Banking On Open Standards

Information drives business, so the more the better, one would think. But when it comes to financial information, communication between companies and their banks normally provide too little too late. But a new industry group hopes to give the quest for end-to-end financial supply chain integration a new twist.

“When I’m dead and gone, you’ll find the words ‘manual reconciliation’ carved into my heart”, the CFO of a large multinational company recently told me.

In fact, treasury departments in companies around the world all share the same problem: Every time money is transferred, a break occurs in the information flow that today marks most successful business systems.

The reason, simply put, is that computer software in companies and banks do not really understand each other. This is hardly strange, given that they were built for completely different purposes.

On the corporate side, systems such as ERP (enterprise resource planning) and TMS (treasury management systems) are meant to supercharge business processes and boost productivity. As a result, they have expanded outwards to include branch offices, subsidiaries, suppliers, service providers and customers. The amount of information transported over these networks is huge. Openness and interoperability are crucial, hence the rapid development of standardization initiatives driven by large companies and industry associations.

Banks, on the other hand, have focussed traditionally on centralising their settlement operations, credit management and trade execution. Essentially, their systems are meant to hook up to those of a limited number of other financial institutions such as clearing houses or other banks. The automation and standardization initiatives developed by banks for their own use usually do not take into account the corporate-to-bank communication requirements.

When the two worlds meet, the results can be traumatic. For instance, most software systems used by clearing houses in the United Kingdom to process payments offer space for only 18 characters in which to describe a transaction – hardyl enough space to convey the complex information financial departments need to match individual payments to a mass of invoice numbers, purchasing orders, credit notes and cash discounts.

Without this information, costly manual operations are required to investigate, identify and match the payment and the invoices. Also, customers forced to wait for their money are naturally not very happy. Similar inefficiencies occur in the presales and the sales processes, where the handling of purchase orders, acceptances, orders, delivery notes, and invoices are still manual and thus costly and prone to errors.

Which is where TWIST comes in. TWIST is a non-profit industry group set up by Royal Dutch Shell and sponsored by major corporations such as General Electric, Cable & Wireless and HP. They have been joined by financial service providers such as Citigroup, JP Morgan Chase, ABN Amro, Standard Chartered Bank and Voca, one of the world’s largest automated clearing house.

TWIST’s goal is to enable effective straight through processing (STP) from end to end of the financial supply chain, irrespective of the way the processes are transacted, the service providers that are involved and the system infrastructure that is used. To achieve that, TWIST has developed a set of non-proprietary XML-based standards in three significant, interlinked, financial processes, namely

•    wholesale financial market transaction processing
•    commercial payments & collections, e-invoicing and working capital finance
•    cash management

“For many years corporate treasurers had to wait for their relationship banks and bank-controlled providers to offer services that would enable them to execute their core activities efficiently”, says Tom Buschman, chairman of TWIST. “Most operational treasury activities such as payment processing, supply chain financing and credit management are traditionally delivered by the finance industry via proprietary solutions of individual banks”, he says. Big companies who deal with many banks have to struggle with a myriad similar, but incompatible solutions.

“TWIST, in effect, is a good catalyst to address the problem”, says Sarah Jones, EMEA Corporate Treasurer of HP. By providing a set of open standards for both businesses and banks to work with, it is laying the groundwork for instance for standardized remittance information to be transferred from the payer to the recipient, either within the existing financial networks or separately over the Internet, SWIFT or via a clearing house’s network. This information can then be used to automatically reconcile bank statement data with the additional information companies need to keep their books in order and to comply with ever stricter auditing rules.

For over a year HP, Voca and UK-based Burns e-Commerce have been actively developing and endorsing the TWIST standard together with corporate peers and financial institutions such as Office Depot, Westcoast, RBS, HSBC, Citigroup, Credit Suisse, JPMC, Barclays and Mizuho.

Initial results are promising. For companies, the benefits include cost reduction, cash allocation improvement, increased customer experience. And banks, by offering a common exchange platform, can now offer new value added services to corporate customers, such as account receivable reconciliation, account payable securitization and invoice discounting.

Besides the business need for straight through processing, another major driver in this area is SEPA, the “Single Euro Payment Area” initiative by the European Commission and the European Central Bank, which aims at harmonizing payment services and wholesale transaction processes within Europe over the next two to three years.

To help achieve this goal, TWIST and its bank-owned counterpart SWIFT have jointly developed a standard called the ISTH Payment Kernel as the core for corporate-to-bank implementation of SEPA. “Leading banks are now realizing that open standards and open market can be an opportunity for them to grow and to reduce their cost base”, says Sarah Jones. Corporations, on the other hand, can now approach their banks with a clear set of requirements for automated services, based on open standards.

Hopefully, that will give them all the information they need to succeed in an increasingly networked world, thus taking a load off the heart of both corporate treasurers and IT professionals.