10 forces shaping corporate bank connectivity

A G X S I N S I G H T S A RT I C L E

The past five years have witnessed the emergence of anumber of new operational models, regulatory changesand technology paradigms in the corporate treasuryand banking sector. The result is radical changes to thestructure of treasury functions within multi-national cor-porations. The changes are also impacting the relation-ships between corporations and banks—both the wayin which banking products are selected and the servicelevel expectations treasury organisations hold for finan-cial institutions are evolving. There is also a significantparadigm shift in the technical approaches used toexchange information between corporations and theircash management banks.

GXS has compiled a list of the ten primary forces trans-forming the way in which corporations and banks com-municate electronically. The list is based upon studiesof market-leading multi-national corporations based inWestern Europe and the United States. The ten forcesare not mutually exclusive, but rather interdependent.Five of the forces outlined are changes that affect over-all corporate banking practices—new organisationalstructures, payment strategies and management mod-els. The remaining five are technology developmentsthat are impacting the electronic communicationsbetween banks and corporate clients.

Transforming Corporate BankingPractices (#1-5)

Single European Payments Area (SEPA)—Starting inthe 1990s, the European Union began the SEPA initiativeto harmonise and simplify payments across the 15 coun-tries which have embraced the Euro as the national cur-rency. The goal of SEPA is to establish a common set ofregulations, processes, standards and technologies for mak-ing payments across the Eurozone. Consumers and corpo-rations will enjoy consistent pricing and service levels

regardless of their country of citizenship and the location oftheir bank account. As a result, citizens and corporations willbe able to make payments in any Eurozone country as easilyand cost-effectively as they could in their home nation. Witha harmonised approach to payments across Europe, corpora-tions will begin to shift their country-specific finance,accounting and treasury functions to broader Pan-Europeanmodels. Additionally, selection criteria for banking partnersand products will evolve as financial institutions expand theirgeographic footprint and introduce new, low-cost cross-bor-der payment services.

Payment Factories—Historically, corporations have main-tained separate Accounts Payable (A/P) organisations in eachcountry to provide the necessary local tax and paymentexpertise. However, there is a growing trend towards central-ising A/P functions into shared service centers, otherwiseknown as “payment factories.” The shared service centersenable opportunities for higher levels of efficiency in theback-office. Productivity improvements can be gained byeliminating country-level staffing and by embracing bestpractices on a regional level. Further savings can be gainedby relocating A/P functions to either captive or outsourcedservice centers in lower cost geographies. Transitions tocentralised, payment factories require staffing and proceduralchanges, and standardisation of A/P applications. Manymulti-national corporations are re-evaluating their approachto payment processing as they transition to shared servicecenters.

Centralised Treasury—In addition to creating shared servicecenters for A/P, corporations are re-evaluating organisationalmodels for the treasury function. Many multi-national enter-prises are centralising treasury groups on a regional or globalbasis. Historically, corporations allowed each country tomanage its cash needs locally. Centralisation enables a num-ber of efficiencies in the areas of cash forecasting, foreignexchange and cross-border payments. However, to realise

Ten Forces Transforming CorporateBanking ConnectivityGXS Market Perspective

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the benefits, corporate treasury organisations needaccess to real-time information on account balances,investment holdings and securities prices from theirfinancial institution. Consequently, the transition tocentralised treasury models is driving higher demandfor straight-through processing of information betweencorporations and financial institutions.

In-House Banking—Many large corporations are estab-lishing in-house banks to complement centralised trea-sury functions. These banks are not officially regulatedor licensed financial institutions. However, they actmuch like a commercial bank by offering payment pro-cessing, liquidity management and collections functionsto various subsidiaries of a large, global corporation.The creation of an in-house bank substantially impactsthe corporate banking interface. Instead of each operat-ing company routing payment transactions directly to alocal bank, all disbursements are channeled through thein-house bank at headquarters. Centralised paymentprocessing applications managed by the treasury groupare configured to evaluate opportunities to reducebanking fees. Multi-lateral netting, supplier payment

consolidation and local funding techniques are exam-ples of services provided by an in-house bank.

Consolidation of Banking Relationships—Along withcentralisation of internal functions, multi-national cor-porations are also rationalising the number of bankingrelationships they maintain. Changing regulations inthe US, the European Union and countries such asChina have enabled numerous financial institutions todevelop a global footprint. Consequently, multi-nationalcorporations no longer need to establish local bankingrelationships in each country of operation. Instead, cor-porations can consolidate banking providers to theminimal number appropriate to cover the necessarygeographic footprint and offer the appropriate productfeatures. As part of the consolidation process, corpora-tions are demanding that financial institutions providelower processing fees, higher service level agreementsand stronger technical integration. Corporations aremandating a minimal set of technology requirementswhich financial institutions must comply with in orderto compete for global banking contracts.

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PAYMENTFACTORIES

Regional SharedService Centers

for A/P

ERPCONSOLIDATIONStandardised ERP

Applications

Conversion ofCheques to EFT

SWIFTCONNECTIVITYSWIFT Network

for Routing

SINGLE EUROPEANPAYMENTS AREA

Primary Bank #1

Primary Bank #2

CONSOLIDATIONOF BANKING

RELATIONSHIPS

CENTRALISED TREASURY

IN-HOUSE BANKS

MULTI-BANK CASHREPORTING

ISO 20022 XMLfor Payments and

Statements

BANKRELATIONSHIPMANAGEMENTSOFTWARE

Large File Transferof Cheque Images

ACHACH RTGSRTGS

Ten Forces Transforming Corporate Banking Connectivity

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Transforming Corporate BankingConnectivity (#6-10)

ERP Consolidation—Most multi-national corporationshave a project underway to standardise and consolidatethe various ERP applications being utilised within theirenterprise. Historically, different brands, operating com-panies and legal entities have operated autonomouslywith their own enterprise systems. Fragmentation ofERP platforms prohibits sharing of information acrossdivisions and with headquarters. Standardisation ofERP onto a common platform (e.g., Oracle 11i) enablesconsistent business practices across divisions and theutilisation of shared service centers for back-office func-tions. As multi-national corporations consolidate andstandardise their finance, accounting and treasury mod-ules, IT organisations are re-evaluating their approachto bank connectivity.

SWIFT Connectivity—Several hundred large corpora-tions have registered to participate in SWIFT’s corpo-rate access programs. SWIFT connectivity can reducethe costs and complexity associated with corporatebanking communications. Corporations utilise a num-ber of different transmission mechanisms to exchangedata with their banks. High volume data transfers typi-cally occur over private lines or Internet-based filetransfer. In some cases, older technologies such as dial-up connections and fax transmissions are still in useby smaller corporations. Web portals have become anincreasingly popular option for bank interfaces recently.With SWIFT access, corporations can replace the broadmix of connectivity mechanisms with a single standard-ised approach. Messages and files can be sent toSWIFT for routing to any of the over 7,000 bankson SWIFTNet reducing cost and complexity.

ISO 20022 XML—Otherwise known as the UniversalFinancial Industry (UNIFI) standard, ISO 20022 XMLis designed to replace the myriad of local file formatsused for payment processing around the world with asingle, global message schema. Today, most corporationsutilise EDI (e.g., EDIFACT, ANSI X12), country-specif-ic ACH formats (e.g., NACHA in the US) or legacy

banking standards (e.g., BAI, SWIFT FIN) to exchangeinformation with financial institutions. The file formatsused to send payment instructions and receive accountstatements vary from bank to bank. In some cases, cor-porations are required to send more than one type offile format to different divisions of the same bank. TheUNIFI vision is for corporations to be able to utiliseone message schema to exchange information with anybank in the world.

Multi-Bank Cash Reporting—One of the key benefitsachieved from centralising treasury functions is theimproved cash management capabilities. Treasury per-sonnel with visibility to all cash positions at bankaccounts worldwide are better equipped to performcash forecasting, borrowing and investment activities.Treasurers must be able to easily collect account bal-ance information from all bank accounts in all coun-tries. Multi-bank reporting applications developed byfinancial institutions and technology providers offeraccount aggregation services. The services consolidateend-of-day and intra-day balances for all accounts ontoa single web portal or channel the information directlyinto a treasury workstation. Corporations armed withenhanced cash visibility can make borrowing or invest-ing decisions earlier in the day, reduce probability ofovernight idle balances and accelerate the processingof exception items.

Bank Relationship Management Software—

Bank connectivity has become such a complex issuefor corporations that several ERP vendors have intro-duced specialised software modules to simplify integra-tion. SAP recently introduced its “Bank RelationshipManagement” application. The SAP module offersnative support for ISO 20022 XML and SWIFTcorporate access. Furthermore, the SAP applicationhas seamless integration with the vendor’s treasury andaccounting modules thereby lowering the barriers tostraight-through processing with financial institutions.Out-of-the-box support for emerging standards frommajor ERP vendors will accelerate adoption by multi-national corporations.



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Additional Forces

The ten factors listed above are revolutionising the waycorporations interface with their cash management banks.The list could be further extended to include technologicalforces such as Large File Transfer, conversion from cheques toElectronics Funds Transfer (EFT), and banking innovationssuch as Payments Hubs.

• Conversion from Cheques to EFT—Corporations arerapidly migrating away from cheques and paper instru-ments to Electronic Funds Transfer (EFT). The mostsignificant transition is occurring in the US, which his-torically utilised cheques as the primary B2B and B2Cpayment instrument. Credit cards, debit cards, onlinebill pay and lockbox-based image conversion are rapidlydriving B2C payments to EFT. Adoption of EFT in theB2B payments segment has been slower. However, pro-curement cards and Automated Clearing House (ACH)are quickly becoming the primary payment instrumentsfor large corporations. The result is that corporationsmust communicate a significantly higher volume ofelectronic payment instructions to financial institutions

than with cheques. For large multinationals, the netincrease in number of payment messages sent to bankscould be in the millions per year.

• Large File Transfer—Corporate treasury groups areseeking more information in faster time frames thanever before. For example, in the US the rapid growth ofimage-based cheque substitution is driving demand forcopies of cheque images to be distributed to corpora-tions. Collections organisations retain the chequeimages for customer service, record-keeping andexception processing purposes. Today, cheque imagesare burned onto a CD-ROM and shipped via courierto a corporation. The CD-based distribution is becom-ing too cumbersome and complex for most corpora-tions to manage. Consequently, financial institutions aremigrating towards Internet-based file transfer of chequeimages. However, many banks and corporations lack thetechnology infrastructure to support such high volumesof data exchange. New low-cost, high-volume servicesfor Large File Transfer are emerging, promising to fur-ther simplify corporate banking communications.



About GXSGXS is a leading global provider of B2B e-commerce solutions that simplify and enhance business processintegration and collaboration among trading partners. Organisations worldwide, including more than 70percent of the Fortune 500, leverage the on-demand services on GXS Trading Grid® to extend supply chainnetworks, optimise product launches, automate warehouse receiving, manage electronic payments and gainsupply chain visibility. GXS Managed Services, GXS’ B2B outsourcing solution, empowers customers with theexpertise, technical infrastructure and program support to conduct B2B e-commerce with trading partnersglobally. Based in Gaithersburg, Md., GXS has an extensive global network and has local offices in theAmericas, Europe and Asia-Pacific regions. GXS can be found on the Web at www.gxs.co.uk.

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10 forces shaping corporate bank connectivity

Technology