Published: October 01, 2009
In last month’s edition of TMI, J.P. Morgan introduced its new series addressing the topics that matter most to treasurers today by focusing first on risk management. In this second article, we look at the opportunities and barriers to transactional and process efficiency, both amongst banks and corporate treasuries, and how confronting the impediments to efficiency can contribute to an effective treasury strategy. Optimising operational and financial efficiency are among the primary objectives for corporate treasurers, so efforts that can be made to enhance these areas are likely to result in financial advantage and process efficiency.
Visibility for efficiencyIncreasing operational efficiency in treasury is closely connected to our previous topic, risk management. There are a wide variety of ways in which treasurers can increase their operational efficiency, which in turn mitigates the risk of error and fraud. Furthermore, efficient business processes reduce costs, which reduce pressure on margins, and facilitate better decision-making based on greater visibility over information and transactions. Efficiency improvements could include:
- electronic banking removes manual processing and payment statement storage;
- e-invoicing removes postage cost and time in transit;
- ACH payments offer improved account credit time scale compared to cheques.
Financial efficiency also involves optimising the liquidity structures that support the needs of the business. This includes rationalising account structures, particularly in Europe where the 32-country reach of SEPA has prompted treasurers to question the efficiency of maintaining multiple in-region accounts. Companies are also increasingly seeking to reduce the number of bank relationships to reduce fragmentation, build deeper relationships and achieve greater liquidity concentration. [[[PAGE]]]
One of the issues that we are advocating at J.P Morgan is a Rulebook approach for creating, implementing and proliferating common standards amongst banks.
One of the foundations for achieving financial efficiency is to have full visibility over cash flow in all currencies and countries. While this should be straightforward in theory, it can be a complex feat in reality, particularly as banks frequently store and communicate different information in disparate formats, and despite attempts at rationalisation, companies will often work with multiple banks. There are three elements to addressing this: firstly, the channel through which corporates communicate with their banking partners; secondly, the format in which information is presented; and thirdly, interoperability between systems to ensure that information flows in a timely, accurate and complete way. For example, looking at bank connectivity, SWIFT Corporate Access, explained further below, enables companies to communicate with their banking partners through a single channel. Furthermore, future generation technology will also increasingly enable global banks to provide transparency of transactions and positions across a customer’s network of partner banks. For example, J.P. Morgan is already providing real time statement reporting to clients, with high quality reference data to assist with reconciliation and booking.
Some of the best-publicised initiatives that are underway are those that aim to standardise the format of financial messaging between counterparties which in turn facilitates greater interoperability. Standardisation has the potential to play an important role in enhancing efficiency by allowing data to be transferred between systems and counterparties in a consistent way. This eases the process of system integration, which is typically a major overhead for both corporate treasurers and their banking partners, and enables data to be passed between systems without losing or truncating the data held within each record, such as reference information used for reconciliation.
The desire for standardisation is not new; indeed, the financial services industry is one that prides itself on generating standards, and sometimes seems as if it has more standards than any other industry! However, a standard cannot be truly described as such unless it gains widespread adoption and is used consistently. This has been one of the pitfalls of previous efforts at standardisation, with adoption often restricted to a small group of industry participants. Today, however, the scene is set for substantial progress towards standardisation in the form of ISO 20022 financial messaging standards, based on XML. J.P. Morgan is an early adopter of this new generation of messaging standard.
There are various reasons why ISO 20022 is succeeding where previous efforts have failed. One is the support of SWIFT, whose messaging infrastructure SWIFTNet carries financial messaging between over 8,000 banks and now over 500 corporates globally. Furthermore, ISO 20022 is the format of the new SEPA (Single Euro Payments Area) payment messages. Although there has not yet been widespread adoption of SEPA payment products, this will undoubtedly happen as plans are refined to set a definitive end date to domestic payment products, which will add significant weight to ISO 20022 as a universal format.
In the meantime, with a plethora of legacy formats, standards and interfacing still in active use, all of which pose barriers to greater efficiency, it is up to individuals within banks and corporates to embrace XML-based standard formats. This is not always easy to achieve in practice, with people having vested interests in legacy technology or lacking the necessary technical awareness. This is particularly the case in treasury where the breadth of responsibilities and technical sophistication has developed significantly over the past four or five years, but where the primary skill sets are business-focused rather than technology-focused. ERP, TMS and middleware providers have taken great steps towards supporting XML-based formats to facilitate customer transactions and enable greater interoperability. In emerging economies such as in Asia, deploying new technology and leveraging new technical standards is often easier as there are fewer legacy issues and vested interests to address. Working extensively in regions such as Asia creates new challenges but also opportunities, as the financial markets are taking a different evolutionary path from those of North America or Western Europe. For example, the use of mobile technology as a core communication channel rather than being supplementary to fixed telecoms provides new ways of communicating financial messages and transactions. The most important trend, however, amongst companies that are headquartered in, or operating in emerging markets, is to adopt significant automation to maintain their competitive edge and reduce costs.
Embracing new standards and technology creates apprehension and risk, and it is the fear of failure that is perhaps the greatest barrier to adoption. Looking at the business challenges that standardisation addresses: high integration costs; operational risk, and lack of STP, treasurers and their banking partners should be clamouring to implement new standards. As it is, adoption is still a trickle rather than a rush. One of the issues that we are advocating at J.P. Morgan is a Rulebook approach for creating, implementing and proliferating common standards amongst banks, to reduce risk for every financial participant by ensuring a shared understanding and certainty of delivery. In addition to the perception of risk, there is inevitably a cost of change, which may be difficult to justify in pure cost-benefit terms. In reality, standardisation creates significant advantages, both tangible and intangible, not least reducing the cost and risk of maintaining multiple interfaces, and increasing the quality and consistency of financial information for decision-making, reconciliation and reporting. [[[PAGE]]]
Standardising financial messaging formats and ensuring greater interoperability between systems is one half of the solution to the challenge of fragmented bank connectivity; rationalising the physical connections is the other. Over 500 corporates have now implemented SWIFT under the relatively recent SWIFT Corporate Access programme. Although this is still a minority, many of whom are very large corporations, the scene is set for a portable, bank-agnostic approach to corporate-to-bank connectivity, and J.P. Morgan has been actively promoting and implementing SWIFT with its customers. As a single channel shared by banks and corporates alike, the potential for optimising a multitude of corporate-to-bank communications, and vice versa, is significant. For example, eBAM (electronic bank account management) is now in advanced pilot stage, and is eagerly anticipated by both banks and corporates alike. eBam allows companies to automate the opening, closing and signing authority mandates for bank accounts, which is typically a manual and inefficient task. The development of the Trade Services Utility (TSU) is highly complementary to banks’ proprietary tools. It enables corporates to extend the value of SWIFT further into the financial supply chain, automating some of the trade processes which frequently impede efforts to increase operational efficiency and accelerate the cash conversion cycle.
We mentioned SEPA in respect of ISO 20022 standards, but SEPA itself should be a catalyst for corporates to introduce major new efficiencies into their business operations. Around the world, particularly in the Middle East and Asia, banks and regulators are looking at the SEPA concept with interest, and considering how similar schemes could be adapted to satisfy regional requirements; in Europe, however, although the industry is teetering on the brink of success, this is being delayed by complacency. As with financial messaging standards, the perception of risk and cost are hindering adoption, but there are other barriers too. The perception that SEPA is simply an administrative change, which is placed at the bottom of the priority list is probably the greatest. However, this view disregards the substantial opportunities that SEPA presents. For example, by taking advantage of consistent payment and collection methods, within the legal framework of the Payment Services Directive (PSD), which will be implemented in November 2009, companies can rationalise both their external account structures and internal processes, such as introducing pan-European centralised payment and collection functions. With SEPA bringing such considerable benefits, adoption is surprisingly slow; however, the launch of SEPA Direct Debits in November 2009, which creates significant opportunities for payments and collections efficiency, both for consumer and business payments, may encourage greater take-up. Corporate treasurers should be prioritising migration to SEPA payments internally, and petitioning governments to mandate rapid adoption.
The scene is set for a portable, bank-agnostic approach to corporate-to-bank connectivity.
However, another barrier to adoption is that SEPA requires collaboration and agreement not only between different types of organisation, but also across European countries. Inevitably, each country’s governments and regulators are primarily concerned with representing and protecting the interests of organisations and individuals within that country. In countries like France, for example, adoption of SEPA is a gentle affair, and in these instances, more regulatory pressure will be required to drive it. Banks such as J.P. Morgan that operate globally and represent the interests of its clients who operate both within and beyond the Eurozone, have already put in place the necessary technical investment and have geared up with the skills and expertise necessary to help corporate clients to take advantage of the efficiencies that SEPA brings, but until there is greater regulatory force and a defined end date for migration, the perceived barriers will continue to prevail.
Outside Europe, regulatory pressures and variations between countries, in terms of legal framework, culture, currencies, clearing systems and payment products, create even greater challenges and barriers to efficiency, and the ability to achieve visibility and centralisation of cash flow, particularly when operating across borders. At J.P. Morgan, we consider that one of our most important roles is to insulate our clients against the difficulties of banking in different countries and the need to become familiar with the conditions and constraints. Instead, we maintain a high degree of local expertise and adapt our regional and global solutions to accommodate the requirements in each country. This allows our customers to take advantage of efficient cash and liquidity management solutions, and opportunities for process automation to support the needs of their business.
In newer regions such as Asia, transactional efficiency is potentially hindered by some banking systems which are still in their comparatively early stages of development. This means that branch banking is often more significant than in other regions, which creates a series of separate challenges to efficiency. Companies are seeking tools from their banks to automate processes and leverage electronic payment and collection methods as much as possible, together with front-end tools that enable efficient workflow and protect them from regional anomalies as much as possible.
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While SEPA will ease the process of making euro payments within the Eurozone, and national schemes such as the UK Faster Payments Scheme can accelerate the payments process, making payments is still often a time-consuming and expensive task, not least when doing so cross-border. In Asia, we recently announced enhancements to our US dollar clearing service offering through Asia Direct. These developments further assist clients who are seeking the fastest and most efficient means of making US dollar payments to banks in Asia. Clients now have direct access to a larger number of banks across a variety of clearing systems; for example, the solution’s coverage has been expanded to members of Japan’s Tokyo dollar clearing system. In addition, J.P. Morgan has invested in an intelligent routing technology which streamlines processing and speeds settlement by enabling the fastest channel for delivery. This shields customers from the technical rigours of implementing new industry initiatives, and enables us to be ‘format-agnostic’ when accepting payment instructions from customers, so we can support a wide range of formats including Edifact Paymul, IDOC, MT103, XML formats etc.
Another way in which we facilitate the most efficient payments service for our customers is by leveraging the capabilities of leading local providers in countries where J.P. Morgan has no direct presence. This enables our customers to take advantage of comprehensive capabilities globally in a convenient way as part of their relationship with J.P. Morgan.
The challenges to greater efficiency are, in many cases, the bastions of an older world that, with new objectives, technology and willingness to collaborate, can be scaled and overcome. With every new initiative that is adopted and that becomes part of the financial fabric, the world becomes smaller and global business becomes a little easier. With change comes risk, but lack of change arguably brings greater risk. Many of the initiatives we see today that bring opportunities for greater efficiency, lower costs and more rapid access to information and transactional capability are not out of reach for most corporate treasurers. These initiatives can act today as a catalyst for change, commercial advantage and financial efficiency. With a Rulebook concept to ensure a consistent approach between market participants, and a universal commitment to collaboration, the barriers are surmountable, and the financial landscape has the potential to be transformed.
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