In a nutshell, standard formats substantially reduce the technical complexity of payment transaction processes. What KPMG often see in its projects is an incredibly large number of payment formats for globally active corporates, the maintenance of which causes pain from PAIN for IT systems. The task requires significant time and knowledgeable resources, as regular changes to formats need to be considered for each country and/or counterparty respectively.
It is therefore no surprise that harmonisation and standardisation initiatives – such as Common Global Implementation – Market Practice (CGI-MP) – increasingly gain in importance. Standard formats are being jointly defined by banks, corporates and service providers under CGI-MP via five working groups (WG). These address issues relating to credit transfers (WG1); bank account reporting (WG2); debit transfers (WG3); electronic bank management, aka eBAM (WG4); and bank services billing (WG5).
The issue of standardised formats is also relevant for corporates that suffer pain resulting from the payment factories which have already been implemented. Briefly, two basic approaches are applied: reducing costs and improving process efficiency. Firstly, corporates adopting the “volume bundling approach” seek to reduce process complexity by centralising activities to manage a large number of countries and different formats. We have dubbed most implemented payment factories as ‘manufactories’, as the manual effort is still fairly high due to the different formats used. The term ‘payment factory’ should be reserved strictly for fully-automated setups.
The aim of the second approach, “domestic instead of foreign payment”, is to avoid cross-border payments. The format issue is of major relevance to both approaches on the outbound side. We should also consider two frequently neglected inbound perspectives: externally, in the form of account statements, direct debits and status notifications; internally, in the form of individual payment files supplied by all connected subsidiaries. All of these examples cause corporates pain, as it’s rare for a fully harmonised structure covering local entities and both external perspectives to be executed.
Streamlining the Process?
Let’s examine the three examples more closely. The (external) inbound use of the CGI-MP account statement format can increase the clearing rate – that is provided transaction banks offer the option of dedicated reporting, using the camt.052 or camt.053-notification as opposed to the MT940/BAI2 account statements employed previously. Furthermore, the payment factory obtains the necessary transparency into the feasibility of all payments using pain.002 format notifications and can respond in real time should payments be refused. Details on the reasons for refusal are also contained in status notifications, removing the need for a call to the bank for clarification
On the outbound side, the use of a standard format has the advantage of streamlining processes, thus reducing complexity and increasing efficiency, among others. Ideally, all credit transfers are sent to the transaction bank using pain.001 notifications, regardless of whether payments are urgent, cross-border or domestic. Although country-specific particularities need to be considered, the maintenance and continuation of a single format is much easier than maintenance and continued application of many local formats. Therefore, one harmonised format set alleviates the pain for your payment factory.
Focusing on the internal inbound instance, CGI-MP formats can be used for internally delivering payments and are not merely relevant for dispatch to banks. The conversion of payment formats, which has caused corporates a lot of pain, is no longer material to processes in terms of time and maintenance effort. Any compromises necessitated by the conversion are history, thanks to standard field filling. At the same time faster processing – and thus a later internal cut-off time – are made possible. This approach especially benefits those companies with many subsidiaries connected to their global payment factories.
Another perspective that should be highlighted is the scalability of the payment factory and the technical advantages arising from the implementation of one global format. The harmonisation of both in- and outbound formats facilitates more rapid connection of subsidiaries or newly-acquired entities, resulting in a flexible, scalable treasury organisation. Furthermore, the use of CGI formats allows group-wide transaction banks to be changed with significantly less technical effort and cost. Treasury thereby creates a type of “plug-and-play” to connect newly-selected transaction banks.
At the same time, the flexible eXtensible markup language (XML) structure on the outbound side enables smooth adaptation of new as well as country-specific requirements, since banks (which are part of the initiative) already know how to handle necessary adjustments in the respective file formats. Although the CGI initiative does not guarantee complete harmonisation of formats between banks, the effort to adjust optional fields is far less than that involved in the use of bank-specific formats. Therefore, the objective is to use the CGI-MP formats as the sole applied format in the payment factory and have maintenance centralised in treasury IT, thus helping to reduce the complexity of the data structure. The harmonisation of formats means that a payment factory can precisely that – as opposed to a manufactory – and be better utilised while also guaranteeing optimisation in areas other than treasury.
To sum up, maintenance effort and cost are lower than before while higher process efficiency is achieved by implementing one global format set. CGI-MP formats lay the groundwork to benefit from the full potential of a real payment factory that can be deployed centrally in a centre of excellence or shared service centre (SSC).
CGI-MP formats are equally applicable for companies in the process of setting up a payment factory, or seeking to do so, as well as companies that already have centralised payments. To ease PAIN, it is essential that all aspects relating to formats are fully considered alongside a professional appraisal of the process. This contributes to a state-of-the-art treasury and, ultimately, helps companies take a major step forward towards payments excellence.
Treasuries should be centralised but also extend "strategic autonomy" to decentralised units because they need to be responsive and close to the customer, argues Richard Scase, author and business forecaster on global megatrends.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?