Internet-Based Payment Infrastructure

Pressures to achieve greater efficiencies in corporate business operations are relentless. One area of particular importance, and challenge, is the automation of Accounts Payable and Receivable functions and related communications.

So why has this area become so important?

Corporates are keen to reduce complexity and cost by having single standards for communication with their banking partners. The cost of manual reconciliation has risen considerably and organizations are keener than ever to reduce the costs and risks of any manual operation. Corporates are now looking at ways to better manage their liquidity. Delays in reconciliation and exception processing caused by insufficient information must be eliminated. Ideally corporates would like to see remittance and reference information delivered in coordination with payments to accelerate application of funds and reduce working capital requirements.

Roadblocks to automation

Banks have long enjoyed the benefits of bank-to-bank payment standards for the exchange of payment instructions over the SWIFT network. These have allowed the banks, large and small, to realize advantages from automation and straight-through-processing (STP) activity.

Unfortunately neither banks nor their customers have been able to realize the same savings from their mutual interfaces. Although payment standards such as EDIFACT and ANSI have been developed, they have had limited adoption due to the number of parties with differing requirements and the cost of the technology. This has led to the current situation where corporate customers are likely to communicate with their banking partners in several different ways and the information provided back to them is inconsistent and fails to meet their growing need for automatic reconciliation. At the same time banks have had to maintain several interfaces to cater for the varying needs of their customers, who use, among others, SWIFT, EDIFACT, ANSI and proprietary file formats. In addition several communication protocols such as dial up, lease line, frame relay and the Internet are all used for corporate-to-bank communications.

As well as the issues with standardization, automation has been also been hindered by:

• The large number of domestic and international banking standards around the world.
• The number of parties involved in the processes, such as corporates, banks, service providers and their often conflicting needs.

A New Dawn

Newer technologies, such as the Internet and associated standards now hold out the promise of an 'interconnected world' where connectivity between organizations will be simple, secure and fully automated. The pace of change in this area is accelerating and there has been a proliferation in the number of emerging standards for communicating with partners and an equal increase in the number of providers offering solutions.

With all the change this represents, it can be difficult to understand participants and their objectives. What are the features and benefits? What are the next steps for corporates?

The Current Initiatives

RosettaNet

A supply chain community (and standards group) founded by the technology and telecommunications sector, with 500 plus members.

RosettaNet's focus is the formation and use of XML messaging standards for supply chain communications across the Internet using open standards. RosettaNet standards emphasize operational use: the standards process is not complete, with standards accepted, until full production use of the standard has been agreed by a number of parties.

Select RosettaNet members have initiated a payment pilot, the Payment Milestone Program (PMP), and approached their banks to provide standardized payment messaging (initiation and advising).

RosettaNet members sponsoring the PMP include: Cisco, Intel, Nokia, NSC, and TI. As well as JPMorgan, other banks involved include ABN Amro, Bank of America, Citibank, Deutsche Bank, HSBC, Nordea, Standard Chartered and SWIFT.

TWIST (Treasury Workstation Integration Standards Team)

An effort focused on formulating standards related to communication between treasury applications and financial service providers for contract dealing and settlement, and related communications.

Led by Shell, other participants include:

• Corporates: Elsevier Finance, GlaxoSmithKline, and Richemont Group,
• Banks: ABN-Amro, Barclays, JPMorgan, RBS, and Standard Chartered,
• Others: Bloomberg, Integrity Treasury Solutions, Reuters, SAP and Trema.

SWIFT

SWIFT is the largest association for international banking. A number of SWIFT member banks are working together with SWIFT to address corporate user objectives for commercial payments.

SWIFT C2B (Corporate to Bank) is a set of payment message standards defined by SWIFT and a group of banks. Using XML for messaging, attributes include allowing corporates to communicate to their banks, supporting wholesale payment activity (for example A/R and A/P) and providing the same formats and processes to support domestic and cross border payments, multiple banks and payment systems. SWIFT C2B is being positioned to be inclusive of the interests of various parties and relevant and usable as a messaging standard across multiple environments such as RosettaNet, TWIST, and IFX. A substantial number of global banks are participating in the SWIFT C2B initiative, including JPMorgan. First production traffic was in December 2003 through the RosettaNet PMP.

For banks, this means that the implementation of one standard addresses the broad range of user interests and avoids the need to support multiple standards. For all participants, this 'singularity' of standards will enable the power of multiple efforts to be consolidated into a single, coordinated effort resulting in one large interest group with a common focus.

SWIFT MA CUGs (Membership Administered Closed User Groups) provides SWIFT network connectivity between the corporate and its bank(s). CUGs allow individual banks to sponsor individual corporate connection to SWIFT for the purposes of exchanging messages. Essentially a telecommunications standard, message format can be varied. Message traffic is more commonly payment initiation related, using SWIFT formats.

How It Works

SWIFT C2B is an XML based message set focusing on payment initiation of commercial settlement, including money transfer, ACH/giro as well as checks. It includes status messaging and supports advisability through coordination with SWIFT XML advising message sets.

Payment Flow

Conventional commercial payment flow (credit transfer) commences with:

1. The debit party (the originator/the buyer) passes an instruction to the originating bank
2. The originating bank, through a payment system, communicates to the receiving bank
3. The receiving bank receives, posts, and advises the creditor (the seller) of funds receipt

Information Flow

Transaction information – flows from the credit bank to the credit party.

Remittance information is optionally delivered separately (today) or with the payment (future). In the case of RosettaNet, remittance information is delivered in RosettaNet standard formats (3c6) and passed directly from the buyer to the seller. A re-association process matches payment and remittance information. A value called a Unique Remittance Identifier (URI) or 'remitter to beneficiary reference' travels with both the payment and the remittance information and facilitates re-association.

Indicative of the market interest this subject receives, a number of other initiatives are active including:

IFX – an industry group formulating XML based standards for derivatives messaging, including settlement. IFX addresses ATM/POS, EBPP, business banking, credit application processing and Web services.

Financial Services Technology Consortium (FSTC) – a U.S. financial services industry association hosting a pilot of Web services (an evolved form of XML messaging) in the context of wholesale cash management services.

Until recently the various groups have been working in relative isolation, albeit with common aims for the interface between banks and their customers. This meant that the real benefits to be gained from a single set of standards being used by a critical mass of users was unlikely to be realized. Recognition of this led to the formation of the International Standards Harmonization Team, which is now defining a single set of messages for communication between customers and banks. Participants in the process include SWIFT, IFX, TWIST and OAGi.

So what should be the next steps for corporates, especially those who are not directly involved in the definition of the standards?

First, we need to identify the benefits that these new initiatives can provide to their organizations. While the benefits of automation are probably clear, these need to be translated into quantifiable gains that can be used to justify investment over the next few years.

Most organizations do not work alone and the likelihood is that there are several service providers — from outsourcing companies to software providers — who are involved in the payable/receivables space. Their position on these new initiatives should be understood: are they supportive, do they understand the issues and are they able to work with the new technologies? Corporates may want to consider whether the answers to these questions should influence their future decisions around vendor selection.

Corporates need to know what their banks are doing around these new standards initiatives. Are they actively engaging in helping to define the standards, or are they waiting on the sidelines to see how things evolve?

At a recent client forum, standardization was one of the most overriding issues. Concern was expressed, especially by smaller organizations, that their requirements and concerns may be overlooked because of the major influence of large corporates in the definition of the standards. While this is a natural worry, they now need to consider whether there is an advantage in their participation. Most of the work that is happening on standards is being carried out on a part-time basis and the size of the participant's organization is no barrier to active involvement.

Conclusion

The potential benefits to all parties involved from the realization of a singular standard for customer/bank communication are enormous. However, everyone needs to establish, for their own organization, what the direct cost benefits are to communicate this message widely. Without active participation, a truly efficient end state will never be achieved. All parties should consider how they can get involved.

About the Authors

Tim Decker, vice pesident for JPMorgan Treasury Services, is a member of the firm's Global Clearing Team and is responsible for developing and implementing strategy in response to changes in the European payments business. He is the JPMorgan representative on a number of industry initiatives, such as STEP2 and Real Time Nostro. Tim has worked for a number of large financial institutions predominately in IT, specializing in payments and client communications systems.

Robert Blair, vice pesident for JPMorgan Treasury Services, is responsible for the firm's participation in new industry initiatives including e-payment schemes and related standards. He is a member of the International Standards Harmonization Team and the Corporate STP Payment Program. He is currently involved with the RosettaNet Payment Milestone Program, which went live in December 2003, using XML-based SWIFT C2B message formats to accomplish standardized electronic communications of commercial settlements between corporations and their banks. His previous responsibilities include product and project management of e-banking and e-Commerce product offerings in the U.S. and Asia regions, including browser and Windows-based applications, as well as EDI and related integration between the bank and its clients.

This article was published on www.gtnews.com.