Supplement: Technology in Treasury Management Guide
by Jack and Wolfi Large
The overall efficiency of business transactions is becoming ever more important. Payments and collections are a small, but non-the-less vital part of business transactions, as the order-to-cash cycle described in Figure 1 shows. Although some payment systems already enable companies to improve efficiency and cut the cost of processing, some new systems and services go even further, not only increasing demand in existing markets but creating new ones. (See figure one).
This article describes how the drivers of corporate treasury and lobbying by treasury associations are forcing the pace in the development of payment systems, and reviews developments in payment systems around the world.
Corporate treasury lobbying
Corporate treasurers are forcing both banks and regulators world-wide to listen to their demands by persistent and dedicated lobbying through their national associations and regional treasury associations, such as the European Association of Corporate Treasurers (EACT) and International Group of Treasury Associations (IAGT). They are focusing on electronic payments and payment standards because corporate needs vary depending on the type and size of a company. Between regions, the payments industry is highly fragmented and moving in different directions.
The treasury associations are concerned about the plethora of payment system standards and are encouraging convergence and unification wherever possible – for example, in the development of the UNIFI (ISO 20022) standard for XML payment initiation messages. They are also encouraging the development of XML standards to help automate the financial value chain, particularly the automatic reconciliation of accounts receivable and accounts payable transactions.
Companies of all sizes from all around the world and from all industries are influencing payment system development by their common approach, automating payment and collection processing, centralizing and setting up regional or in some cases global shared service centres/payment factories and forcing the banks to provide low-cost, efficient, multi-country mass payment services.
SEPA: problems and opportunities
The single most important development in payment systems for banks at the moment is the Single European Payments Area (SEPA). In 2002, 12 countries adopted the euro, but the large majority of euro payments are still processed nationally, with almost no pan-European payment and clearing systems.
Since 1999, when the European Monetary Union, with nearly 30 separate national payment and clearing systems, was launched the European Commission has been driving the banks to develop pan-European systems for citizens and businesses to make cross-border payments as easily, safely and efficiently as they can within their own countries and with identical charges. A development programme has now been agreed.
In March 2005 the European Payments Council (EPC) committed to the SEPA development timetable and roadmap, described in Figure 2, and, with its Crowne Plaza Declaration, to its being implemented and deployed by 2008. Banks and national organizations are to take care of the implementation of the SEPA deliverables in close cooperation with public authorities and other stakeholders. Gerard Hartsink, EPC chairman, says: “We have proved the capacity of the banking industry to act, for example with Credeuro in 2002. We will need the full support and encouragement of the regulators within very clear objectives, which we can all stick to. The common implementation approach of the euro system and banks and of the other stakeholders is indispensable to realize the 2008 deliverables on time.”
And so the Euro-zone is slowly moving towards its goal of fully harmonized payment processes and systems. Already, from January 2006, payments of up to g50,000 can be made cross-border for the same cost as a domestic transfer.
The publication of rulebooks and the EU Payments Directive has required massive effort with so many interested parties. The scale of what is being attempted is enormous and the difficulties of achieving the long-term target of having a new pan-European Automated Clearing House (PEACH), and pan-European debit card scheme fully operational by 2010 should not be under-estimated.
There will eventually be significant benefits from the new SEPA payment systems and infrastructure, but companies will need to make considerable investment to exploit them fully. Finance directors and corporate treasurers can see the future benefits but their problem is what to do now. Philippe Lambrecht, general manager, international cash management, at KBC Bank, advises caution: ‘‘If I was a corporate treasurer today, I would not initiate major changes in operations but leave things as they are. I would closely monitor what is happening in the SEPA landscape and wait until the XML standards and messages are full embedded and supported by a whole range of banks in the Euro-zone. Then, and only then, I would go for full concentration of all payments and collections in the whole Euro-zone through one gateway and from a single bank account.”
To help finance directors and corporate treasurers, Euromoney asked four leading banks in Europe, ABN Amro, KBC Bank, JP Morgan and Royal Bank of Scotland, the three things they would recommend companies do now and in 2007/08, as shown in Figure 3. The recommendations reveal quite different approaches by the banks. The one thing they agree on is that companies need to have a strategy for how best to exploit and manage the introduction of SEPA.
Although its introduction will herald a significant reduction in payment system revenues, most banks expect a positive business impact. As they are also expecting a significant concentration of the payment and collection business to achieve the economies of scale necessary to remain profitable, this clearly cannot be so. We could be heading for major over-capacity, forcing some banks and national payment systems out of the business. Companies will need to choose their system providers very carefully.
Few banks are certain of the impact SEPA will have on their branch coverage and partner banking arrangements in the region, but banks with full domestic networks in the SEPA countries believe they will probably retain their branches. Those using partner banks are reviewing the situation. The only certainty is that changes are inevitable.
Payment timing and guarantee critical
There is a general move in companies to classify payments as urgent or non-urgent. Because of the increasing use of shared service centres and payment factories, says Alan Koenigsberg, JP Morgan‘s vice president and product head for in-country and global ACH treasury services: “What our corporate customers really want is faster and cheaper payments and collections, and for us to make or collect them on time, wherever they require worldwide.” Urgent payments are increasingly made via same-day clearing systems (SDCSs) and non-urgent through local automated clearing houses (ACHs).
The only other issue is whether a payment needs to be guaranteed or not. Consumers and companies are increasingly using guaranteed same-day payment services. More than 20% of payments in the UK’s CHAPS Sterling service, for guaranteed same-day payments, are for less than £1,000.
