We who work with cash management are of course proud of being part of the major industry revolution SEPA (Single Euro Payments Area). Since 1st of August 2014 SEPA was finally implemented for credit transfers and direct debits in the euro area. The new standardized payment formats currently carry over two billion payment transactions in a month across the SEPA-zone. For corporate treasurers SEPA gave single payment scheme and possibility to harmonize their euro payments, while some corporate IT functions have been able to bank clear monetary benefits thanks to technical simplicity.
However, since there are numerous of local clearing and settlement infrastructures in place even in Nordics, many of us keep asking a relevant question: So what if we got a new technical format for local payment, we are still doing local payment with local service characteristics? So did something actually change? The right answer is of course yes, although this needs more clarification. I would say that SEPA gave the face for ISO 20022 standard and catalysts the whole wave of changes and innovations that we see ahead today. This pioneering initiative brought together all stakeholders facilitating and creating real dialog among industry, including bankers, public authorities, governments, and of course corporates.
From SEPA to Global?
At the moment there are numerous of payments, clearing and reporting initiatives ongoing and live in the financial industry. For instance in Sweden the real-time payment platform SWISH that uses standard ISO 20022 messages has been introduced. Denmark has built intraday payment and real-time payment system using ISO 20022. The best thing for corporates is that the development does not only limit to Europe but we have live initiatives in Asia-Pacific and North America as well. The standardization has helped to bring more openness and competition to the cash management domain that has always been quite mysterious playfield ruled by specialized market practices and people with in-depth skills and niche systems. And as we know, for corporates, the market openness should mean better quality for even better price.
What are the practical benefits for a corporate?
It is no news that we live in globalized world. For a back office of an international corporate one practical consequence of better standardization is that more and more financial processes can be handled centrally. The most classical oldest centralization benefit is of course cost savings. But more and more decisions are made based on enablers like quality and scalability. Centralization or even outsourcing of accounts payable is a proven business case for many corporates. But to choose centralized technology to manage the last mile of purchase-to-pay has remained more untouched. While global corporates have typically made a strategic choice to build a payment factory, there is more variation in mid-size corporates, although they would have centralized or outsourced their accounts payable.
One pragmatic reason for mid-segment being behind in development is the lack of direct business case for them. Some companies have found the business case from SWIFT while others had already moved to other modern direct bank connections, such as EBICS. Commoditized banking technology simply out-dates business cases that are built from replacing expensive host-to-host connections, since so few are using those anymore. On the other hand business cases built on automation suffer greatly from the fact that FTE costs of the last mile of purchase-to-pay are only a fraction of the whole process.
For the reasons given above the best business case for a payment factory is indirect. The moment you decide to centralize your accounts payable process you are also centralizing your risk. You need to work with your security and segregate dangerous working combinations to mitigate the risk of human errors and fraud. You need to work with your process to keep the control on cash, and to the process itself, while centralization pushes down the unit cost and takes care of your business case. But a sophisticated tool is far better and simpler for this. And it is easier to audit, maintain, and rely on. Since tools can’t create shortcuts to processes, but people do. And tools can automatically force the right process to be used.
Standardization has lowered the level of investment needed for a global payment solution. Since now there are more vendors whose innovative solutions can be used globally, and as always competition has also created some price erosion. Meanwhile, the business case for accounts payable centralization and outsourcing keeps being very relevant for most international corporates. Therefore payment factory is an investment that you make to mitigate the totally unfair security risk that centralization may bring. It is the risk of security and fraud, a risk of losing the control and visibility on your cash.
We at OpusCapita simply love standards since frameworks and organizations like ISO 20022 and SWIFT has helped us greatly to extend our offering to new countries and banks that used to be beyond our resources and reach. Standards help us to focus in deploying our end-to-end solutions for purchase-to-pay and order-to-cash processes for best possible user experience and process benefit.