What Makes Efficiency in Bank Connectivity?

Finland is ahead of the game when it comes to banking technology. It is the first nation in Europe to adopt the single euro payments area (SEPA) Credit Transfer (SCT) programme and to dismantle its old domestic payment infrastructure (the country completed this process in October 2011). And so it was appropriate that Nordea were in Finland in November to discuss the developments and the future of bank-to-corporate connectivity with a group of corporates, enterprise resource planning (ERP) providers and bankers.

Topics discussed during the workshop included web services that allow corporates to interface with banks, the ISO 20022 XML-based global standard and the possibility of allowing an unlimited number of creditor references to be transmitted with a single payment.

Several interesting themes were highlighted in the workshop, including the fact that the road to ISO 20022 payment message standard adoption in Finland has been challenging but promises great efficiencies for corporates in the long run. Some participants at the workshop expressed concern that the ISO 20022-based payment format may not, in practice, be as uniform as we would hope, while there was also much discussion on the potential for cloud-computing web services and use of ISO 20022-based bank connectivity within ERP systems such as SAP.

Finland First

Finland decided early on that it would be counter productive to continue using its old domestic payment message standards as well as the new SEPA infrastructure for a long period of time, so within two years the country adopted the SEPA-compliant ISO 20022 payment message standards and rules and the domestic Finnish infrastructure for credit transfer was abandoned.

“Finland has been a kind of pioneer within the SEPA set-up region,” says Erkki Piironen, a SAP consultant at EAFIN Oy, and one of the participants at the Nordea workshop. “It was one of the first countries to set end dates for the local payment files. But that is not to say there haven’t been some challenges for banks and companies in adopting standard file formats that don’t have bank-specific or country-specific features.”

Adopting the ISO 2002 XML based file format (and set of usage rules) for financial messages was an important step for Finland. One of the main aims of ISO 20022 is to allow all credit transfers to be made with the same format, rather than with the many various formats that are currently in use. Corporates immediately saw that the ISO 20022 payments standard opened up possibilities for further functionalities that would allow them to make even more efficient payments.

One of the corporate participants at the bank connectivity workshop was Kati Maki-Karvia, treasury director at Finnish packaging, paper and wood products company Stora Enso. “Efficiency comes of course from automation,” she says. With operations in more than 35 countries, making efficient payments in as uniform a way as possible is high on Stora Enso’s wish list.

Maki-Karvia explains that automation can bring great improvements, while also increasing the need to mitigate the risk of errors: “There are two sides to this: on the one hand, as processes become more highly automated, a small mistake can affect the whole service process. On the other hand, automated processes can be outsourced, leaving finance administration more time to focus on control or monitoring.”

The possibility of a small automated error disrupting a whole service process raises the question of how to measure the risks, and what kind of incidents are deemed an operational risk. “In the case of financial payments, the cost for errors is so high that of course it has to be sorted out immediately. However, having an error is not ideal, so we aim to avoid this by having backup systems in place,” adds Maki-Karvia.

Web Services

While the XML-based technology is not new, it has not so far been used extensively in bank-to-corporate communication. One of the main benefits that Nordea has noticed amongst corporate clients is that no investment in IT or changes to the back office systems are required. Existing data formats are put into a digital XML file, which can then be transferred online between corporates and banks.

Using the same XML standard for communication between banks, corporates, counterparties as well as other financial and logistics service providers enables what we call ‘horizontal co-operation’ between the vendors and the integrators in the corporate environment. Simultaneously with its SEPA project Nordea has moved all file-based services to web services for more than 100,000 corporate clients. This has only been possible when documentation has been agreed by all financial institutions with activities in Finland. Naturally this also removes the previous banks security protocol. Cost efficiency also requires that previous services are abolished and it will be exciting to see how the financial market and global ERP vendors will start deploying this new connectivity opportunity. Nordea’s expectations are high for third party adoption.

ERP vendors play an important part in the process of developing common standards. The market was curious to know how one of the leading ERP providers, SAP, would use the ISO 20022 standard to innovate and improve ways in which corporates can manage their cash flows and communicate with their banks.

SAP solution manager Marton Luptak co-hosted the workshop in Finland with Nordea. He says: “When it comes to the new functionalities and innovations happening in bank connectivity, the key word is cloud. Through cloud computing, you can bring communication between banks and corporates online – offering more efficiency and visibility for both parties.”

He adds: “The usual case is that corporates have host to host connections but we are working on some generic solutions for multi-banking connectivity, which will be offered in various components and will be available in every area where we offer web services for connectivity.”

Stora Enso’s Maki-Karvia would welcome this development. She says that having multi-bank connectivity within SAP would be very beneficial for corporates: “Having the whole chain of payments – purchase-to-pay [P2P] and order-to-cash [O2C] – within SAP is something very interesting. It is attractive because it would be more efficient; there would be less administration and lower costs, less documentation and better integration with the banks.”

Creditor References

Based on the ISO 20022 XML standard, new payment functionalities have been developed that will enable corporates to gain greater control of their cash flows, their payments and their communications with banks. As well as being able to send corporate-bank payment messages online, there are other possible functionalities that arise because of the uniform payments standard.

One innovation is that corporates will be able to make one payment with multiple global references. Currently the use of a payment reference (or creditor reference) can differ from country to country, but it usually enables the receiver of the payment to automate their receivables reconciliation. While some banks allow just one reference per payment, in the workshop Nordea discussed the possibility of unlimited references – this would enable corporates greater flexibility and enable automated invoice matching. We have been delighted to see that the first corporate clients have adopted ISO creditor reference into their invoices. Over time we will support both domestic and global creditor references and when market adoption has overwhelmingly chosen the global reference then the domestic reference can be removed completely. Decision-making on removing the domestic reference from Finnish systems will take place following discussions with all stakeholders.

Collaboration and Interpretation

ISO 20022 was introduced in 2004 and, since then, the payments market has worked on interpreting how that XML-based standard will work within the payments environment. The emphasis during this process has been very much on collaboration with banks, corporates and ERP system providers working together towards a common goal.

The Common Global Implementation (CGI) group, which Nordea is involved in, is a forum for banks, corporates and vendors to discuss issues related to the ISO 20022 standard governing bank-corporate messaging formats. The group therefore has a pivotal role in interpreting and simplifying the implementation of ISO 20022.

Once there is a common interpretation of ISO 20022 within the CGI group, then there will be a strong global payment message standard. Piironen at EAFIN explains: “Once there is consensus, we will have a robust uniform standard that can be built upon and enhanced in future. I think that within 12-18 months, we will have an enhanced version of ISO 20022. In Finland, the banks already support versions 2 and 3 of ISO.”

While there have been difficulties for Finnish companies and banks in interpreting the standard, they have now made good progress in adopting a uniform payment message format. Piironen is positive: I think that in Finland we are now getting there. When the first companies implemented ISO payment functionality, it was quite difficult for them to see the benefits – it was seen more as an obligatory step. Now far more corporates and banks in Finland have taken the plunge, so we can really see that there are true benefits and of course, now we just have to encourage all the other countries to do it too. They need to take the first step, decide on the end date and make it happen.”

Participants at November’s workshop generally agreed that the banks, companies and ERP vendors are now working together and speaking the ‘same language’. According to SAP’s Luptak, a good framework is already in place: “Both banks and corporates are now working towards a common goal: to implement a communication standard that will reduce costs and increase transparency. Banks in the CGI group and ERP providers such as SAP are co-operating towards standardised solutions, based on ISO 20022, so I think we are progressing well on this plan.”

What Does ISO 20022 Promise?

If the implementation and interpretation of ISO 20022-based payment messages goes according to plan, then in future corporates will be able to use the same message formats for their credit transfers and they will be able to reach any payment system in the world, with any bank.

Achieving a common financial message format will be ground-breaking for the world of business and for the financial community. SAP’s Luptak says: “Standardisation is the key word for simplified, transparent, easy and cost effective communication channels between banks and corporates. Standard messaging formats will allow corporates to have a central payment factory architecture, a faster time to value and allows the corporate to focus on managing cash flows efficiently.”

It is now only a matter of time before more countries enter into offering SCT and SEPA Direct Debit (SDD), and therefore the ISO 20022 global payment standards, instead of their domestic payment messaging formats. However, discussion is still ongoing on how the payment format should be used. With hundreds of fields, some say the ISO 200222 credit transfer message is too big. All ongoing efforts aim to come to an agreement on global implementation guides.

Maki-Karvia voices the fear of some corporates, that the huge number of fields in the ISO 20022 payment message standard will lead to variations within the standard: “Even though we are talking about standardisation, there is still the possibility of differences in formats for different banks. For us this would entail different configurations with the associated costs and maintenance. I would still be looking for a complete standardisation.”

Maki-Karvia notes that there is much to be gained from being able to use just one payment messaging format – but that the process to achieve this has been long and is ongoing. “Before SEPA we had more than 50 different country formats for our payments so by simplifying our payment formats, we were far more automated. But it has been a great effort to achieve this, it has taken a long time and we are still waiting for the end date.”

The Future of Corporate-to-Bank Connectivity

So, as the debate continues, there is still much to be done to reach a consensus on how ISO 20022-based payment message standards should be used and implemented. Finland is ahead of the pack in Europe, but naturally this will change with the forthcoming directive (through the SCT and SDD). Full benefits won’t be realised until there is a critical mass of banks, corporates and ERP systems all using the same standard.

“The ISO 20022 will definitely change bank-to-corporate communication,” says Luptak of SAP. “This is the future and the focus should now be on these standards rather than a country- or bank-specific format. This standard has the potential to really simplify bank-corporate communications, so we now need to focus on getting everyone migrated to the standard as soon as possible.”

For the future Nordea would like to see a single syntax and single connectivity adopted globally. However, there are tasks for the next generation to fulfil the dream. We have taken the first steps but only co-operation will make this work and the feedback so far has been


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