Cash management debate: SEPA: A new model for Europe?
Europe may have one currency, but it still has many payment systems. What will be the impact of SEPA on banks and their clients? What opportunities exist in emerging Europe? Leading cash management professionals debate the confusion over standardization and the pros and cons of payment factories.
JL One of the most important developments in cash management is SEPA. What does it mean for suppliers and customers?
FT, ING The single euro payment area (SEPA) is an initiative of the European Commission. The banking community – the European Payments Council (EPC) – focuses on the 12 countries that have the euro, but the political debate includes the 25 countries of the European Union. SEPA’s objective is that the difference between domestic and international payments will disappear within intra-euro countries. There are three initiatives: the European credit transfer scheme, the pan-European direct debit scheme and the domestic debit card scheme. These products should enter the market by January 2008. Then we get a two-year transition period. By 2010, momentum should force volumes to switch from domestic to European schemes. The migration will be complete by about 2013. That’s the official roadmap of the EPC, but we have a lot of work to do to meet that timeline.
JL What will be the impact of SEPA on the banks? HD, Citigroup The impact will vary across the region. The idea is that corporates or consumers will be able to reach the banks that they want to pay money into through a single piece of infrastructure. We will go from 12 national associations and sets of products with 12 different sets of rules, governance, regulations and products, to a single infrastructure with a single governance and a single set of products. There will be further price compression. New product development to complement the commoditized payments service will be key.
SM, Deutsche Bank SEPA will remove the current complexities of centralized cash management in Europe and will further drive rationalization, harmonization and standardization. Scale and the capacity to invest in new value-added products to differentiate oneself become the key to a bank’s survival. There are clear opportunities in the long run for certain banks.
PP, AFTE Also, a new legal framework will define the duties and rights of the payment system users, providers and the banks. This should be implemented by 2008, the date at which the products could be optional. Once the directive is voted in, each country will have one or two years to implement the directive within its own national rules.
JL Most people believe we will miss the beginning of 2008 target though. Why? FT, ING Well, it is relatively easy to come to an implementation profile for European credit transfer, but not for European direct debit. There are so many issues to be resolved, and so few specifications and rules have been agreed.
OB, Volkswagen I think there’s another reason. There is a feeling that the EPC product offering – the proposed direct debit and credit transfers schemes – is not as good as what we have currently on a national level. Even if it’s available, people won’t move.
JL And will the debit card be ready by 2008? FT, ING We don’t have to change that much if the banks take a scheme like Maestro or Visa. Provided it has been checked legally and with the competition authorities, it is relatively easy to migrate to one of those international schemes.
JL What difference will SEPA make to your corporate customers? FT, ING Corporates with high payment volumes in the more expensive countries will benefit from the more competitive price levels of countries like the Netherlands and Belgium. Institutions and government bodies who make a lot of payments may also benefit from that shift towards the lower priced areas.
SM, Deutsche Bank The benefits of SEPA will vary among corporates, depending on their regional profile. The larger their presence in the euro countries, the greater the benefits of regional harmonization and the greater the possibilities of centralized management of flows. SEPA may accelerate the current trend of payment factories and shared service centres by facilitating their operations.
PM, SFS But will we benefit? We expected to gain from standardization such as the introduction of Iban [the international bank account number]. But in fact although we’ve been informed about it, nobody has told consumers how to use it.
HD, Citigroup At the moment Iban can only be used for cross-border payments in most countries, and these represent 2% or less of total payment traffic. The inertia is the pace at which national clearing associations adopt it as the standard. As a result, many corporates don’t routinely collect their Ibans and BICs [bank identifier codes] for their domestic vendors because they can’t use it.
PM, SFS True, but subsidiaries that use our central payment factory don’t know whether we are executing a domestic or a cross-border payment. We pay wherever payment is cheapest. We might make supplier payments to Portugal from a completely different country. Our payment factory will require Iban for all those countries with incoming payments. What we then send out to the banks is something completely different because large organizations like ours have payment accounts in each country.
OB, Volkswagen Banks say there are no volumes in cross-border payments. Of course there aren’t because the infrastructure is so badly organized that we have to work around it so it doesn’t seem like a cross-border payment. We need a standardized, efficient infrastructure.
JL What are you planning to do when this SEPA concept becomes fully operational? Will it change the way you work? PM, SFS Of course. If there is a domestic European market then we will use just one euro account to pay from. In Europe, we still differentiate between resident and non-resident accounts, and if you read Resolution 2560, the only reason for this differentiation is reporting obligations. The corporates have to ask for Iban and BIC numbers for payments in Iban countries. Then whether the transaction is done locally or cross-border is up to the infrastructure the banks offer on a pan-European basis.
AW, ABN Amro I think your frustrations are the same as the banks: for the next few years we too will have to live with both domestic clearing systems and SEPA. We want to be able to have Iban and BIC throughout Europe, because it’s straight-through processing for us, and we can then pass on the benefits to our clients. I think Luxembourg, Italy and Spain have indicated that they will be migrating their domestic traffic to EBA Step 2, and we expect that many of the others will be encouraged to consider doing the same.
JL Clearly there’s a plan in Siemens and Volkswagen regarding migration when the opportunity arises. What about Linpac? AF, Linpac Clearly, for the bigger organizations, centralizing and managing a large volume of payments is critical. But as a larger mid-market company, I ask: ‘Will it make a big difference to our lives?’ Although we have operations all around the world, a significant proportion of our transactions are domestic. We don’t have a large international centralization of activity on the purchasing side or on the selling side like Volkswagen or Siemens.
JL So, what strategy can you adopt to take advantage of SEPA? PP, AFTE Our strategy is to see what the final SEPA products will be. If they offer the same advantages as the current national ones, then it makes sense to assume we will shift to the SEPA product in 2010. However, the EPC credit transfer scheme cites a maximum of three days for a credit transfer. No one would shift from national transfer to that, because the national transfer is done within a day.
OB, Volkswagen But these companies have accounts around Europe that work in different ways; they have to employ people that have knowledge in running those accounts and they have to reconcile them differently. With SEPA, you can reduce overheads, costs and risks.
AF, Linpac In context though, many mid-market companies are not concerned with making payment processing efficient to the nth degree. They have more significant strategic issues to deal with, and therefore, although what you say is true and there would be advantages to be gained from common standards or processes across Europe, it may not be the greatest priority for mid-market companies to seek those out. At most, a bank marketing those products could have a competitive advantage with us, provided that they were already one of our funding banks.
HD, Citigroup A single account to effect all euro payments will also make liquidity management and cash optimization much easier; so clients benefit both from lower prices and this subsidiary benefit. But I agree with you. For a mid-cap enterprise it may not be as compelling to commit resources to changing present processes.
OB, Volkswagen Good working capital management is a key issue too. Mastering payments in and out is an essential element of working capital management.
AF, Linpac Tight control over working capital, and so over cash, is absolutely critical to Linpac too. My concern, in the context of the group’s wider strategic priorities, would be the time required to implement new payments infrastructure or to centralize infrastructure.
AW, ABN Amro Our biggest concern is that as long as there is a choice, both choices will be made. Provided the product meets everyone’s requirements, we want everyone to be encouraged or potentially required to go down the same route.
SM, Deutsche Bank A key to SEPA’s success will be offering a strong incentive to use the new instruments: they need to have a higher value-add than current products. The question is whether market forces alone can provide that incentive for all market participants, including purely domestic companies with limited SEPA use.
JL Do banks want a maximum period in which you run the dual systems and then legislation to force the issue? AW, ABN Amro Personally, I think there will be a push to regulate. There’s no appetite for a transition period to 2015 or whatever it would take for everyone to migrate their traffic voluntarily.
PP, AFTE The next few months will be critical, as all the stakeholders will try to influence the final SEPA products. The migration period will depend largely on the difference between the national products and the SEPA product. And I agree that at some point there will be a legislative package saying something like: ‘By the end of 2012, you will only use pan-European direct debit’.
Incorporating the east
JL Let’s turn to some of the other issues. The inclusion of eastern European countries has changed things. How? AW, ABN Amro In 2004, there were 10 accession countries to the EU, and treasurers are taking advantage of that. For example, the currencies of Czech Republic, Hungary, Poland, Slovakia and Slovenia are now fully convertible. Inter-company lending is starting to resemble that in western Europe and the US and non-residents are opening local and foreign currency accounts. It’s an ideal opportunity to include some of those countries’ balances in euro pools to get additional returns – and that’s just at a basic liquidity management level. Many companies have already started to include the central European countries within their payment factories and shared service centres. Some are also looking at locating those centres in central Europe.
FT, ING The accession countries have to introduce the euro to have efficient cash management at an acceptable level. Also, their legal framework is still not one we can trust – though it depends where, and it’s improving. But in terms of infrastructure, I think they’ll be better equipped in three to five years than we are in western Europe today.
OB, Volkswagen It’s like phones in emerging countries. Because the static telephone infrastructure wasn’t working, new mobile networks were founded from scratch. As the eastern European payment systems are renewed, they will apply the highest and newest technology.
HD, Citigroup Some central and eastern European countries just leap-frogged a whole generation of payment instruments, such as cheques. They’ve gone from cash to very high-level technology and we need a similar leap in western Europe for SEPA to become a reality.
JL Are we getting a new model for pan-European cash management? PM, SFS We have come from very complex surroundings with different currencies in the EU member countries, to a euro zone with one currency, though we still have payment accounts in the various countries. We’re heading for one payment account and one account for collections for the European domestic market in the euro area. This account will have substantial volume. Where the payment factory is located will be irrelevant. It will probably be at the headquarters, because treasury is a headquarters function.
AF, Linpac I think that’s over-simplifying things. If physical collections are still important to you, you’re still going to need an account close to where your customers are.
PM, SFS Yes. Each subsidiary has its own bank account for collections, but payments can be centralized, with the exception of salary payments. You can’t pay domestic salaries from a corporate account.
AF, Linpac And as Peter mentioned earlier, corporates won’t necessarily want to rely on a single bank. We may want more portability, so that we can easily move our operations from one bank to another or one system to another in the event of not being satisfied with the level of service that’s being delivered.
OB, Volkswagen Yes. Efficiency shouldn’t conflict with a sound level of competition. Moving towards a small number of partners who execute payments around Europe scares me a little.
HD, Citigroup I think the model is changing. At the moment the global banks talk about their membership of all the high value/low value clearings, and that’s going to be neutralized to some extent under SEPA. That advantage will disappear. We all expect more consolidation in the banking infrastructure. Some small banks may decide to leave the space altogether, or larger banks may decide to go into partnership with them. There’ll still be space for niche bank players and they will take advantage of the fact that some of the differentiators that exist today are driven out.
PM, SFS It’s the small and medium-sized enterprises in Europe that will use the niche banks. These enterprises don’t take part in the SEPA discussion and they don’t use Peach – the pan-European ACH. In Germany we already have cooperation in transaction banking. The large domestic banks share their services and share their investment. You will see that in other countries as well.
AF, Linpac We still have local banking models to complement our international pooling because of local collection processes and other national differences. Even if international banks move into local areas, unless they break the stranglehold that locals have over collections or somehow buy into the banking processes, local banking won’t change quickly.
SM, Deutsche Bank In addition, while the increased centralization brought about by SEPA will result in a further reduction of the number of banks used by the very large multinational corporates and the potential elimination of the ‘national champions’ in each country, we should keep in mind the credit issue and the fact that this may not be completely concentrated in a single bank, especially for those large corporates with significant funding needs and those middle-sized companies with limited access to the capital markets.
AW, ABN Amro I will be interested to see whether the primary bank concept takes off more than it has. Yes, corporates want to maintain relationships with a number of banks, but they still want things tidied up and pulled together at a single point. Then they may appoint a single bank to manage the client service and the SLA [service level agreement] aspects while retaining the right to have independent relationships with other banks.
Dealing with standards
JL Olivier, looking at the role of MACUGs – member administered closed user groups on the Swift network – and the use of new technology, what opportunities are there for greater efficiency? OB, Volkswagen As a treasury centre, seven years ago we started thinking about using Swift as a tool for routing our payments – relatively few, but big amounts. Speed is relevant, as is a resilient payment system. Now we have a Swift address and we are hooked up to the net as the Volkswagen Group. We had to make a big investment in terms of technology and security, and we wouldn’t have done it if we had millions of small payments. It has turned out to be a very good decision because we are in that area of high-value payments with fewer references than you would have for a domestic commercial payment.
HD, Citigroup Well, we all agree that we need common business processes to support AP and AR [accounts payable and accounts receivable] in our activities and a single secure interface with the banks is a part of that. That’s what SwiftNet aims to do for corporates. I think it’s particularly relevant for corporates, such as Linpac, who require for funding reasons – or simply just prefer – to use multiple banks. For others, it will cut switching costs and provide a standard way of connecting with your banking partners. Banks want to compete on functionality, products, customer service and the whole cash management experience. They don’t want to compete on connectivity, formats and security. The large banks are indifferent as to whether a customer wants to use SwiftNet to access them or to use a proprietary connectivity or to use, as we have found, the public internet.
JL You’re making this sound wonderful, but it’s not that easy is it? MACUGs are not easy. And there are a number of different proprietary standards around. Without going through a single lead bank, you have problems getting a pan-European solution.
HD, Citigroup When we started looking into what SwiftNet would do for us, we understood that if a customer wanted to connect with five different banks through SwiftNet they’d need to be in five different MACUGs. That wouldn’t make a compelling business case for many corporates, based on the complexity and costs associated with joining a MACUG. But now that the Corporate Access Group of Swift is looking to rationalize that so that you can access multiple banks through a single MACUG, this might change.
SM, Deutsche Bank In reality, implementing the MACUG standard is not a standardization process in itself. As a result, such an investment in time and money could only be justified by very large players with multiple banking relationships and systems and large volumes that help amortize the investments and result in real cost-savings.
JL What do we believe the banks and corporates should do to get through this mess of emerging standards? What are the answers? FT, ING I’ll give you the example of Edifact, which was an effort to come to that standardization. Every imaginable party participated: government, banks, the technology industry, trade communities, different industry sectors. Despite this, there were country- and industry-specific deviations. In so far as a standard was implemented, it was Edifact, which the Nordic companies still favour. But each company tweaks their SAP or Oracle or whatever. So if we don’t have a rigorous overseeing agent, which can rubber-stamp adherence, forget about real standardization.
SM, Deutsche Bank Let’s not forget that standard communication protocols and formats already exist domestically in many European countries such as France, Belgium and Germany. Therefore, I do not believe that this is something new to the banking community.
PP, AFTE The message format has to be internationally agreed and that’s why we are interested in Swift. We think the only way is to adapt interoperable forms – Swift or xml – that could be used by any company with any bank. In other words, the standard should not pose a problem to a company that wants to change banking relations.
JL That’s the model, but the agreed objective is increased straight-through processing with increased consistency, making you bank-independent, supplier-independent. How do we get there? AW, ABN Amro I still think some clients find the cost of bank independence too high. They’re quite happy to maintain their proprietary standard with their bank. That’s one of the challenges banks have in trying to serve a whole spectrum of clients.
FT, ING Even if you have a standard, you have customers asking you to deviate from that standard for commercial reasons. And there are also many corporates happy with the current standards.
SM, Deutsche Bank In the end, the elements that will be standardized will be limited to the core functions, and the competition in the banking industry will shift to the value-added services that can be added to the MACUG, such as personalized signatures, payment status reports and return messages for bulk payments. Therefore, while you may have a standard MACUG with common communication protocols, a MACUG from one bank may be perceived to be superior to that of another bank.
HD, Citigroup For one thing, the ERP [enterprise resource planning] providers need to engage more intensively in this debate. SAP has announced they will be using an xml-based corporate bank payments message. It’s the core payment kernel that has been required, because customers are saying: ‘Why should I invest in moving to a Twist standard when the i-doc or Edifact serves me perfectly well?’ It’s going to take time.
JL Yes, but hang on! How do companies like Andrew’s respond in this confusing environment?
AF, Linpac As an individual corporate, we don’t have the time or the resources to invest in pursuing better international standardization of electronic payment formats or use of common bank payment systems. We are happy to have accounting systems that meet our internal standards and can interact with the banks in different countries. We want formats standardized in a way that enables us to change our banking relations, even though the payment system is not standardized. We want the banks to tell us how they can help us improve on what we have at the moment.
HD, Citigroup The flip-side is that I would like Andrew, as a customer, to come to me and say: ‘Look, this is my problem, help me solve it’. Often what we find is that the corporate says: ‘I don’t have the resources to map from what my ERP system is producing today into the core payments kernel. You take it and do it for me.’ That’s customization, not standardization, because the next customer will need something else. Standardization will enable us to pass on reduced implementation costs, but we still need to offer flexibility when appropriate to satisfy our customer’s requirements.
JL Let’s turn to payment factories. How do Siemens use them? PM, SFS Payment factories create economies of scale – a bundling of volume with the aim of achieving better pricing. And from the CFO perspective, they are a tool to ensure that certain compliance requirements are met. Some are operated in shared service centres. A multinational might have various shared service centres or there might be one payment factory for the whole corporation, as in our case. We have a global solution and we are required by our CFO to use this payment factory for certain transactions; for example inter-company transactions. A payment factory might also be used to concentrate a volume of local payments.
JL What do you put in and what do you keep out of your payment factory? PM, SFS It depends on what you want to achieve. Let’s take, for example, the standardization of formats. You need to define the formats to be delivered on a worldwide basis for all subsidiaries linked to the payment factory. Within our organization, for example, we only accept Edifact format payments. Then you need to decide on what you send out to the banks. The more formats you send out, the more complicated it gets. You set standards with regard to the quality of the payments delivered to the payment factory. For example, you can make sure that the BIC identifier is checked against the BIC identifier table or that an account number meets the criteria that are applied in the country of the beneficiary account
HD, Citigroup There are cost implications. Clearly, one reason for centralizing anything is to drive out cost, but there’s an IT cost associated with going from many systems to one system, because you need to have all of your operating companies on the same platform for it to work efficiently. One view of a payment factory versus a shared service centre is that one is physical and the other is virtual. A payment factory can be achieved by having some middleware in place just to consolidate files. So, if you’re going to centralize at that level only, IT cost is one of the main considerations. For more far-reaching centralization, a significant consideration is the corporate culture. How easy is it going to be to centralize those activities and take the responsibility away from the local operating companies who are making payments that are critical to their supply chain? Are they confident you can deliver that from the payment factory? How much senior management buy-in is there?
AW, ABN Amro A number of companies are now trying to rationalize incoming payments. This does not work as well in a centralized environment, given the nature of the current payments infrastructure. But I think Hugh hit the nail on the head. A lot of it is down to cost, influence and who is actually driving that model, irrespective of location. If you don’t have the buy-in and you don’t have a robust cost/benefit analysis, then why would you do it in the first place?
HD, Citigroup The distinction between a payment factory and a shared service centre can be important, because in the payment factory you’re still leaving your AP/AR locally. The payment factory is simply the file consolidator. All the models that we have assume you’re going to use a single bank in a region.
AW, ABN Amro Yes, and that’s where you’re removing the relationship with the local bank, and that is the biggest point of resistance; even more so on the receivables side.
JL Are there any lessons from around the world in terms of how to make receivables work in payment factories? FT, ING It depends heavily on the industry type. If you are in the service industry, you have no standardized products, so it’s very hard to centralize receivables. The credit department has to be familiar with customers, otherwise you will lose your commercial relationships. But on the other hand, if you are a manufacturer with business to business relationships, with yearly contracts where everything is specified, then it’s easier to do the accounts receivables from a more centralized position because of this standardization.
SM, Deutsche Bank One of the key challenges in including receivables in a payment factory structure with a single account structure has been reconciliation. Can the incoming remittance information allow the payment factory to clearly identify the beneficiary of the funds within the corporation (ie, the subsidiary)? This varies from industry to industry and is dependent on the level of standardization of the remittance information. The latter is much higher in the B2C market.
JL In the US, companies are starting to centralize receivables collection management using new middleware. Getpaid is one example, but there are several others, and it expands the role of what the payment factory does. AF, Linpac If you use what is in effect a virtual entity, you get some benefits in terms of control and reporting, but the real cost/benefits are lower transaction costs, less float time and perhaps fewer administrative costs. On the other hand, what have you got to invest to get that? A corporate like us would have to be very rigorous about whether we embarked on even a simple project like this because of the payback period involved.
PM, SFS You need to know the cost of having decentralized contracts and adjustments of formats. If you don’t have a centralized system, and your subsidiaries send their payment files to their own bank, they need to agree on formats, on data transfer, on the contract – and these contracts need to be reviewed from time to time.
JL How do you manage ‘on behalf of’ payments? PM, SFS From a centralized system you can choose to effect a payment from the account of the subsidiary, or from a central payment account in the name of the mother company, and you make a payment ‘on behalf of’.
HD, Citigroup One consideration is the booking of inter-company accounts and the administration associated with that. Can you handle that and can you handle it cost-effectively? But the other implication is that the account of the mother entity is a non-resident account in country. So, if you want to use that structure to pay your domestic vendors in a particular country, you’ll convert what was a resident-to-resident payment into a non-resident-to-resident payment. While clients can do that through the ACH, and it won’t give them any price advantage, they end up giving a central bank reporting problem to the beneficiary. The client’s now received a payment from a non-resident that he has to report for anything that’s over A12,500. Now, the way a number of mainly larger corporates get around the CBR issue is by picking one entity in a country and using that entity to pay on behalf of all the other entities. A number of our customers want to take advantage of a payment ‘on behalf of’ structure to rationalise their cross-border payment processes, because they’re non-resident to non-resident anyway. That’s a model that we’re seeing in the marketplace. It’s a bit of a hybrid; domestic payments are still routed through the accounts belonging to the resident entities, and cross-border payments are routed through the in-house bank entity.
SM, Deutsche Bank The other issue is one of legal ownership of funds and compliance issues in an increasingly regulated banking market. This is particularly true when using an agent to collect ‘on behalf of’, using instruments such as direct debits. In general, the agent is not party to the mandate, which can lead to issues in certain jurisdictions when funds are collected on the account of the agent.
JL What’s next for payment factories? Is it going to be receivables? What’s the next step in terms improving efficiency? PM, SFS SEPA.
AW, ABN Amro Yes, I agree, that’s the next step.
SM, Deutsche Bank SEPA will definitely facilitate the reconciliation issue related to the collections piece.
HD, Citigroup Outsourcing it to a BPO [provider of business process outsourcing].
JL Are you serious? HD, Citigroup We see that starting to happen now. Companies that have a mature shared service centre in place are asking whether running it is core to their business, and looking to see if it can be outsourced. Technology companies and BPOs are combining to see if there’s a model that could establish a utility shared service centre.
SM, Deutsche Bank Indeed, and we are also seeing variations of such models in the market, going as far as combining outsourcing with the payments ‘on behalf of’ concept, using the account of the BPO provider.
AW, ABN Amro And it’s not just payments. You outsource the whole shared service centre with HR [human resources], the accounting, not just the payment factory.
HD, Citigroup Remember, as a payment factory is essentially virtual, it can’t be outsourced. However, a company that has rationalized and reengineered all its AP and AR into a shared service centre may start to ask why it needs to run that?
PM, SFS Because the economies of scale have substantial competitive and cost benefits, and we want to be in control of our processes. If we outsourced accounts receivable management. For example, whoever does the reconciliation would get a good picture of our financial situation, wouldn’t they? That’s dangerous, especially if you outsource it to a bank that is also your investor.
FT, ING Customers are now thinking of putting the very sensitive accounts receivables process in a BPO-like environment in India or whatever. A corporate that has a lot of invoices and a lot of companies all over the world has a huge reconciliation problem and a lot of enquiries. It’s a very labour-intensive process, and it’s cost effective to move that business out of Europe, out of the Americas, and into countries like India.
JL What types of companies will adopt these types of solutions? HD, Citigroup A lot of the cost associated with this kind of solution is fixed. If you haven’t got the volumes, it’s going to come down to investment on the part of the large and medium-sized enterprise who have a problem that they need to solve.
AW, ABN Amro You can also outsource individual processes rather than the whole thing. You may not want to set up or outsource a payment factory or shared service centre environment, but may have a process that is, say, predominantly cheque-driven, and you may want to place that individual activity with a provider.
AF, Linpac That would be interesting to middle-market companies: cherry-picking the processes to outsource.
HD, Citigroup But that’s always been available, there’s nothing new from the technology perspective.
AW, ABN Amro Exactly. It’s always been available but it’s generally been used by larger clients. Now we will see more middle-market clients taking advantage of it.
PM, SFS Technical developments will drive this, because the efficiency with which accounts receivable, for example, are going to be processed depends on the percentage of documentation available electronically. Our partners in the industry are offering solutions to enable us to interchange this supply chain data with our suppliers and customers.
PP, AFTE It’s clearly a question of culture and type of entity, and a question of cost and of control of processes. Is it worthwhile centralizing payments or not? If there’s no clear benefit, usually companies don’t want to go into that process. They know they will antagonize a lot of people.
JL Looking at the efficiency of the whole business process, from the buyer looking at a catalogue to the clearing and settlement and reconciliation, what is achievable right now?
HD, Citigroup Look at RosettaNet. Look at the Payment Milestone project and at what Intel has achieved in terms of tangible benefits in access to cash and reduction of credit. It’s phenomenal. They’ve transformed the way they do business. Standardization of the way that information flows and the content of the information flow has been a catalyst. One of the most critical things was truncation in the clearing system. The URI of the Payment Milestone project, the unique remittance identifier, is a maximum of 18 characters long, because that is the maximum amount of data that will go through any clearing system anywhere and not get truncated. It hinges on those 18 characters getting through the clearing systems to reconcile the URI with the remittance information that’s been sent between buyer and supplier over the network.
JL RosettaNet covers not only payment, but order, structures, data fields and everything else. I’d like some examples of people taking a piece of the financial supply chain rather than all of it.
SM, Deutsche Bank Providing financing on a portfolio basis for both sides of the chain including the buyers and the suppliers is where banks can add value, especially if such funding is somehow linked back to the invoice in order to make the entire process seamless.
FT, ING We have a receivables financing pilot run by one of our daughter companies. The buyer and seller share access to the invoices on the internet. By handing over the legal right to the financing company, based on the document flow between the buyer and seller, we are now financing the receivables side. You can also handle payment settlements based on that information. It took five years of discussions and we engaged with various IT providers. You have to start with a small piece otherwise you won’t have the buy-in of all the parties involved. So, take a small piece and try to work based on that.
JL That’s supplier financing. Have we got an example of buyer financing?
AW, ABN Amro We work with a number of clients to finance their receivables – though not necessarily their whole portfolio. You don’t necessarily finance it all because there’s a lot of due diligence to do on each of the remitters. That’s where you go out and build a solution with a client. Then you sit down and say: ‘Out of your receivables portfolio there’s maybe 60% or 70% that we can finance for you.’ One of the challenges is handling both the buyer and supplier financing. That’s advantageous for both the banks and the clients.
FT, ING The other current initiative is on electronic bill presentment. Here is an example from the Dutch market. All the banks have tried to get proprietary systems into the market over the last couple of years. Most failed because through lack of critical mass. So, the three large Dutch banks – ABN Amro, ING and Rabobank – decided to develop an electronic bill presentment standard together with TPG, the postal service. With an inter-bank standard, together with a logistical provider, TPG, we can gain enough critical mass to have an electronic invoice system, with a view to working from there. But you have to have those millions of invoices so you can force a buyer or a seller to use the system, and the consumers must accept that in their electronic banking systems they receive and pay those e-invoices. So the business case is twofold. On the consumer side, we get rid of all remaining hand-written payments and instructions and, together with the acquiring side, we get additional revenue from the electronic bill presentment towards the invoices. This system will be more or less up and running in the first quarter of 2006. Then we will have the basis for additional services.
JL Including supplier financing and so on?
FT, ING It could include, let’s say, the hundred largest invoicers. Electricity companies and so on – if they all bring their invoices and monthly or quarterly payment processes into the system, that would be something to build on.
SM, Deutsche Bank We are currently marketing an e-billing solution that integrates the financing piece, to provide extended payment terms to the buyers while giving attractive financing to the suppliers. At the same time, the entire invoice and dispute resolution management is electronically handled, with reduced costs and improved liquidity.
JL The key though is to get universal standards – your standards will be different to CheckFree and they are different to BVS in Norway. And this is where SEPA doesn’t go far enough. It should be looking at the whole financial supply chain. Twist is doing a good job trying to fill in the holes. RosettaNet is a classic example of where they’ve looked at the business transaction as a whole. The Payment Milestone project is very important in terms of disciplines. Are there other examples? Because the corporate treasurers out there are thinking ‘What do I do about the financial supply chain? What are the things that make sense now?’ AW, ABN Amro They could look to banks to help them with documentation handling or purchase order management. They can implement little things like that very quickly without having to address the whole end-to-end financial supply chain.
SM, Deutsche Bank While implementing small solutions along the chain can bring incremental value, the corporates still need to have an integrated view over the entire chain in order to achieve maximum efficiencies. This is clearly evidenced by the growing involvement of corporate treasurers in the supply chain management piece. And some banks have realized the need to have an integrated financial supply chain offering by merging their trade, risk management and transaction processing under one roof.
HD, Citigroup From a treasury perspective, the driver is being able to reduce your funding costs. The treasury contributing to the business in this way has become very important – almost as important as any other innovation in the business. It’s about optimizing working capital in the system.
AF, Linpac I think that corporates have to open up a certain amount to allow banks to understand what the real issues are and how they operate. Then the banks can bring potential solutions. On the banks’ side, projects do have to be very realistic in terms of what they’re likely to achieve and what the deadlines are, and they have to offer a fairly rapid pay-back.