The advent of cloud technology promises to revolutionise messaging services and also to open up a host of value-added services that financial institutions can offer to their corporate clients. It also enables close collaboration between banks, their technology providers and companies, which is key in achieving global standardisation so that the needs of businesses may be met.
The goal is therefore to move from the traditional legacy and proprietary solutions to something that commands global recognition. The ISO 20022 standard is gaining traction as the financial services industry’s universally-recognised messaging scheme, although it was developed without the cloud in mind. How the two are brought together is important.
That much of the cloud’s potential as yet remains undeveloped is also due largely to the fact that relatively few communities have yet agreed on what form the connectivity protocols to be adopted should take. Installations and documentation can vary significantly from one bank to another, although as the leading presence in business management software SAP has made valiant efforts to achieve a greater degree of harmonisation.
For Nordea and its peers, five basic tasks must be tackled in developing cloud-based services to achieve their full potential. These can be summarised as follows:
- Breaking down the competition boundaries through greater collaboration between financial institutions, technology providers and integrators.
- Achieving global reach, through state-of-the-art connectivity.
- Removing fragmented local operations, through the introduction of mutually-agreed best practices.
- Developing joint initiatives that expand the scope and sophistication of traditional financial services.
- Rethinking the roles of all the parties involved, including enterprise resource planning (ERP) systems vendors, banks, integrators and corporate clients.
The first steps have already been achieved in certain parts of the world, such as the US and Germany. The latter has seen a number of its banks offer Electronic Banking Internet Communication Standard’s (EBICS) solution, while the Nordic countries are in the process of replacing the previous proprietary bank security protocol with web service. Moreover Europe is a relatively mature market as regards how banks deal with messaging, with a lead over North America where the majority of US payments are still by cheque and paper-based. However in other respects the US could be said to have an advantage; for example in allowing remittance in wires and automated clearing house (ACH) transfers and having definitive settlement schemes without an equivalent of the single euro payments area (SEPA).
As a dominant force in business software, SAP attempted to gauge progress by embarking on a review towards the end of 2011 of existing connectivity between its corporate clients and their banks. The study confirmed that the group and the top 17 global banks share many of the same major corporate names on their client roster. As a large number of corporates also have multiple relationships with a number of banks, SAP realised that it could speed up the work towards achieving collaboration by reaching across various financial, business and supply chain processes.
Jointly organised workshops and regular interaction between banks such as Nordea, SAP and other participants quickly identified the five main action areas outlined above and identified how and where banks are seeking to improve the services offered to corporate clients so that an appropriate platform could be developed. The ambition was to influence SAP’s preliminary concept of a platform to serve all banks, which in the past have competed fiercely in the technology space and treated it as a means to lock-in customers. Traditionally, each bank attempted to promote its individual technology offering as superior to those of its rivals.
However, the development of the cloud,coupled with new initiatives such as Google Wallet, a mobile consumer payment service, means that non-financial institutions have effectively closed the gap, leaving banks to refocus their efforts on service levels as the main area of competition. For some corporates, service hinges on having as near to 100% availability as is possible, for others it means a second check to eliminate the potential for any duplicate payments being made.
Whatever the priority, banks are looking to their technology providers to support their efforts and help them deliver these enhanced services. If a corporate client wishes to communicate with a selected group of banks, SAP is positioned to offer the options of a web service with net connectivity, EBICS, or even a more basic proprietary solution for banks with a local, regional or even global client base.
So banks have come to recognise that battling each other for market share with their proprietary solutions in the corporate bank space no longer makes sense. While there is still keen competition, competing on standards and formats, security, delivery technology in a way that leaves the shared corporate with too many delivery solutions to maintain has become a no-win situation. In this particular arena, the banks need to co-operate, and SAP as an intermediary cloud service provider can accelerate the adoption of a more simple and straightforward environment for the corporate market.
Progress has already been achieved towards standardising the syntaxes and harmonising the content of messaging between corporate clients and their banks. As well as looking at a common technology platform approach, both Nordea and SAP are members of a group, including other banks and major corporates, working together under the title of the Common Global Implementation (CGI) plan. CGI has worked steadily at honing a total of around 900 different data elements – a massive syntax that covered every conceivable requirement from a corporate – down to a more manageable total of around 200. Of this lesser total some are mandatory, optional or bilaterally determined. The latter data element group allows for value added services to be added, if so desired.
Keeping Pace with Corporate Growth
With the so-called ‘BRIC’ economies of Brazil, Russia, India and China coupled with other emerging markets offering the best hope for business growth over the years ahead, more corporates are looking beyond their traditional territories. Banks need to be able to maintain relationships with their corporate clients as they expand into new markets so, for example, a major Scandinavian conglomerate with international operations such as IKEA can continue using a Nordic bank with their global partner banks as the company moves into new countries.
Nordea, with activities in 10 countries, would describe itself as a regional bank that recognises a growing number of its corporate clients are spreading their activities further afield via overseas subsidiaries, operations and production facilities. The tendency with global standardisation is for major companies to concentrate payment flows and financial transactions to their in-house banks. This concentration of flow is a major target area for a bank such as Nordea, so that it can service its clients and their subsidiaries in all EU countries, without any actual physical presence there. Indeed, this is the ambition of the SEPA initiative and one that is being realised. This is a natural and logical step forward, as the first euro member country within Nordea’s network had completed SEPA Credit Transfer (SCT) migration by the end of last year.
Payment factories and in-house banks have been a driving force for standardisation, with the impetus further helped by the ISO 20022 and its predecessors. Main in-house bank (IHB) functionality means that through eXtensible Markup Language (XML) messaging, the parent company can now make payments on behalf of its subsidiary which was not standardised until quite recently. So the receiver of funds in another country is immediately aware that although payment came from the parent, the actual payer was its subsidiary. The very same concept allows identification of seller references for the automation of receivables in the seller ERP.
Global standardisation is also helping to eliminate fragmented local markets, although this remains a work in progress. Nonetheless countries are growing closer to each other, a process likely to be accelerated in 2014 when SEPA becomes mandatory in eurozone countries and again when non-eurozone countries follow in 2016. Companies active in these regions want SEPA services and it makes sense for them to extend them to their operations in other regions.
This poses the question of whether the financial services industry can comfortably shoulder the burden of maintaining all of these local services once SEPA migration escalates. The logical answer is that the chances of success and decrease of dual costs will be enhanced by removing any fragmented markets and attempting to harmonise towards a global market. Ultimately there is no reason why a single global standard for payment messaging cannot be established. A growing awareness sends testimonials that globally designed standards can accommodate all local services as well.
Developing joint initiatives that build on the scope and sophistication of financial services is all about innovation. While traditionally the industry has been tardy, banks are now keenly aware that being innovatory allows them to focus more on their service to the customer and their credentials as a reliable services provider. Today’s banks now think very differently about how they can best offer services. Global standardisation has brought co-operation with all stakeholders, foremost corporate clients and ERP vendors.
In many global regions banks are keen to innovate, but can find that a conservative culture impedes their progress. The industry also has to be culturally aware, and if customers are reluctant to abandon traditional paper-based processes, it cannot push the pace of change too hard. The Nordic countries have proved more ready to embrace change through cooperation however, and banks active in these countries have been able to make progress.
SEPA is already testing abilities elsewhere in Europe and beyond, with a varying pace of change from one country to another. Some countries are still in the very early stages of migration to SEPA, others are more advanced in their adoption, while Finland managed to complete it by October 2011. Nordea rose to the challenge of providing a conversion service, supporting corporate clients that had yet to replace their older ERP solutions and others that had purchased third party solutions for mapping from the old syntaxes to XML. The success of this conversion service was reflected in the recent announcement fact that it will be abolished from supported service and that 100% migration has taken place among both corporate clients for SCT.
Adoption of SCT has been a significantly slower process and at present probably stands at no more than 40% in other euro countries. Whether the target of reaching 100% by the end of February 2014 can be achieved remains open to question. Adoption of SEPA Direct Debits (SDDs) is even further behind and here fragmentation appears likely to continue, which serves to underline the need for co-operation with other players.
A Vehicle for Unity
SAP’s early collaboration cloud initiative, the SAP Financial Services Network, is an excellent example of building this unity, as a provider of connectivity and enrichment and also serves as a basis for jointly-developed value-added services offered by all financial institutions. All those willing to participate can equally share in the benefits.
Success also depends on joint initiatives in which each party is willing to reconsider their role. As an entity with a multitude of relationships with banks and corporates, SAP has played a co-ordinating role in bringing them together. Relatively few corporates have the know-how and technical expertise to embark on harmonising the integration of their business systems and processes with their financial institution’s corporate banking services. This void requires them to bring in outside integration and data consultants.
So now that the ‘era of the clouds’ is underway there are still challenges to be overcome, with a seminar taking place in Helsinki on 11 October to get this latest process underway and another in Stockholm planned shortly. So long as the information flow to all parties is maintained and collaboration replaces competition, the full potential of the cloud can be realised for the mutual benefit of all parties concerned.
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