Bottomline Technologies – Guide to Best Practice in Financial Supply Chain Automation: Part Three

Large corporates and, increasingly, upper middle market corporates (with annual revenues of more than USD250 million) centralising their processing operations to cut costs. This typically takes the form of a Shared Service Centre (SSC) with responsibility for a geographical region such as Europe or Asia. Very few banks can provide a large corporate with all their cash management needs around the world, so despite the gradual consolidation of banking relationships, most corporates of any scale still choose to work with two or more cash management banks. As a result, treasury and payment professionals of large businesses are often confronted with operating a range of disparate electronic banking systems provided by their banks, each requiring proprietary formats and processes and diverse security protocols.

A recent gtnews survey (« The Gap Between Corporate Expectation of ERP Solutions and Business Reality, June 2006), found that over 50% of corporates with ERP systems do not have them implemented across the whole enterprise. It is more usual to find multiple ERP implementations, due typically to merger and acquisition activity or simply the effort and cost required to roll out a single version across a large group of companies. Surprisingly, payment data output from some major ERP systems is still not in a format that corresponds to the requirements of a number of major cash management banks. As a result, corporates undertake projects to build in-house user interfaces for their pipe solutions or they employ systems integrators to build bespoke solutions in order to bridge the gap between their ERP and their banks’ pipe solutions. In practice therefore, payment files from hosts systems / ERP are often still imported manually and loaded into different bank software packages, a process which can expose files to fraud and in some cases still involves time-consuming and error prone re-keying.

Increasingly, corporates are realising that they can benefit from web-based payment and reporting platforms, sitting between their multiple ERP / host systems and their banks, hence providing a secure and flexible front end and hub. Such a payment factory enables a large corporate to manage all its multi-currency payments from a single platform on a regional or global basis. This can greatly assist in the preparation, formatting, validation, approval and release to their banks of clean payment instructions, as well as the control of bank reporting and cash management activities.

With the introduction of corporate governance regulations such US Sarbanes-Oxley, there is an increasing emphasis on improving internal controls and financial reporting. An efficient payment factory must therefore provide a platform for improving internal controls and the reporting of banking, payments and treasury activities. This can take the form of flexible approval workflow, allowing for configurable entitlements for definable user groups, based on multiple approval levels by payment type, accounts to be debited, and use of templates and transaction limits. The distribution of these flexible entitlements should be controlled by suitably appointed system administrators who, in accordance with the best practice principles of segregation of duties, should not have any direct powers within the payment approval process itself. Such a degree of control allows for the standardisation of procedures across the enterprise, with full audit trail of who does what. Similarly, access to bank accounts and reporting information must be available throughout the business in a timely manner, but must only be accessible by personnel who have been duly authorised.

In the current times, when compliance is a key driver for the business community, this payment factory structure is particularly valuable in those corporates which have multiple ERP systems or even different versions of the same ERP software. In this frequent scenario, the payment and reporting platform can act as a hub to these disparate systems, improving the visibility and control of banking and payments activity across the enterprise.

A payment factory platform acts as an intelligent middleware translating and / or validating output from multiple host systems to ensure that the payment instructions sent to the bank are clean data in the format required by the bank. It is noteworthy that for international bulk payment solutions banks often require payment instructions in EDIFACT / PAYMUL format, whereas many ERP systems do not generate files in the exact way the bank requires such instructions. A payment factory solves this disconnect, by bridging the air gap between the corporate’s back-office and the bank’s payment systems.

With the advent of SEPA, it is increasingly important for corporates to ensure their payment instructions released to the bank are complete and properly formatted. This enables them to minimise the need for bank repairs, especially important now that many banks have introduced differential pricing, i.e. lower pricing for STP payments, but higher pricing on those payments where the bank has to repair payments. This split pricing approach is the way in which banks are going about complying with EU Regulation 2560/2001 on low value cross-border euro payments: euro denominated cross border credit transfers of less than EUR 50,000 must now cost no more than domestic payments. To qualify for the new lower pricing and travel STP, payments instructions must now include the beneficiary bank BIC (SWIFT Bank Identifier Code) and the IBAN (International Bank Account Identifier), a European-wide standard to uniquely identify a bank account.

In order to raise the quality of payment files submitted to their banks, corporates would be well advised to make greater use of online databases, such as pop-up windows of SWIFT BICs to uniquely identify the bank to which a payment is to be sent. These pop-ups can be easily searched and traversed to identify the appropriate code and populate the payment screen speedily. Data bases of national bank branch codes are also available, such as UK Sort Codes and the USA’s ABA codes. With the increasing usage of IBANs in Europe, it is important to pre-validate these new instruments.

BIC, IBAN and domestic branch code validation can be achieved not only with single payments but also with bulk payment files imported from a corporate ERP. For batch data, the system first checks the file for all mandatory fields. Once these criteria have been met, the transaction STP rules are checked. These can be based on corporate specific business logic. Any items not meeting defined STP requirements should be separated for review and edit by the user before release to the bank. In this way, by pre-validating payment instructions before files are submitted to the bank, the corporate can ensure it is submitting clean payment data and has a stronger case for negotiating lower bank charges.

By introducing some of these basic systems and best practices, corporates can cut their in-house processing costs and reduce bank charges. These improvements are in the interests of their bankers as well, since the bank’s back office also benefits from improved efficiency and STP and hence achieves much sought after cost reductions through lower manual repair rates, thanks to the better quality payment information submitted by their corporate customers.

The migration to SEPA, combined with other changes in the payments landscape, such as Faster Payments in the UK, look set to encourage wider adoption by corporates and banks of lowest cost routing solutions. Large corporate are likely to want to control this important aspect of their payments and collection flows through multiple banks in order to ensure maximum flexibility. The standardisation of payment types (such as credeuro and PEDD) will be accompanied by an increase in the choices over which payment and collection channels these new instruments can be sent down. In the light of this development, combined with the launch of Faster Payment in the UK, corporates will want to select the most suitable channel, or even auto-select, based on business parameters regarding destination, urgency and value of the payment, as well as the currency.

In the case of euro payments and collections, it is now generally accepted that we will not have just a single Pan European ACH (PE-ACH), but instead we are seeing the emergence of several SEPA compliant regional ACH’s who will operate alongside the purpose built PE-ACH, STEP 2. In addition, banks will have bilateral file exchange arrangements in place with partner banks to handle particular concentrations.

The key is to retain flexibility and it is likely that SEPA and Faster Payments will lead increasing numbers of corporates to conclude that, in order to achieve lowest cost routing, they will want direct corporate access to a number of clearing systems such as BACS, Faster Payments and Interpay for pan-European euro payments, as well as multi-bank connectivity, all from a single web-based payment factory platform. This will make it easier than before for a corporate to establish a single pan-European Shared Service Centre (SSC) for payments and collections, which is likely to prove an important growth area over the next five years.

But this is an evolutionary process and there is a need to « future proof » by retaining flexibility in structures. This should help minimise the upheaval and cost of change. The opportunity to streamline multiple systems and interfaces should prove to be a key benefit of SEPA for corporates in terms of improved security, efficiency and control. Web-based payment factories can deliver lowest cost routing as well as secure access to the most suitable payment channels, such as multiple banks and key infrastructure providers. They also incorporate validation tools covering IBANS, BICS and Sort Codes to ensure clean data is produced for the bank or payments processor, hence attracting low STP fees, and minimising the risk of bank repair charges.

A web-enabled payment factory plays a key role in integrating with ERPs and can therefore securely close the « disconnect » or « air gap » between the corporate’s back-office and the banking network. It should supports all payment types (including RTGS, ACH, cross-border and cheques) which can either be keyed individually (with automatic update of the ERP system) or via file import. Similarly, an efficient payment factory needs to incorporate a flexible remittance advice solution, enabling remittances to be issued by fax, in paper form as well as via email with a pdf attachment or hyperlink back to a payer’s website. This allows the beneficiary to download remittance details in the format required to achieve automatic reconciliation in his accounts receivable system.

In addition to consolidating payment activity on a single platform, a payment factory also needs to be able to receive balance & transaction reports from banks in a range of formats, such as SWIFT MT940 prior day account statements, MT900 / MT910 settlement advices and MT942 intra-day up-dates, as well as BAI and proprietary bank formats. The data can then be made available in a timely manner to all personnel across the business, using configurable entitlements to ensure they can only access information which they are authorised to see. Customisable reports need to be available through a flexible report generator, while search and filter tools enable rapid location of required specific items / amounts, even among large amounts of data. Similarly, the data can be uploaded into an ERP system for reconciliation in the required format, avoiding re-keying and other labour intensive processes.

Historically payment factories have incorporated bank connectors to enable STP connectivity with payment pipe solutions at the major banks. With the important recent changes in the rules allowing corporates to access SWIFTNet more easily, bank connectivity can be further streamlined. Rather than a separate pipe to each bank, payment factory solutions can now provide connectivity with practically any bank using a single interface to the SWIFT network.
Thanks to SWIFT’s launching of the new Corporate Access CUG, it is now be simpler than ever before for corporates to link with their banks securely to exchange messages relating to payments and cash management. Most corporates are multi-banked for their cash management business, but now by using SWIFTNet as a secure and resilient channel to access their banks, many of the problems of using disparate electronic banking systems will be removed. Although there are sometimes nuances in the way that individual banks want SWIFT messages and fields to be completed, at last corporates are able to use a single interface to link securely with practically any bank of their choice anywhere in the world using a similar set of messaging standards. This standardisation will greatly help corporates in terms of reducing processing costs and operational risk, enhancing automation and improving controls. Similarly, this will facilitate improved liquidity management.

 
But for a corporate to maximise the benefits of direct access to SWIFTNet across its business, there is added value to be gained in deploying a web-based payment and reporting platform as a flexible front end in order to make it easier to prepare and submit clean payment instructions to its banks and handle incoming messages. This is because the range of SWIFT interfaces required to provide a connection to SWIFTNet do not generally provide for the secure ‘large-scale’ preparation and approval of SWIFT messages in the appropriate format. This is where web-enabled payment and reporting platforms can prove particularly helpful, enabling secure, pan-enterprise visibility and facilitating the secure preparation, approval workflow, validation and audit trail of all payments being submitted to the SWIFT interface. This could include payments being generated in a shared service centre, treasury, AP department or even an overseas subsidiary. Similarly the web-based platform can give multiple users (wherever they are located) visibility of balance and transaction information for multiple bank accounts globally.

Changes in payment infrastructures, such as SEPA and UK Faster Payments, and important changes in the way corporates can communicate with their banks, such as SWIFT’s new Corporate Access CUG, open up new opportunities for businesses to streamline their payment and reporting activities. These opportunities can be harnessed through the deployment of web-based payment factories to maximise security, efficiency and control across the enterprise.

fjacquot@bottomline.fr