Published: August 01, 2012
In this month’s cover story, ‘From London in 2012 to Basel in 2013’ we highlight the fact that one of the important outcomes of Basel III is the development of relationship banking. Relationship banking should not be seen as a fuzzy concept of going out for lunch every so often and asking after each other’s children. Instead, it reflects a closer way of working, based on the full spectrum of a corporate’s, and a bank’s needs, not simply the delivery of particular products and services. For a relationship banking model to work, corporates need to communicate effectively with their banking partners. Furthermore, in addition to exchanging information efficiently, this data needs to be integrated with internal systems to automate financial processes such as reconciliation, cash positioning and payments. These all rely on an effective connectivity strategy. In this edition’s Treasurer’s Voice, we look at how corporate treasuries and shared service centres (SSCs) are connected with their banks and the outstanding challenges that remain.
Over 140 companies participated in the Treasurer’s Voice over a four-week period between June – July 2012, of which 50% represented organisations with a turnover of $1bn or more. All regions were included, with 40% from Europe and 41% from North America. Forty per cent of respondents were finance directors/ CFOs, group treasurers or regional treasurers. A further 37% also held senior treasury positions, while most of the remaining 23% were responsible for treasury technology. These statistics reflect the high quality of the findings, with people who are responsible for, or who have a good level of understanding of bank connectivity issues responding to the survey.
Until relatively recently, corporates in most countries (with the exception of France, Germany and Belgium) had relatively little control over how they communicated with their banks, and were effectively beholden to their banks in terms of the tools they were provided with. This often resulted in a proliferation of banking systems, which frequently used different formats. This led to increasing difficulties in creating a single view of cash and inefficient processes for payments and reconciliation, as well as high costs to maintain multiple systems.
There were a number of multibanking initiatives before SWIFT opened its doors (albeit not very wide initially) to non-financial corporations. Some of these are bank-neutral, such as FIDES (Switzerland), Isabel (Belgium), EBICS (originally Germany, now also France) and ETEBAC (France, now superseded). Treasury software vendors such as SunGard, and a number of banks themselves also launched successful multi-bank channels. While these tools continue to have market traction, they also paved the way for the introduction of SWIFT Corporate Access by demonstrating to banks that their relationship with corporate customers could be enhanced rather than eroded by communicating through a bank-neutral, multi-bank channel. Furthermore, it became increasingly clear that the use of different formats by banks and system vendors was detrimental to corporate efficiency, which also had the effect of damaging corporate-to-bank relationships. This in turn led to a variety of standards initiatives, the most successful of which has been ISO 20022 based on XML, which is now becoming a recognised industry standard.[[[PAGE]]]
We asked respondents how they communicate with their banks today for making payments, and retrieving balance and transaction information. This information was provided not only for group treasury, but for regional treasury centres, SSCs and local finance departments. In general, we found that companies are developing a cohesive connectivity strategy, in that they are using the same technology (e.g., web-based electronic banking systems, host-to-host or SWIFT connectivity) to support different parts of the business. A cohesive strategy, however, is not the same as cohesive technology, as when using individual bank systems in particular, there may be a multitude of different systems in place, each of which needs to be maintained individually, with diverse integration and security requirements.
Web-based electronic banking systems provided by banks are unsurprisingly the most popular connectivity solutions, not least due to the ease of implementation and low costs (figure 1). Amongst larger companies, however, host-to-host connections and SWIFT connectivity are increasingly preferred options, in order to process higher volumes of data and streamline the connection with multiple banks. SWIFT is also becoming more popular amongst smaller companies, but is not yet the connectivity method of choice, primarily as these companies typically have fewer banking relationships, so the business case for SWIFT may be less compelling. Laurie McCulley, Partner and Head of Treasury Strategies, Inc.’s technology practice says,
“There are no surprises here. We would expect to see headquarters and regional treasury initiating high value payments via bank web channels, but also through other connectivity options, as these results demonstrate. SWIFT is typically used for treasury payments originated by headquarters treasury and for bulk payments initiated by shared service centres.”
Typically, companies are using the same method for making payments as retrieving balance and transaction information (figure 2) although a slightly higher proportion of SSCs used host-to-host connections for payments. Laurie McCulley, Treasury Strategies, Inc. continues,
“We would not have expected such a large proportion of shared service centres to use banks’ web-based solutions to retrieve balances; however, this may be a result of cost considerations, and SWIFT connectivity may be the last stage of optimising SSC operations. The 41% of respondents who use host-to-host, SWIFT, and other connectivity methods demonstrates the multiplicity of options available to SSCs for bank connectivity.” [[[PAGE]]]
Neil Rapson, Director, Host to Host Channels, Cash Management, Barclays notes a growing trend towards host-to-host channels,
“It is interesting that the majority of companies in this survey continue to use banks’ proprietary web-based systems for electronic balance & transaction reporting and payments as opposed to accessing banks’ services through their ERP or TMS (i.e., host-to-host connectivity). Host-to-host connectivity has been growing significantly over recent years, and we anticipate that this will continue as companies see the benefit of integration.”
Neil Rapson, Barclays comments,
“The proportion of companies using SWIFT to connect with their banks is quite high in this survey, reflecting the large proportion of European and North American respondents, who are currently more likely to use SWIFT than those in other regions.”
SWIFT connectivity is becoming an attractive connectivity choice for large multinational corporations, particularly amongst those headquartered in Europe, closely followed by those in North America. SWIFT is also growing in popularity amongst Asian companies as they expand geographically and develop sophisticated treasury and SSC functions. Early adopters of SWIFT, and those with dedicated treasury IT functions, are most likely to connect directly to SWIFT (28%) but the majority (70.7%) now choose to connect indirectly through a service bureau or member concentrator, provided by their bank, TMS vendor or third party. Although SWIFT is gaining increasing traction amongst smaller companies, this trend is weaker than amongst larger companies that typically work with more cash management banks. Laurie McCulley, Treasury Strategies, Inc. suggests,
“We are seeing the majority of new SWIFT connections now take place through a service bureau, so the proportion of companies connecting directly is likely to decline over time. There would appear to be quite a large proportion of companies that use banks’ service bureaus. These may be mid-sized companies, or services recommended by banks but delivered by third parties. The variety of ways to connect to SWIFT is continuing to grow with myriad service bureau models emerging, such as service bureau access packaged as part of a TMS solution and managed direct connections.”
Neil Rapson, Barclays concurs,
“It is not surprising that such a large proportion of those using SWIFT decide to do so indirectly. Corporates are seeking to benefit from the same degree of communication efficiency and consistency as their banks, but they do not necessarily have the same appetite for investment in the necessary infrastructure. Consequently, working with a third party service bureau that has the required skills and infrastructure can be an efficient and cost-effective way of achieving this.” [[[PAGE]]]
As figure 4 illustrates however, there is still some progress to be made in ensuring efficient, streamlined bank integration, particularly amongst those that work with multiple banks and do not use SWIFT. However, bearing in mind that research projects tend to be an opportunity for people to air their grievances, it is perhaps surprising that almost 20% of respondents indicated that they had no particular challenges. This was quite a curious finding. Although the largest proportion that responded in this way had a turnover of less than $250m, and are most likely to be single-banked, large multinationals also noted that they had no connectivity challenges, despite these same respondents indicating that they had very low straight-through processing rates. One has to conclude that either expectations are low, or that the treasury and finance organisation has somewhat shielded the treasurer from the operational challenges that exist!
Amongst those using connectivity methods other than SWIFT, the problem of fragmented information, multiple connectivity points and the associated costs of connectivity was raised by 39% of respondents in total, representing 48% of those that indicated they had connectivity challenges. Fragmented connectivity is leading to a variety of related issues, such as the inability to construct a complete daily cash position (23%) and diverse formats (30%). These figures increase to 29% and 38% respectively once those that expressed that they had no particular connectivity challenges are excluded. Inadequate information, which is not necessarily an issue related to the connectivity method used, and lack of integration are also significant issues.
The high proportion of responses in each of these areas illustrate that there is still significant progress to be made. Part of this needs to be corporate-driven, by reviewing and revising the connectivity methods in place, being realistic about where the problems are, and discussing ways of addressing outstanding challenges with their banks. Addressing these issues also needs to be a bank and vendor priority, to resolve integration issues, and support standard formats. In addition, some banks are working more closely with network partners to enable third party bank account information to be channelled through their electronic banking system, particularly in regions such as Asia and Africa. Neil Rapson, Barclays notes,
“The types of challenges identified by respondents come as no surprise, and there is a great deal of work going on across the industry to address the issues of integration and standardisation. One of the difficulties, however, is that although the potential exists to streamline the flow of information between corporates and their banks, there remain differences at a bank and country level in terms of the quality, timeliness and granularity of data. The growing use of ISO 20022 standards will be instrumental in addressing this; however, there remain varying degrees of preparation across the industry. The differences between countries will be resolved in Europe at least by the rollout of SEPA, but some countries will enjoy less detailed information than they have been accustomed to in the past.”
Laurie McCulley, Treasury Strategies, Inc. suggests,
“All of these challenges would point to the need for SWIFT solution, and these are the issues cited most frequently in SWIFT business cases, along with the need to obtain cash visibility and therefore control over cash in the wake of the financial crisis.” [[[PAGE]]]
Many treasurers and finance managers recognise the need to enhance bank connectivity to solve some of these challenges, and create a more streamlined, integrated cash and working capital environment. We asked companies whether they had plans to address bank connectivity. Thirty-eight per cent had plans to do so, while a further 32.6% had recently undertaken a project to do so. From the results above, however, it appears that there are still a variety of issues to be addressed. Twenty-nine per cent had no plans to do so, which is a high proportion of companies bearing in mind the challenges outlined above. Once again, it appears that expectations are low, or there may be a lack of knowledge about what possibilities exist. Without a complete and accurate cash position, it is impossible to make informed cash management decisions, monitor counterparty risk effectively or manage working capital. Furthermore, inefficient processes in key financial activities such as payments can create significant financial and reputational damage. Without automation of collections posting, credit limits with customers are not freed up, which may hinder new business growth.
With a variety of competing projects, however, it is often difficult to justify a connectivity project ahead of other priorities. In the largest proportion of cases (32%) the need to reduce costs and increase efficiency is the primary driver for change. Lauren McCulley, Treasury Strategies, Inc. confirms,
“We see a number of companies exploring connectivity options in effort to achieve optimal connectivity, primarily to reduce costs and enhance efficiency. Cost reductions are centred on redeployment of IT resources required to maintain legacy, varied methods of connecting to banks. It is also important to note the importance of centralisation as a driver. If you surveyed only companies centralising payments or collections, virtually all of these would be reviewing their connectivity options.”
The need to improve integration is also an important catalyst (15%). However, in 42.5% of cases, connectivity is not a discrete project, but one element of a wider project to centralise treasury or finance activities, implement a new TMS or ERP, or change banking relationships. Lauren McCulley, Treasury Strategies, Inc. continues,
“Most companies pair bank connectivity decisions and SWIFT projects with other treasury technology projects or even organisation-wide ERP implementations, with bank connectivity the foundation for financial processes and technology.”
Neil Rapson, Barclays explains that there are other important factors in reviewing bank connectivity decisions,
“38% of respondents are planning to review bank connectivity in the future, and it is likely that multi-banked organisations in particular will consider SWIFT. Initially, implementing SWIFT is rarely a cost-driven decision, although there can be a considerable impact on IT infrastructure and maintenance costs by retiring multiple existing banking systems. The primary benefits, however, are in areas such as security and risk reduction, which should be key considerations for any treasury or finance function.”
Major business change such as mergers or acquisitions is also a catalyst to review bank connectivity. Only 1.7% of respondents indicated that SEPA was a driver for bank connectivity change.[[[PAGE]]]
Finally, we asked respondents what degree of straight-through processing they had achieved, as a way of gauging success in bank connectivity and integration and information quality in as objective terms as possible. Respondents were asked what proportion of information is integrated from their banking system into their internal systems (e.g., for cash positioning and reconciliation purposes) without the need for manual intervention, typically referred to as straight through processing or STP. As figure 6 illustrates, the results are quite mixed. A remarkable 35% lack a connection between their bank system(s) and internal systems altogether. Only 25% of companies indicate STP rates of more than 75%, while the largest proportion, 39%, have STP rates of 25% - 75%.
To understand these figures further, we broke the responses down according to the size of company. Figure 7 shows the breakdown of responses amongst those that indicated an STP rate of more than 95%. Initially, it was tempting to assume that the largest companies would invest the most in ensuring that processes were as streamlined as possible. As this data reveals, however, only 14% of companies with a turnover exceeding $1bn have achieved this, presumably due to the on-going difficulties with rationalising bank connectivity and standardising formats and data richness across all banks. Larger mid-caps ($500m - $1bn) and $1-5bn multinationals fare better, with 29% in each case indicating a high STP rate.
In contrast, figure 6 demonstrates that 35% have yet to integrate their banking and internal systems efficiently. This is broken down further in figure 8. The data illustrate that STP remains difficult to achieve amongst companies of all sizes, both large multinationals with complex requirements but more resources, and smaller organisations with more straightforward business needs, but typically fewer technical resources. Neil Rapson, Barclays says that corporates should be aiming higher in their STP expectations, [[[PAGE]]]
“The STP rates that companies mention here are less than impressive, and perhaps expectations are unreasonably low. Companies should expect an STP rate well in excess of 90%. In some cases, the low response may be the result of a mixed group of participants. Group and regional treasury functions should not find it difficult to achieve high STP rates, but local business units may be more involved with reconciliation of operating cash flows, which may account for lower rates of STP in some cases.”
Laurie McCulley, Treasury Strategies, Inc. on the other hand, is not surprised at these findings,
“Bearing in mind the challenges of using multiple bank connections outlined earlier, it is not at all surprising to see only 10% of respondents achieving greater than 90% STP and 50% achieving less that 50% STP. Many companies are now focused on centralising payables and receivables, implementing SWIFT connectivity and direct file transmission to achieve greater STP efficiencies, reduce costs and enhance controls. Even information delivered via a single channel such as SWIFT must contain sufficient information from counterparties to facilitate STP. More organisations are moving to ISO XML formats to increase integration of bank information with ERP source records, such as iDoc numbers.”
The striking differences in STP achievement, and the challenges that still exist in corporate to bank connectivity, demonstrate that there is still substantial progress to be made in communication, integration and automation. Many of the tools required to address these challenges are well-established, but there are frequently organisational and technical impediments in each organisation. The benefits of efficient bank connectivity and integration with internal systems can be enormous, and underpins an effective cash, liquidity and risk management strategy. This poll suggests that those that can leverage these benefits can create significant competitive advantage.
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