Trends in the banking payment landscape:
What does this actually mean for corporate treasury?
As gate keeper of corporate’ cash balances, the core treasury responsibility has always been, and will always be, to ensure the company has sufficient funds to pay all company’s obligations at the appropriate time and in the appropriate currency. Nothing new here. However, the way how corporates can pay is changing rapidly due to the different innovations and trends in the banking payments industry.
Supported by the data-driven and real time information trend, there is an ongoing movement to move towards real-time settlement payment types (e.g. instant payments). 56 countries are now providing real-time payment rails. The adoption on real-time settlement payment types does not only allow corporate treasuries to more effectively manage the company’s liquidity requirements, it also reduces the industry-wide settlement risk. In parallel, the financial industry is investing heavily in the adoption of real-time information by the usage of API, however the lack of standardization within the industry appears to be causing the primary drag on adoption. The implementation of real-time balance and transactional information will provide immediate visibility and enable faster and more informed decision making. Corporate Treasuries should evaluate if the movement towards a real-time treasury including real-time data and/or real-time payments would result in a positive business case.
Shift to ISO 20022 XML
Another hot topic in the payment area is for the forthcoming SWIFT MT to MX migration, which starts its three-year adoption plan in November 2022 within the interbank payments messaging space. This means SWIFT will be moving from the traditional MT-based messages, initially in the cash management space, onto ISO 20022 XML messages. It’s this migration that is introducing a requirement to adopt the XML Version 9 payment message – pain.001.001.09. Although the changes will not apply (directly) towards the corporates to bank formats, corporates are impacted by this migration. With the XML message, corporates have the opportunity to implement structured remittance information up to 9,000 characters (in the version 9 message) which is subject to bilateral agreements with your banking partners. Given the increased importance of data, and more importantly on structured data, this change will give corporates the opportunity to truly harness the power of intelligent automation and machine learning, data will be the fuel that powers AI to deliver real benefits to the organization. This will become a table stake in the future as more structured information will help the beneficiary automate their cash application process and reduce time consuming account payable enquiries. It will also be a contributing factor to the ultimate success of the new predictive and prescriptive capabilities that are now emerging which will redefine what is possible within corporate treasury.
What are the main considerations for corporate treasury?
Whilst there are a number of core considerations, like the status of your core banking partners and your ERP and TMS software vendors, probably the most significant concern at the moment surrounds the mandated structured address related to the MT to MX migration. So what is all the fuss around this structured address?
Well today, most companies use systems that do not support a separate field for each unique address point. The current practice is to simply merge this information into an unstructured (address line) tag. So a common example could be the address 12 Phoenix House, 18 High Street, which would typically be placed in line 1 of an unstructured address and this approach would be fine. However, with the increased focus on the use of structured data, at some point non-compliant messages will be rejected as the building number, building name, street number and street name need to be separated out and not merged from a compliance perspective.
Initial conversations with the corporate community has highlighted this is a significant piece of work. Indeed, the devil is always in the detail and Zanders has ran a snap poll in TMI last year to get a pulse check on the potential corporate impact of this single structured address change. It highlighted that 70% currently merge their line 1 address data and of this group, 52% identified a high cost of change.
The changes in the payment landscape provide a lot of opportunities for corporates to transform towards a real-time treasury organization. However, every change give its challenges, we would advise corporate treasurers to discuss with their core banking partners what the impact will be of both the transformation towards real-time payments and/or information and the impact of the MT to MX migration. As gatekeeper of corporate’ cash, its corporate treasurers’ duty to have (greater) visibility around these forthcoming industry changes.