to manage. Treasury has responsibility for ensuring that control, transparency and risk management are achieved and that multiple banking, value chain and technology partners are coordinated. The most practical way to fulfil these objectives is through the creation of a shared service centre or payment factory model, which supports an enterprise-wide platform and operating structure.

Treasury and CFO functions increasingly demand an acceleration of payment and collection factory projects or are at least reviewing their current set-ups. Such moves are driven by the continuing need to lower banking and technology costs, improve efficiency and transparency, and strengthen internal governance. They are facilitated by a number of standardisation developments, which are enjoying widespread adoption.

At the same time, corporates are evaluating their counterparty risk, financial value chain risk and wallet share across their providers – to assess core strategic partnerships and to ensure that their organisations are positioned for the future.

"The level of technical specificity of this year's regional Request For Proposals (RFP) is a relatively new phenomenon," says Vanessa Manning, EMEA Head, Global Payments, Transaction Services. "It's being driven by a confluence of factors – new market developments in standardisation of connectivity, messaging and processing techniques, and the need for international network and working capital expertise to guide entry into new markets and client segments."

Corporates are using the opportunity of payment factory projects to assess their treasury centre or payment factory partner for the future. "At a time of great technological change, it's important to understand which banks are participating in the creation and rollout of new interoperable standards; the agility of their deployment of new solutions and standards and their advisory services to support corporate implementation," notes Manning.

The global adoption of the ISO 20022 XML standard – for transaction processing and account administration, reporting, electronic invoicing, FX and letter of credit confirmations – continues to fuel corporate RFPs. It is prompting companies to review their bank connectivity model and further accelerating the scalability of payment factories. Corporates are also increasingly interested in banks’ involvement in collaborative initiatives, such as ISO 20022 XML-based Common Global Implementation (CGI) and electronic Bank Account Management (eBAM).

SEPA migration end dates have finally been set: national instruments will cease to exist in February 2014 (or 2016 for niche products and non-euro countries). As a result, for corporates with operations in Europe, SEPA and ISO 20022 XML provide the impetus to review current technology, bank connectivity and cash management procedures, and assess centralisation and optimisation opportunities.

"All of our global corporate clients with European operations are getting their feet wet with ISO 20022 XML for SEPA," says Manning. Corporates are focusing their technology and process reviews to support a like-for-like migration – transitioning current domestic and cross-border transaction types into SEPA to ensure minimal business disruption. As corporates assess the technical implementation of SEPA in their payment factory structure, it is clear from European Payments Council (EPC) statistics that the migration journey has only recently become part of corporates' budgeting process.

The majority of corporates are not SEPA-ready, so engagement with banks and specialist technology providers is increasing for the provision of enrichment, translation and validation tools to ease the timepressure for migration by 2014. The availability of stand-alone or bank white-labelled solutions shows the changing roles of participants within the transaction services market. In particular, the solutions on offer reflect transaction banks' desire to be more agile in deployment of time-relevant solutions and their preference for a partnered delivery rather than in-house development.

Only when corporates have migrated to SEPA will the majority consider centralising all applicable euro transactions into a single euro account structure. Some of the key obstacles for the immediate adoption of a single euro operating account remain, including

• local central bank reporting (scheduled for elimination in 2016 under SEPA regulation)

• resident versus non-resident specifications relating to domestic 'specials', such as VAT, tax and social payments. Whether these payment types can be executed in SEPA or remain 'niche' until 2016 has yet to be determined. It will probably be detailed further in individual country migration plans, which each national authority has until February 2013 to disclose

• continuation of 'niche' products to co-exist with SEPA in the national schemes until 2016 at latest.

Among the important factors in determining the future fit of a banking provider is the technical and advisory solutions that it brings with regard to operational efficiency, especially On-Behalf-Of (OBO) account structures and processing for multi-currency treasury, commercial and supply chain payments and collections.

The use of OBO payments and collections – which have the potential to improve operational efficiency, cost and risk management control and liquidity visibility – has become an important requirement for next generation payment factory RFPs. Put simply, OBO payments allow multiple entities within a group to operate from one account that is controlled by the central treasury (assuming that the fiscal and legal structure of the corporate permits such an arrangement).

While the idea is simple, implementation can be complex given varying tax and legislative requirements in multiple jurisdictions and lack of consistency across local clearing and settlement mechanisms to carry through the full ultimate beneficiary. In addition, the ability of banking and Enterprise Resource Planning (ERP) providers to pass back all relevant data for reconciliation can add further complexity.

OBO payments have become more popular in recent years because SEPA – given its use of ISO 20022 XML – expressly enables them. Although they were previously possible, local clearing variances rendered them more difficult to implement before SEPA. Secondly, the use of XML messaging, which is the key technical standard underpinning SEPA, has aided the uptake of OBO transactions because it supports OBO files. It provides greater certainty and security that the full invoice, ultimate ordering and beneficiary party will successfully clear and return through the payments system for enhanced Straight-Through Processing (STP) and Straight-Through Reconciliation (STR) by the corporate.

Thirdly, OBO payments have grown in volume because of the natural cost and efficiency benefits that they offer. Many companies have large numbers of bank accounts at country level. Necessarily there are fees associated with keeping accounts open, but there are also costs associated with auditing accounts and maintaining their security. Rationalising account structures can therefore reduce cost.

Finally, the availability of tools to facilitate OBO transactions has increased significantly. Now almost all vendors have an In-House Banking (IHB) type that can be added easily to existing ERP systems and Treasury Management systems (TMS). Such packages make it easier

to manage flows internally to support delivery and receipt of OBO information to enhance corporates’ cash conversion cycle.

As corporates increasingly focus on SEPA migration and cost reduction, there is greater analysis of their payment and collection instrument mix. This analysis includes the ratio of manual, paper-based instruments; STP and STR ratios; the percentage of high-value transactions and the cost and time criticality of those transactions. The importance of this process of analysis has been made clear in the first wave of SEPA credit transfer migrations: the majority of corporates migrated to SEPA specifically for cross-border transactions which, while accounting for less volume, are more expensive per transaction.

Corporates' focus on lowering cross-border, cross-currency transaction costs, the desire tojreduce the number of accounts held across banking providers, coupled with the requirement for transparency for all fee and FX margin agreements, has supported the growth of OBO multi-currency account solutions. Such structures enable a corporates IHB or treasury to use its centralised IHB account to transact all treasury, commercial and supplier transactions on single and multi-currency basis, secure in the knowledge that:

• transactions are routed based on the lowest available cost via the banks' local branch, atáa domestic transaction pricing level

• corporate-specific margins for all cross-currency transactions are applied and are transparent and auditable

• cost and control procedures maintain multi-currency accounts at a per country/per subsidiary level (where regulation and corporate governance permit)

• FX, interest rate, supplier and other risks are centralised and managed at treasury level.

Transparency of cost and efficiency of processing are important – not just to lower costs but to benchmark banking providers. As a result, interest in Treasury Workstation Integration Standards Team (TWIST) billing, a standard that has been adopted by ISO 20022 XML this year, has also increased.

A crucial issue when corporates are choosing which bank to work with for their payment factory project, is the extent of individual banks’ involvement in various collaborative initiatives aimed at improving efficiency and ease of use for corporates. The most important example of these initiatives is CGI XML, which aims to streamline and standardise corporate-to-bank connectivity and messaging so that true interoperability can result.

Most of the world’s top fifty banks and leading ERP providers have now agreed standards for ISO XML implementation and an increasing number of banks have gone live with CGI XML. In addition, many technology providers have developed out-of-the box solutions for CGI messages. Such solutions lower technology costs and make payment factory propositions more attractive.

"In the longer term, CGI XML will also lower costs for both companies and banks as a result of the use of fewer and less complex interfaces between the parties," says Peter Hoogervorst, Senior Product Manager, Direct Channels, RBS. "While corporates have rationalised the number of banking providers they work with – down from between eight and 12 banks before the crisis to between three and five now – using multiple interfaces is clearly time-consuming and cumbersome. Multi-bank, multi-ERP solutions are the key to future proofing payment factories."

Another important collaborative initiative is eBAM, which uses XML technology to eliminate challenges associated with maintenance of corporates’ banking mandates, including account opening, closure and maintenance of credentials data. In line with their goals of cost efficiency and improved mobility through standardisation, many corporates and financial institutions are seeking increased levels of self service and the elimination of paper trails and excessive manual administration in their banking mandate arrangements.

eBAM is being developed by a number of banks in response to these corporate needs, to standardise core treasury processes and interaction with banking partners on the most mundane – but time-consuming – activities.

Regulatory requirements around compliance and know-your-customer continue to increase, pitting banks’ need to follow regulations that require paper-based verification for identification against the appetite of their clients to digitise account management processes.

Working with four global banks (including RBS), Swift has successfully completed a pilot exercise for the Electronic Bank Account Management Central Utility (E-CU). Significant milestones were achieved to support the Swift eBAM product development life cycle, while progress was made on concepts such as use and population of a central validation database. They show great promise towards the development of a full production version of the utility.

The key is to make the utility into a working model. The ease of use for corporates is superb: the utility can offer easy access to eBAM messaging for corporates across the world. Banks and Swift now need to determine how to fund E-CU – significant investment will be required by the participating banks to develop and commercialise a go-to-market model.

At the same time as this multi-bank model is developed, banks need to continue to invest in their proprietary account management solutions in order to meet clients' expectations. RBS, for example, has enhanced its proprietary banking tools to include intelligent e-binders, self-service real-time enquiries and investigations. "Corporates need to check that their bank is continuing to seek ways to make it accessible and intuitive to change their account parameters online for account maintenance-type activities, in addition to replicating authorisation, legal or fiscal changes into their bank environment," says Manning.

Electronic or e-invoicing is as important a workflow automation tool as eBAM for corporates. Ease of adoption has increased as the market has migrated to SEPA XML. In Finland, which successfully completed its migration to the SEPA in 2010, e-invoicing has been rapidly and easily adopted. The goal of the European Commission through its Digital Agenda Framework is to deliver a regulatory framework to support a pan-European standardised solution (based on ISO 20022 XML) to ensure a common EU market for commercial transaction processing and interactions. While all market participants see the value of e-invoicing (as shown by Swift’s new suite of e-invoicing and supply chain solutions) the pace at which corporates and banks can absorb and translate these multiple developments into their operating environments is relatively slow.

Multi-banked sophisticated corporate clients do@not necessarily expect their banks to offer integrated e-invoicing solutions now, given that industry-based vendors have vast global supply chains and mass on-boarding models already in place. However once corporates are familiar with ISO 20022 XML as a result of SEPA, the treasury will be empowered to centralise and standardise procurement processes in a similar way so that e-invoicing can be implemented.

Client RFPs for next-generation payment factories in Europe have security and authorisation concerns as a top priority. Chief among developments in this area is a Swift initiative that could have significant implications for account management in the long term: 3SKey.

Many users are familiar with the use of proprietary keys or tokens to access an online portal securely. Recent technological developments have enabled the production of multi-bank token solutions. Swift, as an independent trustworthy body, administers the 3SKey solution: tokens would be transmitted to customers by banks, as before, but would be activated by Swift.

While 3SKey allows access to multiple proprietary bank portals, its real value is as a digital signature. Currently, digital signatures are bank specific. The digital signature used in 3SKey is necessarily bank-agnostic. So, provided a bank is signed up to the initiative, the token can be used to facilitate digital flow in eBAM and as a digital signature on payment files, which must be legally authorised, for multiple banks.

In the past year, 3SKey has expanded outside of its strongest market in France as increasing numbers of banks have pledged to support it. "3SKey has the potential to meet local legal requirements and corporates' own strict rules while still offering flexibility to customers," says Hoogervorst. "It will allow some corporates to leapfrog their peers." 3SKey could also have a role to play in enabling the kind of added-value functionality of a proprietary portal that many users assume they have to sacrifice to achieve bank-agnostic solutions.

Increasingly, corporate treasurers want enriched decision-making support tools that deliver advanced customisable analytics and core counterparty, FX and interest rate risk transparency through intuitive, user-friendly dashboards. There is an emerging trend towards risk-based exception reporting for immediate cost, margin and liquidity information rather than detailed complete transaction reports. The use of such reporting facilitates the use of treasury metrics, drives down bank fees and margins; and provides better insight on supplier or client credit quality. It also offers improved accuracy of liquidity positioning and forecasting.

Treasurers' demand for increased, targeted information (accessible from a tablet or smart phone) is being supported not just by banks but also by Swift and payment factory technology providers. Such providers are increasingly offering greater functionality and analytics that take into account total financial exposure. By conveniently aggregating data in this way, payment factory technology providers in particular are helping to solve a number of multi-bank related challenges for corporates.

More generally, mobile analytics and contingency authorisation options are an important consideration for corporate treasurers. Treasurers are eager to gain access to new ways of receiving payments. However, mobile payments still have security and legal issues to overcome and most countries have yet to develop a legislative and financial framework to support mobile payment clearing and settlement in real time.

The range of participants seeking to serve corporates is changing and, inevitably, so is the relationship between banks and corporates. Increasingly, providers of cloud-based solutions (such as SAP) are gaining ground with value-added services such as translation or reconciliation, so that corporates no longer have to manage such tasks themselves. Unsurprisingly, existing providers such as Swift are repositioning themselves to service this market.

The arrival of new entrants is beneficial for corporates. Often, they are more familiar with ERP providers than they might be with Swift, for example, and therefore moving to an ERP-provided cloud-based solution could be easier and more natural. Banks are not excluded from this new relationship dynamic, and it is important that companies ask their bank providers about how they can assist in corporates’ plans in this area.

Establishing a new payment factory or re-assessing a current set-up is a project that will take over a year from inception to delivery. Corporates need a strong understanding of the fiscal, legal and regulatory environments in which they operate, and how these will evolve given upcoming regulatory and market standardisation developments.

Combined with inevitable enterprise-wide politics, variance in enterprise objectives, cost constraints and expertise levels, it is clear that corporates should work with their network bank provider if they want to meet their objectives in a cost effective and timely way. Only through such a consultative relationship can the effective design and deployment of a cost and control focused payment factory solution, which supports multibank portability, be achieved, enabling treasury and finance to focus more on value-added activities.

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