From Format to Content: Taking standardisation to the next level?

by Bart Van Buggenhout, Senior Product Manager e-channels, International Cash Management Division,  KBC Global Services

The implementation of both the Single Euro Payments Area (SEPA) and the Payment Services Directive (PSD) has supplied the technical and regulatory foundations to level the European playing field for payments. We at KBC’s International Cash Management Division detect through our customer contacts that this outlook towards standardisation in payments is welcomed by international corporate customers, public administrations and financial institutions alike. Europe’s current payments landscape – a complex patchwork of local standards to be adhered to – limits re-use of cash management and payments infrastructure, necessitating costly investments and maintenance for all parties involved.

First step: format standardisation

One of the major potential benefits of the introduction of SEPA for corporate customers lies in a side-effect at the technical level: the European Payments Council (EPC) has decided to deploy the ISO 20022 (UNIFI) message standards for the exchange of information between parties in a SEPA transaction. (See Figure 1.)

The ISO 20022 message standards define how to structure eXtensible Mark-up Language (XML) files to exchange payment-related messages between customers and their banks. The EPC defined the SEPA Data Formats as a valid subset of the ISO 20022 message standards and highly recommends that corporate customers use these SEPA Data Formats to initiate SEPA payments at their banks. And all corporate customers using SEPA are doing this, or are they? This subject is often touched upon by KBC’s consultants in international cash management during customer visits.

Format versus content?

To answer that question it is important to realise that today’s SEPA transactions are not ‘new’. As they aim to replace existing country-specific payment types, we can distinguish two SEPA subtypes:

• Cross-border SEPA transactions: replacing cross-border payments in EUR between participating SEPA countries

• Domestic SEPA transactions: replacing domestic payments in EUR (~95% of payments volumes within the SEPA zone)

Both SEPA subtypes can be described using the EPC’s SEPA Standard Formats. The distinction between them lies deeper and is situated at the content level. The differences at that level are driven by the historical implementations of payment-related functionalities.

Cross-border transactions are – by definition – exchanged between countries. This exchange called for international agreements on format and content, resulting in a working but – compared to domestic payments – basic set of functionalities supported by all participants. The EPC’s SEPA Standard Formats in their pure form cover in full this basic set of functionalities.

It has always been the goal for SEPA, however, to replace current domestic payments as well. In order to build SEPA volumes – and ultimately replace traditional domestic payments – it had to be ensured that domestic business processes would keep functioning properly within a SEPA context. Some countries therefore decided to agree on country-specific implementations of the EPC’s SEPA Standard Formats to enable continuation of existing domestic functionalities within a SEPA context, as e.g.:

• Structured communication used for reconciliation purposes

• Company identification identifying an involved party

These agreements have been documented in country-specific ‘Implementation Guidelines’ and apply to domestic SEPA transactions. (See Figure 2.) However limited the pick-up of SEPA may currently seem, reaching this volume has partly been made possible through the existence of these Implementation Guidelines. If we look e.g., at the transaction volumes for KBC in Belgium at the start of 2010 we see that ~25% of credit transfers are SEPA payments, predominantly domestic SEPA credit transfers of course.

Everybody agrees that the support of domestic functionalities within the SEPA context is required to make the adoption of SEPA possible in the short term. It needs to be clear however that – limited in number as they are – these country-specific rules will ultimately need to disappear to achieve the ‘S’ingle in SEPA. [[[PAGE]]]

The next level: content standardisation…

It is self-evident that in order to reap the full benefit of standardisation all parties involved will need to solve the puzzle of domestic payment features. (See Figure 3.)

Most of these features have been around for decades however and have been built exclusively to support a certain country’s specific requirements for financial transactions. The impact of standardising such features at European (SEPA) or even global level will be quite severe. As a result we have up to now seen little keenness on either the corporates’ side or the governments’ side to do so. On top of that it must be said that for some features valid alternatives were not even around at the time the initial standards were defined.

A step in the right direction is the approval of the international ISO Creditor Reference Standard and its inclusion into the EPC SEPA Data Formats. Usage of this reference however is not mandatory today and it will take time before it will be widely used, let alone completely replace the existing domestic creditor reference schemes, present in 95% of the euro area.

… requires an end-to-end view

The product managers within KBC’s International Cash Management Division work closely together to ensure an end-to-end view of cash management. They have identified exactly the same challenge coming up for reporting: the current multitude of domestic formats with country-specific content will ultimately have to evolve into a standardised reporting format, based on the ISO 20022 XML standard.

In order to build SEPA volumes - and ultimately replace traditional domestic payments - it had to be ensured that domestic business processes would keep functioning properly within a SEPA context.

The outlook is bright, however, as all stakeholders in the standardisation process are aware of these challenges. In its December 2009 newsletter the ISO 20022 organisation confirmed its long-term goal of ultimately reaching a single standard. At the same time it is acknowledged that there are still many technical and legal obstacles to be overcome before this ultimate standard becomes an everyday reality. As technical barriers are being torn down one at a time the question that remains is how long the market will take to get there…or how long it will take before deadlines are imposed…

It is clear that the next decade will be filled with changes within the European payments landscape. The speed at which these changes will materialise is still a mystery in Western Europe, and even more so in Central Europe, where the economic crisis has pushed back euro introduction dates, delaying SEPA introduction as well.

Local expertise combined with a group-wide approach towards international customers will remain important for banks when offering products and services to their customers, and all of us in KBC’s International Cash Management division remain available to be your experienced guides using our innovative products, such as KBC Global Cash Concentration and W1se Corporate e-Banking.

KBC Global Cash Concentration

KBC Global Cash Concentration (KBC GCC) is a state-of-the-art cash management service which simplifies the management of your accounts abroad and in Belgium. On a periodic basis (e.g., daily), the balances of your participating accounts at third-party banks are automatically verified: surpluses are automatically centralised on your KBC master account and deficits are automatically settled out of your KBC master account. The service can be configured to your needs, e.g.:

• avoiding inefficient low-value transfers

• setting ‘target balances’ on participating accounts

w1se Corporate e-Banking

W1SE Corporate e-Banking is a web-enabled system which offers a uniform banking interface to companies and their affiliated entities worldwide. Payment and collection instructions in domestic and international formats can be forwarded to KBC Bank, its branches and subsidiaries, and even to third-party banks. W1se allows users to consult all accounts registered in the application at any time, using their native language. This is what we refer to as A Global Reach with a Local Touch. [[[PAGE]]]

We’re with you all the way

We at KBC firmly believe that SEPA and ISO 20022 will ultimately bring both you as a customer and us as banks the benefits we are both looking for. We at KBC are there for you to steer you through this complicated and evolving European payments landscape. As the International Cash Management division of KBC we are ready for this journey with a clear vision of the future, backed by a strong strategic plan. The combination of our competitive product portfolio and strong local knowledge makes us your ideal partner: we’re with you all the way!

Clear focus and commitment

With a reinforced focus of KBC’s Corporate Banking divisions on our home markets in Belgium and in Central Europe, namely Bulgaria, the Czech Republic, Hungary, Poland and Slovakia, KBC is and will continue to be a very strong regional player in Europe.

The product managers within KBC's International Cash Management Division work closely together to ensure an end-to-end view of cash management.

This regional approach is further supported by KBC’s own network of foreign branches and subsidiaries in the Netherlands, France, the UK, Germany, Ireland, Spain, Italy, the US, China, Hong Kong, and Singapore. These will continue to guarantee the supply of KBC’s products and services – including cash management and payments – for our internationally oriented customers.

As a full member of the international banking alliance IBOS (International Banking - One Solution) KBC’s cash management capabilities stretch even further to cover both the Americas and most of Western, Eastern and Central Europe.

Full range of cash management solutions

KBC Group provides a full range of cash management solutions:

• Cash pooling: notional and target-balance pooling over all KBC group banks;

• Payment services: domestic and international transfers and collections. KBC Bank has access to the major clearing systems;

• Balance and transaction reporting: on-line and end-of-day information on balances and transactions;

• Electronic bank access: different solutions are available, e.g., access through the SwiftNet network or through W1se Corporate e-Banking

Our dedicated team of cash management consultants develops solutions that
fully meet corporate customers’ requirements.