Enhanced Remittance Information: Are You Ready?

After a significant delay, the US large value payments systems, Fedwire and the Clearing House Interbank Payments System (CHIPS). will deploy enhanced remittance information (ERI) on 21 November 21. The large value systems in the US will now provide a business-to-business (B2B) capability that corporations have been seeking for many years. The Association of Financial Professionals (AFP), which represents approximately 14,000 finance and treasury professionals from over 5,000 businesses, has been working for the adoption of standards for reporting remittance information with large value payments since 2004. In 2006, the Clearing House Payments Company and the Federal Reserve Bank of New York conducted joint research that clearly indicated that there was a significant need for structured ERI in a large value payment.

ERI will provide the opportunity for business originators to include up to 9000 characters of structured payment remittance information, such as: invoice number, invoice date, purchase order numbers, invoice gross amount, amount paid, discounts taken, adjustments and adjustment codes, for up to approximately 30 invoices with their payment. Compare this to the existing beneficiary information capability of 140 characters of free format data that precludes the use of automation in the application of the incoming payment. The payment message formats for Fedwire and CHIPS have been modified to carry the structured payment details that will position the US as the first country in the world to enable their large value systems for business-friendly payments. There is a global need for payment systems to carry business remittance information but the banking industry has been slow to heed the requests of their business customers. The goal of ERI is to provide structured payment information to beneficiary companies for automating cash application and posting to receivables. There will no longer be a need to match the payment details manually.

The ERI can be transmitted by the originating company in any format that the originating bank and customer agree to. The originating bank can use one of three formats to transmit the ERI over CHIPS and Fedwire. The first format is the ANSI X.12 standard 820 or the ANSI X.12 STP 820, the second format allowed is XML that follows the remittance detail elements for the ISO 20022, which is compatible with the STP 820, and the third is the Fedwire tag structured format whose data elements are based on those defined for the STP 820. On the receipt side of the transaction, the receiving bank will work with its business customers to determine the format that the ERI will be delivered. The bank could deliver the information in the 820 format, an XML based format, the BAI format or a proprietary format agreed to by the bank and its customer.

The main use of ERI will be initially focused on satisfying the B2B needs for domestic large value payments. However, the new feature can and will be used by multi national corporations for international payments through the use of the SWIFT MT103 Remit, which can carry the 9000 characters of ERI for delivery to beneficiaries outside of the U.S. The issue today is that the MT103 Remit can only be used in a closed user group (CUG). Banks that provide global payment services can join the CUG to facilitate cross-border payments with ERI until SWIFT develops a more comprehensive strategy for transporting this information.

While there is a CHIPS and Fedwire requirement for all banks to implement the capability to receive the ERI, there is no mandate for the originating bank to be able to send the information or for the receiving bank to deliver the information to the beneficiary. This is the equivalent of building a highway without providing on or off ramps. A highway without on and off ramps is useless – conversely a payment system without on origination or receipt capability is just as useless. It is refreshing to hear that some innovative banks will be providing the origination and information delivery from day one. Some banks are taking a wait and see attitude, while others are sticking their heads in the sand claiming there is no demand from their customers. The ‘no demand’ myth has been dispelled through extensive research. The most recent AFP research in July 2009 revealed that the overwhelming majority (95%) of survey respondents indicate that remittance information would be valuable to their organisations if it were included in the large value payments message.

The banks that are willing to offer origination services and information delivery to their business customers will have an immediate competitive advantage over those that do not. It seems likely to me that the banks that do offer the service will be very appealing to the business customers of those banks that do not offer the service.

The ultimate success of ERI will depend on the origination and remittance information delivery services provided by banks. A mandate would have been nice but it is really unnecessary because competition will be the driver that will ultimately determine the success of this initiative. Banks that are sitting on the fence should know that ERI will be here on 21 November, whether they are ready or not. The key question being: will my competitors be ready?

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