From the April/May 2012 issue of Treasury & Risk magazine

Agile Payments

Efficiency remains a key goal in the area of payments – but as treasurers continue to focus on counterparty risk as well as straight-through processing and straight-through reconciliation, the ability to adapt the company’s payments strategy to changing conditions has become a greater priority.

For multinational corporations, having a robust payments infrastructure is important – but in today’s volatile environment, treasurers are increasingly looking to take their payments one step further. While visibility, efficiency and automation continue to be core objectives, companies also want a payments infrastructure which is flexible enough to adapt quickly and seamlessly to changing conditions – a quality that can best be described as ‘agility’.

At a high level, an agile strategy is one that enables the company to respond to changing conditions – whether external or internal – quickly, efficiently and smoothly. Agility can be a competitive advantage, particularly when faced with uncertainty. In the current challenging economic climate, this quality is particularly useful: if the road ahead is full of hairpin turns, would you rather be driving a juggernaut or a motorbike?

Since 2008, companies have had to become more adaptable. Strategies that might have worked before the financial crisis began have been reassessed in light of changing market conditions: treasurers have had to adapt to lower interest rates, greater counterparty risk concerns, tighter credit and changing regulations, among other challenges. The list continues to grow, as the U.S. budget deficit and eurozone debt crisis illustrated in 2011.

In this climate, agility is a characteristic well worth pursuing across the full spectrum of treasury activities. The area of payments is no exception and for companies working with a number of different banks, an agile approach can be a significant advantage. In order to be agile, companies need to have automated their processes to the fullest extent possible. Flexibility to make changes driven by an acquisition or divestiture or to minimize exposure to deteriorating counterparty risk is difficult when manual interventions and workarounds are at play. Companies with an agile payments strategy have efficient and automated payments, and have also eliminated intervention in both payment instructions and reconciliation as far as possible. An agile payments strategy should also enable companies to move quickly and seamlessly between bank providers if the need arises.

However, companies wishing to achieve this level of agility may be hindered by their existing infrastructure. In order to minimize counterparty risk, multinational corporations tend to work with a variety of banks. But this can lead to operational inefficiencies: companies working with several different banks typically send payments in a number of different formats using proprietary bank systems. Additionally, companies that are in the process of integrating recent acquisitions may have a variety of disparate back office systems in place.

When a treasurer sets out to make the company’s payments more agile, connecting to the company’s banks in a standardized and automated way is typically a top priority. ISO 20022 XML is  critical in making this possible as the use of a single format gives companies the opportunity to minimize the impact of geographical boundaries when sending payment files. In Europe, ISO 20022 has been given weight by being the format of choice for the Single European Payments Area (SEPA), thus corporations will need to send XML payment files to their banks by 2016. ISO 20022 XML is also the message of choice for electronic bank account management (eBAM) and is supported by SWIFT, which set up the Common Global Implementation (CGI) initiative in 2010 in order to facilitate consistency in ISO messages between different banks.

As ISO 20022 has become more widely supported, companies are beginning to look at how they can benefit from the standardization it offers. Corporate treasurers are increasingly looking for standardized information and communication channels across their banks. While many have been able to streamline their delivery channels over the years, the depth and type of information which they receive can still vary greatly from bank to bank.

This can present certain challenges: whenever the company is upgrading its systems it becomes necessary to work with each bank to validate that each of their different formats continues to function properly with the upgraded system. And each time a bank upgrades its own systems, a similar exercise must be undertaken to validate that the mapping still works.

Meanwhile, whereas companies using multiple proprietary banking systems must contend with a proliferation of payment messages and formats, a bank neutral approach – typically SWIFT connectivity – offers companies a way to standardize these.

Companies looking to connect to SWIFT must choose between setting up a direct connection to SWIFT in-house or adopting a service bureau approach. The latter may be a more viable option for companies lacking the technology resources required for in-house connectivity. Either way, an important aspect of the project is integrating SWIFT to the company’s ERP system. By connecting the ERP system directly to SWIFT, companies can benefit from straight-through processing (STP) across their payment activities, from initiating and confirming payments to checking the status of specific transactions.

Once they have achieved increased levels of automation, significant benefits can accrue. Treasurers have greater line of sight and control over payment initiation. They are able to push more of their high-value transactions through their automatic connections, thereby minimizing the need for manual payment. This in turn can lead to a reduction in the hours spent on payments and the risk of error arising from any manual input while enhancing internal treasury controls.

Agility in payments doesn’t stop with origination. In order to maximize efficiencies, straight-through processing on payment initiation should be accompanied by straight-through reconciliation. This is becoming a more realistic goal: whereas in the past banks tended to provide limited levels of information reporting, they are now able to provide more detailed payments data. As a result, those corporates who are looking to leverage agility to the fullest are setting their sights on deeper reconciliation, which can allow them to reduce the number of exceptions while having better control and better data.

Once setting out to make payments more agile, treasurers can deploy software that compares the bank’s file format analysis statements to the pricing agreement to determine accuracy month-by-month, as well as tracking payment volumes and trends. For example, if the company has a target level of STP payments, it can monitor the extent to which those targets are being met.

As this topic continues to attract significant attention from corporate treasurers, it is becoming clear that collaboration is a key enabler of agility.

In order to adopt an agile payments strategy, companies need to be able to make payments using standardized payment files sent via a bank-neutral channel. However, in order to facilitate this, major industry players – namely banks, corporations and vendors – must work together at an industry level to support the adoption of standardized formats and drive development of this area.

Collaboration is also important at a company level. While SWIFT offers companies the ability to communicate with all of their banks in the same way, the desired level of standardization does not always happen automatically. Companies looking to get the best out of their SWIFT connectivity might consider conducting an open dialogue with all of their banks in order to confirm they are working with each of them in a consistent way. Alternatively, companies may wish to set up separate workstreams – but again, the end-goal is consistency across banks.

Furthermore, companies can be greatly supported in their quest for agility if they are working with banks which possess that very quality themselves. While many corporate treasurers are looking to achieve agility in their payments, they don’t necessarily have the in-house knowledge of this area that banks do. Confirming that the company’s banks are well equipped to advise on the company’s strategy – both in terms of planning and execution – is therefore key. Banks with ample experience in working with corporate clients on interoperability projects are more likely to have the most to offer.

In summary, the topic of agility in payments is attracting significant interest among corporations. Increasingly treasurers are recognizing that optimizing payments is as much about flexibility and adaptability as it is about harnessing efficiency gains. This is particularly true in times of uncertainty – and if treasurers have learned anything in the five years following the financial crisis, it is to expect the unexpected.

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