Effective 19 November 2011, the Federal Reserve Banks (FRBs) and The Clearing House Payments Company (TCH) plan to implement enhanced message formats to accommodate payments containing extended remittance information (ERI) on their respective US dollar wire transfer systems. The current remittance capacity of a Fedwire/CHIPS payment is 140 characters, while the new message formats will be able to carry up to 9,000 characters (approximately 30 invoices) of remittance information along with a wire transfer payment order.
Interestingly, this development finally aligns wire payments with checks/automated clearing house (ACH) payments in terms of informational value: remittance documents are routinely sent with checks and the ACH payment format in the US was enhanced in 1987 to allow payments to carry remittance information as an addendum.
In the context of the business environment that dictates the growth of wire payments, it is important to note that global trade volumes are expected to continue growing faster than world gross domestic product (GDP). In a recent report, Global Insights, McKinsey & Company and World Economic Forum (WEF) forecast that trade will grow by nearly 9% per annum between 2000 and 20201.
At the same time, imbalances will continue to drive international capital growth. By 2020, the total global funding surplus is forecasted to reach US$21 trillion. This would be concentrated in few countries, thus incentivising other nations to connect to the surplus countries for capital generation and trade. As a result of this trade activity, payment volumes will also continue to grow and the need for ERI to travel with the payment will become increasingly important.
The Demand for ERI
Recent ERI developments are a culmination of years of research and lobbying by corporate user groups and associations in the US. The Association for Financial Professionals (AFP) 2005 Wire Transfer Survey found that 17% of incoming wire payments to corporations require research to properly reconcile and apply, costing an average of US$35 and 30 minutes of time. The study surveyed 371 US corporate respondents and the typical respondent had an annual sales turnover of US$1bn-$4.9bn.
A 2006 FRBs and TCH report, ‘Business-to-business Wire Transfer Payments: Customer Preferences and Opportunities for Financial Institutions’ concluded that corporations value an expanded message format with structured and standardised remittance information. The FRBs and TCH survey of 381 US corporate respondents, as well as eight focus group discussions in several US cities, found that corporates are willing to pay an additional fee for a wire transfer message that included ERI.
In 2007, 92 companies (drawn from the Fortune 100 and the middle market under the umbrella of the AFP) sent the FRBs/TCH a statement of support saying they will use the service if it is provided.
These statistics prove that the lack of standardised ERI is holding back the adoption of wire transfers, a fact that was again confirmed by the AFP 2010 Electronic Payments Survey. The survey found that two of the top four barriers to the adoption of electronic payments are:
- Inability of trading partners to send or receive automated remittance information with electronic payments (77%).
- No standard format for remittance information (72%).
About 25% of the 484 respondents believe that the introduction of ERI with wire transfers will increase their organisations’ use of wire transfers for domestic transactions.
Clear and Strong Benefits
Currently, the lack of complete and structured information appended to the wire transfers payment messages leads to higher manual intervention for the beneficiary and follow-up communication with the sender. ERI can help solve these issues.
For example, ERI will provide value to beneficiaries by:
- Significantly improving the informational value of a wire payment message.
- Enhancing the straight-through processing (STP) rates of accounts receivable (A/R) matching for incoming trade and commercial payments, effectively reducing manual intervention.
- Reducing the follow-up communication with the originator of the payment.
On the other side of the payment equation, ERI will provide value to the originators by:
- Reducing follow-ups from vendors and enhancing their satisfaction.
- Reducing cost of communicating remittance information through alternative methods.
- Allowing urgent/high value payments to be sent as wires, if currently being sent through checks/ACH due to lack of information capacity in a wire.
* Applicable only if the originating
and the beneficiary banks are members of MT103-Remit Message User Group defined
*Applicable only if the originating
and the beneficiary banks are members of MT103-Remit Message User Group defined
Source: HSBC Global Payments and Cash Management
‘Network Effect’ Needed for Success
Unlike other product/service innovations, where a participant can benefit by being first to market, the success of ERI will be dictated by how many other players join in. This is particularly true because neither the FRBs/TCH in the US nor SWIFT globally have attempted to introduce a compulsory mandate to originate or report ERI as of yet. As per FRBs/TCH, it will only be mandatory for Fedwire/CHIPS member banks to receive ERI effective Nov 2011; origination and reporting will be at a participating bank’s discretion. Therefore, for an originator to send ERI to a beneficiary, banks on either end of the transaction must be able to support ERI. In the case of cross-border payments, often there will be one or more intermediary banks that will also need to be able to receive and pass on ERI.
In addition, banks and corporate users would be able to more easily originate and report ERI if the vendors providing the enterprise resource planning (ERP)/electronic data interchange (EDI)/payments systems enabled their solutions to originate and process ERI through standard file formats.
As things stand today, the ERI reporting / origination proposition appears be promising for the US domestic payments as several major banks and technology providers in the US are known to be working towards establishing customer solutions in the first phase itself.
As co-inventor of the ethernet, Robert Metcalfe, once stated: “The value of a telecommunications network is proportional to the square of the number of connected users of the system.”2 Interestingly, this effect that Metcalfe’s Law describes applies to ERI as well.
Global Proposition: Somewhat Wobbly Today
At a global level, the industry faces a fork in the road today: one route leads to the adoption of SWIFT’s MT103 Remit, and the other, a cloud-based independent industry utility.
Being closely aligned with the new Fedwire/CHIPS message formats, SWIFT MT103 Remit can be easily translated for seamless reporting. Currently, it is optional for a bank to accept or originate messages in the MT103 Remit format; in order to do so, it must participate in a Message User Group (MUG) created by SWIFT. It has been proposed that MT103 Remit be made a general use message so that every SWIFT member will be mandated to receive it. However, this proposal has not yet received broad consensus as it necessitates an overhaul of the core payments systems for every SWIFT member bank globally. Until that happens, the ERI, if present in a payment received in the MT103 Remit format, will be truncated and sent out as a core MT103 if the receiving bank is not a participant of the MT103 Remit MUG.
Once banks begin to receive MT103 Remit on a mandatory basis, the Fed/CHIPS ERI will have greater global relevance as any messages originated in the new Fed/CHIPS format can be translated to MT103 Remit seamlessly for reporting the ERI to beneficiaries in most countries.
However, even if the ERI crossed the US border via SWIFT, it may still be truncated if the payment needs to be then routed through local clearing systems that currently do not support ERI. Therefore, local in-country clearing systems will also eventually need to implement enhanced message formats similar to Fedwire/CHIPS in order for ERI to travel seamlessly to its final beneficiary.
By the time this occurs, file format protocols for disseminating ERI will more than likely have achieved greater global consensus. The new Fedwire/CHIPS formats for ERI have been deliberately designed to accommodate multiple formats (such as EDI STP 820, ANSI X12 and XML). While there is a general agreement that XML may be the global gold standard in the future, Fedwire/CHIPS has currently designated STP 820 as a preferred format, in deference to the demands of corporate America, which still largely supports an EDI environment. However, the move towards XML will continue unabated, even if it is gradual.
Once this happens, payments with ERI will possibly begin to originate from and be received into countries outside of US on a wider basis, driving ERI to become a globally consistent and truly commoditised offering.
Given the complexity and long timeframe of the above evolution, another school of thought has emerged that envisions a cloud-based independent industry utility which will circumvent the infrastructural issues mentioned above. Banks will still need to enhance their front-end systems to be able to originate and report ERI; however, once originated, ERI will be transferred to the utility and retrieved later by the beneficiary bank or beneficiary. This is an attractive proposition in light of the uncertainty surrounding not just SWIFT MT103 Remit but, more importantly, the in-country clearing systems. However, the disadvantage is that information sent in this way has to be re-associated with the payment later which defeats the objective of ‘information traveling with the payment’.
The cloud-based industry utility may be a practical interim solution and yield sufficient returns on investment, simply because the long-run solution is fraught with uncertainties. However, while the utility may include sophisticated logic to ensure ERI is re-associated with the correct payment, it will still not be the ‘Holy Grail’ that is represented by an end-to-end integrated payment plus ERI.
Considerations for Users
Today, payment originators wishing to leverage ERI are faced with important considerations, for example:
- How to determine whether ERI will reach the beneficiary?
- Could the payment get delayed due to compliance screening of ERI?
- How to evaluate the success of ERI for your company?
As previously mentioned, after the ERI go-live in November 2011, it will not be mandatory for a bank to pass ERI to the beneficiary customer or the subsequent bank in the payment chain. As a result, it becomes imperative for the originator to talk to the beneficiary and confirm that their bank will be able to report ERI if the originator’s bank was able to include it in the payment.
Payments containing more data are likely to yield more compliance investigations than those without. However, the screening systems utilized by banks will adapt overtime to eliminate ‘false positives’ and provide smoother passage to the ERI that relates to a lawful payment.
As the industry moves towards ERI, originators should be able to observe and measure reduced overhead cost of alternative communication channels for sending remittance information as well as reduced follow-up calls from vendors seeking clarifications on wire payments.
Beneficiaries should be able to observe and measure reduced time and cost of reconciling wire payments as well as better management information services (MIS) on days sales outstanding (DSO).
There is an unmistakable trend towards integration of the payment with the information needed to reconcile it. As more banks and technology providers join the ‘ERI movement’ and the corporate demand expressed earlier is realised, substantial benefits will accrue on both sides of a payment and as a result, the ERI proposition with continue to evolve and converge globally.
Global Insights, McKinsey & Company and World Economic Forum, ‘More Credit with Fewer Crises: Responsibly meeting the World’s growing demand for credit’ page 49, exhibit 25: ‘Funding gap or surplus for selected countries’, (http://www3.weforum.org/docs/WEF_NR_More_credit_fewer_crises_2011.pdf).
2 Wikipedia, Metcalfe’s law, http://en.wikipedia.org/wiki/Metcalfe’s_law.
To read more from HSBC, please visit the company’s microsite.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.
In order to survive, banks must get ready for an open application programming interface-led economy and develop superior value propositions for their customers.
The banking industry will meet the challenge of the new era introduced by Europe’s Payment Services Directive, but it is up to its individual members to determine whether they sink or swim.