ISO 20022: The way forward in AP/AR management
It can take a very well-known company (or a very determined treasurer) to push through changes to banking processes that end up having universal benefits.
LVMH, also known as Moet Hennessy Louis Vuitton, is one such brand. In 2014, it spoke to The Corporate Treasurer about its strategy to set up a payment factory that could serve its businesses throughout the globe, including in Malaysia, Hong Kong, Singapore, and even Macau.
Let’s look at the challenges it had to overcome in this typical multi-country setup:
1. Divergent systems, languages, communication channels, different payment requirements
2. Contrasting regulatory environments, processes, and demands for more information on reporting
3. Differences in payment and settlement infrastructures
So, what issues does this create? There are two core components that need to be considered:
1. The payment instruction for the value of the transfer
2. Transfer details that are useful to the counterparties
Legacy payment systems were only ever concerned with the former, leaving it to the banks and customers to match the right data with the payment instruction. In turn, this created disharmony, and the need to reconcile the two components.
The inclusion of business information with the value transfer instructions is now more common in modern payment systems.
What was critical to LVMH’s success was its determination to adopt a global standard to transact and receive bank statements. By the end of 2013, it could boast using the single format in more than 50 countries for 300 entities with 120 banks, delivering the headquarters greater efficiency, improved working capital and visibility of bank flows.
ISO 20022 XML has been in the market for about a decade. Its core strength is its versatility – for example, all currencies can be processed through the payment factory, as the ISO 20022 XML format is rich enough to send all required information to banks.
And it is not only companies that are pushing for ISO 20022 XML change. Increasing compliance requirements mean banks also have an incentive to put robust systems in place to ensure know-your-client procedures are being handled appropriately. “Regulators are mandating that data is not only captured but also transmitted verbatim,” explained Balaji Natarajan, Head, Asia Capabilities & Client Solutions at ANZ. Of course, banks have been aggresively getting on
“Traditional issues are centered on handling local language information” added Natarajan. “But with the ISO schema being adopted by local regulators as a template for their domestic payment systems, we see corporates starting to align.”
The ISO standards for payments/cash management envisage the structure to contain not just the payment/value transfer information, but also supporting data regarding central bank reporting, business context and information, counterparty information, as well as how to handle and process the information in the message itself.
Most central banks, including those in Singapore, Australia, India, and China are adopting ISO standards for their new and real-time payments systems. The structured message efficiently captures the reporting needs of screening and transaction monitoring and much more business data than just value transfers. Before the end of the year, and with the help of Japan, Myanmar will have installed a real-time gross settlement system that will inevitably improve its communication with local banks looking to improve their cash handling and settlement.
The wider availability of low cost bandwidth for data transmission, together with stability in the ISO standards, has allowed application and service providers in treasury management or the enterprise resource planning (ERP) space to incorporate and build support for handling automated reconciliation using standard schemes, especially ISO 200222 XML.
In the past, Swift and XML were the preserve of the largest top-tier multinational companies, but it is now on the radars of smaller companies that believe they deserve the same level of service and wish to operate in a bank-agnostic environment.
Again, with the development of the cloud based service providers, the cost of adoption and customisation is less of constraint.
Financing the supply chain in Asia
Focusing on Asia specifically, one interesting area of development is that of financing the supply chain. With very large manufacturing hubs located in places such as China and the Mekong Delta, multinational companies are anxious to ensure the financial stability of their suppliers, especially as funding can be harder to come by in these markets.
Integral to this is the purchase order or invoice being made visible to counterparties to the banking system. In the past, there have been separate independent portals, Natarajan explained, but larger corporates are now savvy about how that data can be transferred. “We have implemented a number of deals where customers transmit and receive information in ISO format.”
Payables financing, whereby suppliers can receive cheaper financing earlier than their invoice payment due date, is a viable method of tackling the supplier issue, but the processes for getting a programme in place are complex and time consuming – there are a lot of moving parts.
In brief, suppliers can suggest all or a portion of their invoice payments are paid as soon as the buyer approves them. This should not affect the balance sheet and the buyer also benefits, as the value of invoices is not deducted until the original payment due date is reached.
And this is where ISO standardisation is extremely handy. Not only can you provide the complete invoice details as defined in the industry, but you can also denote whether the specific invoice is eligible for payables finance.
From a procedural point of view, all treasury and accounts payable needs to do is send a single file, with the appropriate indications, and the banks can then reach out to the suppliers to accept early payment in the payables finance programme. “It is not just the data that is transmitted, but also how it needs to be handled,” Natarajan added.
The process can also help distributors with any funding needs they may have. Some companies, such as automakers, have set up closed-loop systems, whereby the manufacturer and the distributor have well-integrated order-to-cash cycles that are monitored closely. “That source of information can be channeled back to the bank for distributor finance. And ISO 20022 XML is a good way to be consistent,” Natarajan said.
Of course, for large companies with global legacy platforms, the thought of re-engineering their systems to become ISO 20022 XML-ready may be too much to bear. With so much more rich data coming through the pipeline, ageing accounting systems may not be able to handle the information.
With the rapid development of cloud technology, more vendors can deliver streamlined services out of a box, helping connectivity between the corporate end user and the bank. Delivery of messages through this more automated method means treasury departments are immediately empowered to get a better hold of their working capital and payments reconciliation.
“If you look three years ahead, the process of standardising payments communications and regulation are the key themes to look out for,” Natarajan said. “Ultimately, improved technology lowers costs and makes it much easier for trade to take place.”
If companies can improve their working capital and reduce their funding costs, then it is no wonder they will move mountains to get everyone talking the same payments language.
Head, Asia Capabilities & Client Solutions
Global Transaction Banking, ANZ