Greater adoption of electronic payments (e-payments) by business and government entities is currently lethargic because existing networks and clearing solutions limit the amount of remittance data they can carry across their systems.
Inevitably, this means that remittance information is provided:
- As a separate communication, via email or mail for payment re-association ahead of receivables processing.
- As supplemental elements or structured data included with a payment in an ISO or non-ISO message (automated clearing house (ACH), Fedwire, CHIPS or SWIFT).
- By value added solutions and/or networks that provide remittance data transmission services for payment re-association ahead of receivables processing or investment account allocation.
Although e-payments offer convenience, efficiency, cost reduction and for many environmental stability, cheques remain the preferred choice for a large proportion of business and government payments in key markets.
The Australian Situation
Australia’s bulk e-payment system, Direct Entry (DE), lacks the electronic means to exchange rich, accurate remittance information with payments. As a result, remittance information has to be provided separately, requiring re-association (reconciliation) ahead of cash allocation and receivables or investment account allocation.
This inhibits processes from payment initiation through to reconciliation and receivables processing and results in cheques remaining the preferred choice for business-to-business (B2B) payments, even though their use imposes significant costs on users, particularly the payee (beneficiary) and financial institutions.
Interestingly, the lack of an electronic means to deliver information with payments is also an issue for some individuals who might wish to provide or receive information with e-payments.
Potential Options to Provide Remittance Advice
The DE system currently has the ability to carry 18 characters of remittance information across the Australian system. It could be re-engineered to allow each payment to be accompanied by a much richer set of accurate information. This option is not currently being pursued because the consensus is that it will be difficult to co-ordinate and expensive to implement particularly in view of the varying levels of specialist automation of bank and end-user systems introduced over time.
A completely separate system to carry additional data using ISO 20022 initiation messages with remittance advice is the preferred option (international ISO 20022 message standards are already planning to move in this direction), as this allows the originator to provide remittance details that can be associated with a payment.
Apart from having to carry large amounts of data over the selected payment network, a potential challenge will be data variation across markets making standards specification difficult. Additionally, exchanging remittance information between buyers and sellers is complicated by the number of available solutions, formats and data transmission approaches adopted.
Another option, as part of payment initiation workflow, is to include a reference in ISO 20022 message standards to allow the originator to identify in the message where the remittance data can be accessed. Our understanding is that this option is currently being evaluated.
A DE System Solution
Third-party technology is currently available that provides for the exchange of unlimited amounts of accurate remittance information or context without having to re-engineer the existing DE system in Australia. It adopts the concept of a remittance advice locator (an electronic staple in the form of a Universal Resource Locator (URL)) as an alternative to a remittance location message being proposed for ISO 20022 customer credit transfer initiation and direct debit initiation messaging.
The electronic staple is placed in the DE system payment file and carried within existing DE system message field, so that all participants in the chain of payments can access (view or download over the web) the rich remittance data provided by the originator on payment initiation.
The technology has been proven within two complex market verticals. To overcome the significant differences in the data requirements across these market verticals and Australia’s overabundance of business systems, any amount of structured or unstructured remittance data can be associated with a payment. Workflow then presents the remittance data in the format required by the payee/beneficiary.
Business processes from payment through to reconciliation, cash allocation, receivables and/or investment account posting have been streamlined in both verticals and costs have been reduced by a significant amount.
Providing Unlimited Remittance Information with DE System Payments
This third–party technology easily integrates with the DE system to inextricably link any amount of remittance information or context uploaded at payment origination to an electronic staple.
The electronic staple (less than 16 characters) takes the form of a URL and is conveyed in the message fields of the DE payment system so that it can be used by the payee, their financial institution or an approved intermediary to view and/or download accurate remittance data provided by the originator via the internet.
Uploaded remittance information and documents are managed in a data repository as XML. Remittance information and other context can be viewed (as a PDF) or downloaded (as a PDF or as XML) for manual, semi-manual or automated cash allocation and receivables/investment account processing. Secure, online viewing and download options, via web services, or via any fixed or mobile device meet the varying needs of business, government entities and individuals.
A ‘one click’ data download capability has been developed for large superannuation funds, investment funds, fund administrators and custodians.
A solution workflow is flexible and typically includes:
- Validation (on data upload).
- Payments file generation with static or transaction specific e-staple (in this case ABA file via the payer/originator’s existing financial institution).
- Payment notification (email or SMS).
- Payee/beneficiary payment receipt notification (on data view or download).
Payment scheduling, employee payment notification for employer superannuation/pension payments and remittance data access notification form part of the workflow process provided in one of the verticals currently supported. In this particular vertical, only the originator is required to register to process electronic payments with integrated data flows, although all participants in the chain of payments can access the remittance advice.
One of the main benefits for Austrlian corporate and government sectors is that little or no investment in IT or changes to existing front and back office systems is required to make or receive payments. This benefit also applies in markets being pursued outside Australia.
Given the solutions ability to improve remittance processes, treasury practitioners in Australia are now far more interested in adopting electronic payments to drive internal efficiencies, improve working capital and increase their control over payment operations to reduce fraud exposure, improve accounting/reconciliation and enhance cash forecasting.
The industry view in Australia is that electronic B2B payments can:
- Lower remittance processing costs: Paper-based payment transactions are costly due in large part to the manual processing requirements. Electronic processing of payments and remittance data removes many of the personnel and other expenses that are required to handle paper remittances.
- Accelerate cash flow: E-payments, particularly same day settlement, improve cash flow and forecasting predictability, and decrease day’s sales outstanding (DSO), all of which eliminate the uncertainty of mail and enhance cash management processes. This applies to payers too, who can better control the timing of payments and better manage early payment discount opportunities.
- Expand fraud controls: E-payments provide an improved audit trail, and are now being integrated with standard fraud controls.
- Improve data accuracy: Cheque processing is prone to higher error and exception processing rates than e-payment processing. Accurate electronic remittance data can be automatically posted to accounts receivable (A/R) systems, eliminating manual reconciliation and re-correlation procedures.
The same technology is also being leveraged to provide next generation electronic bill presentment and payment capabilities (EBPP), otherwise referred to as e-invoicing for business and consumer verticals.
International payment networks can carry both payment and remittance data; however they are largely limited by the amount of data they can carry across their systems and as a direct result remittance information is sent:
- As a separate communication via mail or email particularly by small to medium-sized businesses in the UK and the US.
- As supplemental elements included with a payment in an ISO 20022 or non-ISO 20022 initiation message.
- By value-added networks (VANs) that provide remittance data transmission services for payment re-association.
Cheques stubbornly remain the preferred choice for business and government payments, particularly in North America and the UK.
The US leads the way in the provision of remittance with e-payments. The ACH and other settlement systems carry both payment and structured remittance data in non-ISO 20022 messages.
Remittance components in the US can be accessed by a financial institution, the customer directly or they can be passed to another financial institution via a clearing format.
XML-based Remittance Standards
Currently there is tremendous support for international XML-based remittance standards in order to provide horizontal co-operation between vendors and integrators in the corporate environment.
Current international ISO 20022 initiation messages do not permit their usage as a remittance advice message only. This inhibits the ability to complete the business process from payment initiation through to reconciliation and receivables processing.
An ISO 20022 extended remittance development is, however, being proposed and the scope of the development is as follows:
- Provide a ‘remittance advice message’ that allows the originator of message to identify where the remittance advice is located for a related payment.
- Provide a ‘remittance advice location message’ that allows the originator of the message to identify where the remittance advice is located for a related payment.
This is good news for clearing houses in all markets particularly as they restrict the amount of remittance information allowed across their systems. Expanding their offerings to include the ability to handle remittance information in XML with a link to remittance information will allow them to leverage ISO 20022 without unnecessary duplication of payment features.
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