Data flows in real time

Real-time data is a hot topic but what does it mean? Computers and data services have always been built to provide real-time data. ‘Real-time data’ currently appears to be regarded as the cure-all for several ills. The banks’ payments and cash management businesses appear to want to use it to improve their corporate customers’ service. The problem is that opinion in banks, corporates and their technology suppliers seems to differ widely, as do the solutions on offer.

The faster that money moves, the more obvious problems become. As inter-bank settlement moved from end-of-day net settlement to real-time, the intra-day balance in any clearing and settlement scheme became essential to monitor, because this balance is supported by the bank’s capital. The efficient use of liquidity can save a bank from having to deposit billions of dollars of capital in its central bank reserve accounts.

The efficient management of payments and receipts – particularly for a bank’s major corporate and financial institutional customers – therefore becomes essential to a bank in managing the working capital that it must, by law, assign to its basic business of payment processing. Thus, the corporates’ efficiency in the movement of money becomes the banks’ problem or cost.

The corporates’ problem is the same as the banks’ problem. A manufacturer buys goods from suppliers and has to pay for them. It sells finished goods to its customers and is paid for them. The treasurer has to manage the cash flow so that the working capital needed to bridge the gap between paying and receiving is as low as possible. This rather simple principle is often grandly referred to as the financial supply chain, which has a life of its own, in parallel to the business activity of making goods.

Beyond production

Anyone who has worked for themselves knows how much time the financial supply chain takes to manage, and understands that it is not enough just to make the goods or do the work. The effort of accounting for the work, invoicing for it and getting paid for it takes an unreasonable amount of time and worry because the big companies that self-employed people tend to work for are so worried about their cashflows that they forget that their suppliers need to pay the mortgage and put food on the table. It is not possible to start a business without either a tolerant bank manager or sufficient working capital until a reasonable cashflow has been built up.

Despite having observed this behaviour for decades, only now are banks focusing on helping corporate treasurers with their financial supply chains. Real-time data is part of the solution.

Control of cash

Why now? First, the nature of corporates has changed. Now larger and more international, some are larger than many banks. Operating in global markets, major companies standardised their purchase and sales ledgers and integrated them with their manufacturing systems globally to produce the required quarterly management accounts, in theory at the press of a button (according to SAP ).

Corporate treasurers can manage cash flows more easily today. Debtor days overseas will be as visible to them as in their home country. The control of cash can be measured against likely invoice receipts. Credit lines required by the company can be predicted centrally. Treasurers want credit, cash management and payment services from the larger banks that operate internationally.

Banks have changed – and specifically their payment businesses. The fees that the banks can earn, particularly from the routine banking service of processing a payment, have reduced significantly. Product management people in banks have to come to terms with the fact that a payment is not a product. When speaking at payment conferences, Eric Sepkes, vice-president and director of global financial institutions strategy at Citibank, has often asked: “Who ever woke up in the morning and wanted to buy a payment?”

Payment processing is a vital part of a bank’s service and duty that has become highly regulated, not just by the central banks, which want to reduce systemic and settlement risk, but by governments and consumer authorities that are determined to ensure that payment charges are reasonable and transparent. The EU Directive 2560/2001, which stipulates that all euro cross-border payments below €50,000 between two euro account holders in the EU must be charged on the same basis as a domestic payment, is a classic example of the extent to which bank payment charges are being forcibly reined in.

Banks must add value

Banks have to find better ways of adding value to their corporate relationships to earn their fees. Real-time data from the payment-processing arm of a bank can add to the mix. Consider the types of problem the corporate treasurer has:

• High volumes of payments going out to suppliers, which need to be paid as automatically and cheaply as possible on a given value date, and easily reconciled with the supplier statement;
• High volumes of invoices going out, and monthly statements, where automatic payment directly and quickly to the correct account with the means to reconcile payments against invoices on an automated basis can save substantial sums of money. The ability to retain the remittance data with the payment is key;
• Management of bank accounts affected by these payments, within the limits of credit set with bankers – in many currencies and countries.

Chain balancing

The treasurer’s key objective is to reduce the working capital to keep the financial supply chain balanced – not dissimilar to the management of liquidity required by a bank to support its clearing system activity. The data the treasurer needs lies in the corporates’ enterprise resource planning (ERP) systems, in the payment and clearing systems used by the banks and the corporate’s bank account administered by the bank. Improving the timeliness of payments, reducing their cost and increasing the data associated with payments are central to the treasurer’s success. Much of this data exists in the banking systems.

Treasurers recognise that they would like additional services. Could these be provided in the bank relationship:

• XML-based credit advice and statements that can be imported into ERP systems;
• Invoice dispute and discrepancy management capability for third party suppliers;
• Sophisticated reconciliation of accounts payable and receivable to the corporate?

From a technology perspective, there are three aspects to solving the problem: data management, application interoperability and connectivity between all the parties involved in the process.

There is no single solution. There is a temptation, when confronted with these generic problems, to cry out for a communistic approach to the imposition of standards for data, message types, transaction types, the adoption of general rules, and so on. Agreement on any approach would take forever, however.

Ultimately, the solution for any corporate must lie in a closer relationship with its main banker which, if it is agile enough, can supply the technology help, the real-time data and the support service necessary to improve its financial supply chain. The early adopters of ‘clever’ solutions, agreed between large corporates and their bankers, may lead to solutions that are more generic.

How is this funded? The benefit of any investment goes to the corporate. Because the cost justification to the corporate for the necessary investment in technology and service should be based on interest savings on working capital, the bank’s fees would logically be based on success in the achievement of these savings. Will banks accept that?

Several banks have seen the light and are examining the options. This will not be a level playing field, even if a common infrastructure or utility model is adopted. Where significant standards and technology investment is required, the benefits of scale must apply.

Peter Miller is director of European operations and Liz Oakes is marketing director at Dovetail Systems. Website: www.dovetailsystems.com