The Benefits of ISO 20022 for Corporates and Banks

Publication: Global Treasury Briefing, Volume 2 Issue 2.

ISO 20022 is a universal payments standard that helps automate payment data flows. This article explains how it can bring efficiencies to corporates and financial institutions in terms of systems and processes, which in turn can lead to an improved bottom line. 

Payments messaging standards are not necessarily the most exciting sounding items on the financial radar, and yet developments here are having a profound effect on corporates, banks, in fact anyone with a stake in the payments business. The most talked about standard of current times is ISO 20022. This article looks at what ISO 20022 is, what it means for corporates and financial institutions, and the benefits it can bring. 

What is ISO 20022? 

The International Organization for Standardization (ISO) is a global organisation of national standards bodies. ISO 20022, the universal financial industry message scheme, aims to give the financial industry a standard platform for the development of messages in one eXtensible Markup Language (XML) rule. According to the ISO, this is achieved using: 

• A modelling methodology (based on Unified Modeling Language (UML)) to capture in a syntax-independent way financial business areas, business transactions and associated message flows. 
• A set of XML design rules to convert the messages described in UML into XML schemas. 

ISO catalogues all of the ISO 20022 messages on its website,1 in an effort to provide what it describes as a ‘flexible framework’, open for developers to categorise types of message according to a universally accepted approach. 

This is certainly something that both corporates and banks are becoming involved with, because of the cost benefits involved by integrating systems for electronic data delivery. Tom Buschman, founder, chairman and CEO of TWIST Process Innovations, makes the point that there is global support for these standards in his article, Open Standards for Payables and Receivables. 

Work is underway to incorporate other standards under ISO 20022, such as standards for derivative trading and the billing of bank services. A group of major banks is working on detailed implementation guidelines to avoid banks and their customers deviating from best practices. 

TWIST’s Buschman continues: “It is nice that open standards are becoming mature and solutions that support these are more widespread. But the key is whether a company is interested to start implementing new solutions that make use of such open standards.” 

Corporates that use payment services can start to benefit by actively engaging with their banks, as there is widespread knowledge among financial institutions as to how ISO 20022 standards can be deployed. TWIST’s Buschman suggests that corporates can simply start by using the following Australian list of user requirements for payment services in their discussion with banks. 

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Australia: High-level Expectations 

The Australian Payments Clearing Association (APCA) identified a comprehensive list of high-level expectations of customers of users of payment services. The items are similar to those expressed in Europe over the course of the last decade. 

High-level expectations of customers of payment services: 

Reliability 

• Payment services are available when customers want to use them. 
• Payment services tend to prevent or identify and correct mistakes by customers. 
• Payment services have established service levels and adhere to them. 

Security 

• Payment services will prevent unauthorised access to information or value. 
• Payment services will prevent unauthorised modification of information. 
• Payment services will manage the risk of fraud. 

Efficiency 

• The payments system supports ongoing innovation and enhancement of payment services. 
• Payment services are responsive and timely, both in confirmation of payment and delivery of value. 
• Customers get the payment information they need with each payment. 
• Payment services support customers’ own business processes (such as account reconciliation). 
• The payment system allows value for money services to be offered to customers. 

Convenience 

• Customers find it easy to use and access payment services. 
• The payment system is ubiquitous, allowing payments from anyone to anyone. 
• The payments system facilitates choice and competition in payment services offered to customers. 
• The payments system does not prevent or hinder the customer’s decision to change financial service providers (switch accounts). 

High-level expectations of participants in the payments system (payment service providers who are also users of inter-bank payment systems): 

Business potential 

• The payments system will support commercial, competitive and profitable offering of payment services by participants. 
• The payment system will facilitate the development of new business opportunities and processes. 
• The payments system will permit access on objective terms. 

Global alignment 

• In seeking to increase efficiency of payments activity, Australia’s payment systems will seek to align with and influence development of global payment standards. 

Risk management 

• The payments system will minimise or remove counterparty and operational risk in payments. 
• Regulatory risk (in particular from competition laws) in collaborative payment innovations will be appropriately managed. 
• The payments system will monitor and seek to minimise systemic risk. 

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ISO 20022 Boosted by SEPA 

Despite its international nature, ISO 20022 adoption is finding particular support within the single euro payments area (SEPA). Dr Markus Warncke, head of corporate finance at Villeroy & Boch, outlined this in a presentation he gave at SIBOS last year, a point that was picked up by Martine Goubert of BNP Paribas in her article, ISO 20022 - What's Driving Adoption?. Warncke used the SEPA subset of ISO 20022 because it’s best practice in Europe, in his opinion. "We wanted to implement a standard that we can use Europe-wide but that also gives us the possibility to go global in the second step," explains Warncke. He believes that ISO 20022 can be a profitable standard to use, as it makes it possible to avoid the daily use of various domestic formats in the euro countries, thereby reducing complexity and increasing efficiency. 

"We had many cash management banks before where we did a lot of payments transactions and we usually used their electronic banking systems. All the multiple systems had various security steps, which added to the complexity. We use a dual verification principle that was enforced by passwords, smartcards, tokens and even diskettes in some systems. Now we have a set of homogenous security standards and don't have to maintain all these types of programmes," Warncke explains. This highlights the advantage that his company has found through standardisation. By using the SEPA subset of ISO 20022, Villeroy & Boch could achieve the following: 

• Provision of a wider set of structured and enhanced message information along with the transaction, thereby raising the efficiency in end-to-end automation. 
• Reduce application development times. 
• Decrease number and complexity of interfaces. 
• Reduce support and maintenance costs by avoiding customised or proprietary formats. 
• Increase security. 
• Optimise processes. 

Villeroy & Boch tested its first ISO 20022 FileAct payments in August 2008 and, at the time of SIBOS in September 2008, the company had 90% of its supplier payments executed through SWIFT with a SEPA format. Looking to the future, Warncke said: "Now we will turn our attention to non-euro payments - starting with the US dollar. And by the end of next year, we will have the SEPA Direct Debit format ready." This example highlights how treasurers around the world, not just in the Eurozone, can make the case for ISO 20022 and the bottom-line value it can add to corporates who adopt it. 

Standards Support 

As already mentioned, standardised messaging affords corporates the chance to replace numerous domestic formats with a single ISO 20022-based standard. This makes the communication process with payments counterparties easier and allows integration with internal systems. Elie Lasker, senior market manager at SWIFT, points out that the number of corporates using ISO 20022 is increasing (on, and outside of, the SWIFT network) for sending payments to their different banks. “Going forward, SWIFT is focussed on assisting its corporate customers and banks in further adopting ISO 20022,” explains Lasker. SWIFT is one of a number of companies and associations that are actively involved in developing and advocating payments standards. A selection of the other main protagonists are listed in the box below. 

Conclusion 

As a universal payments standard, ISO 20022 helps automate payment data flows by using a wider collection of enhanced and structured message information, avoiding proprietary formats. This makes processes more efficient, helps reduce application development times, optimises the number of interfaces required and enhances security. All of these benefits can have a positive effect on the bottom line of corporates and financial institutions, which should give ISO 20022 the impetus to continue expanding its take-up and evolving as the global payments standard. 

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Standards Organisations and Associations

CEN 

The European Committee for Standardization (CEN) is a business facilitator in Europe, removing trade barriers for European industry and consumers. Its mission is to foster the European economy in global trading, the welfare of European citizens and the environment. Through its services it provides a platform for the development of European Standards and other technical specifications. 

CEN's 30 national members work together to develop voluntary European Standards (ENs). These standards have a unique status, since they also are national standards in each of its 30 member countries. With one common standard in all these countries, and every conflicting national standard withdrawn, a product can reach a far wider market with much lower development and testing costs. ENs help to build a European Internal Market for goods and services and to position Europe in the global economy. More than 60.000 technical experts as well as business federations, consumer and other societal interest organisations are involved in the CEN network that reaches over 480 million people. 

IFX Forum 

Founded in 1997, the Interactive Financial eXchange (IFX) Forum is an international not-for-profit industry association whose mission is to develop and promote the adoption of its open, interoperable standard for financial data exchange, suitable for use by all sectors of the financial services industry. 

Forum membership is open to organisations interested in contributing to the development of open financial standards. Forum members include financial institutions, hardware, software and service firms, and related non-profit groups. The IFX Forum also promotes interoperability of industry standards by working cooperatively with other standards organizations and consortia. 

ISO 

The International Organization for Standardization (ISO) is the world's largest developer and publisher of international standards. It is a network of the national standards institutes of 161 countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. 

ISO is a non-governmental organisation that forms a bridge between the public and private sectors. On the one hand, many of its member institutes are part of the governmental structure of their countries, or are mandated by their government. On the other hand, other members have their roots uniquely in the private sector, having been set up by national partnerships of industry associations. Therefore, ISO enables a consensus to be reached on solutions that meet both the requirements of business and the broader needs of society. 

SWIFT 

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. Over 8,300 banking organisations, securities institutions and corporate customers in more than 208 countries trust SWIFT to exchange millions of standardised financial messages every day. 

SWIFT’s role is two-fold. It provides the proprietary communications platform, products and services that allow its customers to connect and exchange financial information securely and reliably. It also acts as the catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual interest. 

SWIFT has its headquarters in Belgium and has offices in the world's major financial centres and developing markets. SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis. As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity. 

TWIST 

The Transaction Workflow Innovation Standards Team (TWIST) is a not-for-profit industry group with representatives from corporates, public administrations, financial services providers and solutions providers. The primary aim of TWIST is to close the gaps in the physical and financial supply chain to release the enormous value locked up in disjointed paper-based processes. To achieve this, TWIST rationalises financial industry standards by creating user-driven, non-proprietary and internally consistent XML-based standards for the financial supply chain. 

This pertains to standards for the straight-through processing (STP) of wholesale trade transactions, working capital management and corporate payments. TWIST delivers global standards for business processes and technical integration that enable rapid and profitable change for its adaptors. Its core principle is to be open and inclusive to market participants and their service providers. TWIST's approach emphasises market collaboration, as demonstrated in its proactive role in developing standards in conjunction with other standards such as ISO/SWIFT, IFX, FpML, RosettaNet, MDDL market data standards and CRG-Edifact. These endeavours are led by the corporate treasury operations of Royal Dutch Shell Oil and are actively supported by 70 other participants. 

UN/CEFACT 

The United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT), a United Nations body, has a global remit. It encourages close collaboration between governments and private business to secure the interoperability for the exchange of information between the public and private sector. It has developed: 

• The UN Layout Key for Trade Documents, which is the foundation for the EU's Single Administrative Document (SAD). 
• UN/EDIFACT, the international standard for electronic data interchanges numerous trade facilitation recommendations. 

It is now drawing up the next generation of trade facilitation and e-business standards and tools. 

Source: Conversations with the organisations themselves, and their official websites.

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The Quest for Accurate Cash Flow Forecasting

Publication: Global Treasury Briefing, Volume 2 Issue 2.

Always a key issue for treasurers, the current financial crisis has underlined the importance of cash flow forecasting. This article looks at how roadblocks to effective cash flow forecasting can be overcome.

Cash is the lifeblood of business, a fact that has been brought into sharp focus by the current economic climate. Cash flow forecasting is therefore a vital role of the treasury function - by being able to accurately map incoming and outgoing cash flows through collecting as much relevant information as possible, treasurers can ensure that their organisation is operating at maximum efficiency by putting in place the necessary short-term funding measures. 

This information isn’t anything new for treasurers, who frequently cite cash flow forecasting as a key area for improvement within their department. Despite this awareness, progress seems slow, judging by a recent survey from APQC (see Figure 1). With 25% of respondents finding problems with their company’s ability to forecast cash flow ‘very weak’ or ‘problematic’, and a further 25% describing it as ‘adequate’, hardly a ringing endorsement. What obstacles are preventing these treasurers rating their cash flow forecasting ability as ‘strong’ or ‘very strong’? This article will examine these causes, look at how treasurers can overcome these problems, and take a broader view of liquidity management. 

Figure 1: Corporate Cash Flow Forecasting Ability 

Common Roadblocks to Successful Cash Flow Forecasting 

There are certain common problems that treasurers can come across in their cash flow forecasting activities. One of the most cited reasons by treasurers for the lack of accuracy of their cash flow forecasts is that the information they receive from their business units can be late and inaccurate. However, Timo Hämäläinen, founder and CEO of Exidio, suggests that business units are the best and only experts on their cash flows. “It is a question of motivation, priority and guidance,” he advises in his article, The Cash Forecasting Challenge: Build a Business-to-Treasury Bridge. 

Another common complaint from treasurers is that they have not found a suitable cash forecasting system yet. On this point, Hämäläinen warns treasurers against seeing cash forecasting as a systems project. “Start by building the business-to-treasury (B2T) bridge and continue by finding practical, quickly deployable tools from your bank or technology providers,” he suggests. 

When cash flow data comes to treasury from a huge number of enterprise resource planning (ERP) systems, it can be problematic to come up with accurate forecasts. Despite this, Exidio’s Hämäläinen suggests that simply integrating systems may not be the full solution. “Integration of systems may be helpful but without the human touch of an expert within the business unit, the integrated data can still be unreliable if it comes from any other system than the TMS [treasury management system] where all cash flows are fully committed,” he says. 

Clearly the relationship between the treasury department and business units within the organisation is vital for accurate cash flow forecasting. It is fortuitous, then, that the role of the treasurer has risen in importance as a result of the credit crisis. Investment and funding is now one of the most important areas of corporate strategy at board level, which enhances a treasurer’s mandate to explain to business units the important role they play in providing accurate information and, even, ensure that they know why this is so vital and feel invested in the process. With the support of management, treasurers are in a much better position to establish or reinvigorate their department’s relationship with the business units it relies on. 

Adopting a Best Practice Approach to Maximise System Efficiency 

Once the business units are fully aware of their role and the importance of the quality of their data, the treasurer then has to ensure that they have the suitable forecasting system for their company and, just as importantly, that they are using it optimally. At a time when organisations are increasingly diversifying and moving into new markets in an attempt to make themselves bullet-proof in the face of the recession, old parameters that treasurers use to model cash flow forecasts may no longer be relevant and, in the worse case scenario, could lead to wildly inaccurate reading of the data. Taking a non-parametric approach is one way to avoid this potential pit-fall, which is something that Michael Arben, director of strategic initiatives for CSC Financial Services in Europe, Middle East and Africa, advocates in his article, Once Bitten... The Cautionary Tale of Cash Forecasting. This can involve using a system to take all relevant business data and add in real-time information, which is then fed into a non-parametric representation of the ‘real world’ to show the likely future outcomes along different decision paths. 

CSC’s Arben says that the key difference with this model is that it uses extremely powerful constructs for handling time so that the possibilities built into the model provide more factual and more rigorous forecasts. “So, instead of them working on ‘what might be’, they work more on ‘what is’ and ‘what will be’ in a real world scenario,” he explains. To make sense of the huge quantities of data required for accurate cash flow forecasting, it is vital that corporates understand the rules that govern this data in order to ensure that what they are analysing is of real value to the business. 

However, the strategic decision-making skills required for these types of models are quite rare. There is now a demand for what were previously thought of as individual ingredients, but which are now recognised as needing to be combined. “The resultant mix is very hard to find in the treasury sector,” comments Arben. Clearly there is no quick fix to problems such as this, which is why it is important that treasurers think carefully about which system is best suited for their organisation’s cash flow forecasting needs 

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Cash Flow Forecasting Systems 

Treasury management systems (TMS) 

• Tendency to focus more on financial risk management than on operational cash flow. 
• TMS tend to focus on real cash flows rather than cash flow forecasts. 
• However, they are improving in their support for the forecasting process and continual improvement in this area is expected. 

Enterprise resource planning (ERP) systems 

• Sometimes support cash forecasting, but problems can arise if a company uses many different ERP systems. 
• Corporates looking to migrate onto one common ERP system can find this to be the best option. 
• Can lack flexibility - if a company needs a special report, these normally need to be built as bespoke solutions. 
• Unlike TMS solutions, ERP systems are not designed to handle the financial cash flows, which can limit the system's ability to provide a comprehensive cash forecast. 

Specialised cash forecasting systems 

• As the label suggests, these are specifically designed to provide comprehensive operational and financial cash flows. 
• Cash forecast systems vary in how standardised they are and thereby how much you can tailor the system to your needs. 
• Abilities to automatically fetch data from different data sources, such as bank, TMS, and ERP systems, also vary. 

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As the cash flow forecasting systems box shows, there are a large number of factors that treasury departments need to consider when choosing a new or replacement system. To start with, the treasurer needs to be clear on what their specific requirements are, and then draw up a list of possible suppliers based on that. Then, by writing a request for proposal (RFP) for these suppliers, the company can get a greater insight into how each supplier can service their requirements, as well as find out the relevant costs involved. Despite the technical nature of this selection process, Krister Backlund, finance consultant at OpusCapita, points out in his article, How to Buy a Cash Forecasting System, important role the treasury department has to play here: “It is important for the treasury function to stay in the driver's seat during this process and not let this be run as an IT project.” After all, it is the treasury function that will be managing the system once it is in place, so their knowledge of what is required for their specific cash forecasting needs is vital in the selection of the system. 

Once the selection of a cash flow forecasting system has been made, the implementation process can begin. Again, this requires careful preparation and delivery, as the execution of the implementation process can have direct consequences for the final efficiency of the forecasting system. OpusCapita’s Backlund suggests the following template to achieve a successful implementation process: 

- Scoping - getting all details settled with the vendor: 

• How the forecast process should be set up. 
• Cash flow models. 
• Company structure. 
• User information and user rights. 
• Bank information. 
• Type of forecasts needed. 
• Calculations in forecasts. 
• Other elements. 

- Planning: The timetable for the project and planning of internal and external resources needed to implement the system. 

- Delivery: System implementation, including installation and tailoring of the system. 

- Pilot: Running the system with pilot entities, and making updates on the basis of input from the pilot. 

- Rollout: Starting the forecasting in the new system. 

If the treasury department has correctly identified their company’s key cash forecasting requirements and has ensured these are catered for in the cash flow forecasting system that has been commissioned, they should now be able to make improved forecasts. 

Conclusion 

Cash flow forecasting has long been an area that corporate treasurers have sought to improve upon. Today this quest has intensified due to the global economic recession and the enhanced focus on corporate cash that this has created. Access to credit has been limited and banks can ask to see a corporates’ cash forecasts before making any agreements. It is therefore important that treasurers tackle any roadblocks to efficient and accurate forecasting directly. 

If a treasurer is having problems with the data supplied by their business units, they should take the time to impress upon these units the importance of supplying timely and accurate data. Boards of directors are looking to their treasury departments to efficiently manage the forecasting process. Treasurers can use this mandate to manage their relationships with business units, as well as ensuring that they are at the forefront of any decisions taken over which cash forecasting system to use. With everything that has happened to the global economy in the past two years, treasurers should reassess the forecasting models they are using, because many old certainties no longer exist. Even if the data they receive from business units is accurate, putting that data through statistical models that are no longer relevant could have a negative effect on the overall results. Like in many areas of the treasury function these days, flexibility is key to a successful cash flow forecasting operation.