Commercial Payments: From Many, One

Banks and their commercial clients are faced with an enormous amount of complexity when it comes to payments. Differing payments formats, competing standards and the need for global companies to bank with institutions in every market they serve contribute to tremendous inefficiencies and high costs. Throw in the added complexities of cross-border commerce and everyone is left with an expensive, overly complicated mess.

All the major players - banks, corporations, regulators and vendors - are attempting to standardize and simplify the commercial payments process. But, everyone seems to have a different idea as to the best way to do so. And, as the pace of global commerce continues to explode, the need for a unified corporate payments solution is only intensifying.

Boston-based Celent estimates that cross-border payments comprise 8 percent of total global payments volume. And this will increase in the near future, according to Celent senior analyst Jacob Jegher.

As a result of the globalization trend, more than ever before, banks are attempting to "squeeze revenue out of their payments infrastructures," says Tony Smith, cofounder and chief research and development officer with Framingham, Mass.-based IntraNet, a global wholesale payments service provider. "There's a strong move toward rationalizing their data centers and redundant back-office systems. [Payments] is one instance where it's good to have one application serving all your branches worldwide."

"Banks are looking for ways to eliminate duplicate systems," adds Joe Lott, director of payments for Palo Alto, Calif.-based HP. "This is all being driven by compliance, M&A activity and cost reduction."

The inefficiencies of running separate systems for each payment format (e.g., checks, ACH, wire, etc.) are not lost on banks. Currently, "You have a dedicated system for each process," explains Jens Hanker, a Germany-based partner in the financial services solutions group with consultancy Accenture (Chicago). But, "The payment system should be one big processing box that links to the back-office archiving system."

Simplifying and consolidating multiple payments systems and enabling the same level of service for clients of any size and geography is gaining traction, according to Joe Mazzetti, executive vice president of business development with Jersey City, N.J.-based financial transaction processing solutions provider Fundtech. The idea, he notes, is combining the ability to do high-value and low-value payments with different entities - global or regional - into one system. "Corporations want to send banks payments in a mixed format - high or low value, domestic or international, urgent or nonurgent - and [let] the bank figure it out. Banks are going after this as a revenue source," Mazzetti says.

"There's a convergence between high- and low-value payments," continues Harold Young, managing director and global head of high-value payments with Frankfurt-based Deutsche Bank Global Transaction Banking - Cash Management. "We're seeing files coming from clients that bundle high- and low-value payments together, and we break out the files for further processing."

And more than just systems are converging in the payments world. Cost consciousness on the part of banks has lead to a consolidation of the number of accounts they maintain in other countries.

According to Joseph Furnari, managing director with the Bank of New York's payments area, in the past, the simplest way for a foreign bank to make a payment in a different country was to have multiple accounts with various regional service providers. But that practice has changed over the past few years, he notes. "If you want to pay someone in the U.S. today, you only need one entry point," Furnari explains. "To maintain multiple accounts is very expensive and not necessary in an environment in which over 90 percent of all payment instructions received are processed straight through and within minutes of receipt. The consolidation of payment activity with fewer service providers improves liquidity management and reduces administrative overhead."

Deutsche Bank's Young says there is definite consolidation in the number of financial institutions other banks use for their commercial clearing services. This movement is most evident in Europe, he notes. "This is driven by the prospect of cost reduction for the initiating bank with regard to the number of accounts maintained, exposure to repair and other fees, and service levels that make reconciliation and inquiry resolution more efficient," Young explains.

Monogamous Banking Relationships

Banks are not the only ones seeking simplicity in their payments practices. Corporations are demanding a less-complicated system for moving money, too, according to Celent's Jegher. "One of the biggest changes I've seen is that the involvement of corporations is increasing [regarding payments issues]," he says. "Corporations want the quickest, cheapest route for sending payments across borders."

One way in which to accomplish this is by cutting back on the number of banks with which they do business. Some global companies maintain relationships with dozens of banks throughout the world - if they can narrow this down to one or two, the efficiencies become apparent, especially when dealing with the issue of proprietary payments systems, Jegher says. The idea that each bank with which a corporation does business could have its own payments processing platform has been a bone of contention. That is one reason why banks are starting to accept payments files in bundled form, Jegher adds.

This client demand is a significant factor in the drive toward the standardization of the payments process. "Many corporations prefer not to deal with proprietary platforms from individual banks," says Deutsche Bank's Young. "They are demanding alternatives, such as direct access to the SWIFT network, to send payments."

Of course, SWIFT, the global payments network, is a bank-only member organization. However, corporations see this as at least one standard that could make life easier on the payments side, according to Young. Additionally, some banks are starting to work on ways to bring their commercial clients into SWIFT, for example, via member-administered closed user groups (MACUGs).

SWIFT, however, is expensive in terms of fees, so only large companies that maintain complex bank relationships would benefit from SWIFT, opines IntraNet's Smith. "So far, corporations are finding that banks offer other channels that are more cost-efficient, like the Internet," he says. "Some companies are building their own payments back offices to disintermediate the banks entirely. So banks are worried about too much standardization."

Still, banks are trying to develop alternatives. "The SWIFT network utilized by banks and other financial institutions establishes very clear message standards and rules," says BofNY's Furnari. "The problem is that corporations don't belong to SWIFT. So the Bank of New York developed CA$H-Register Plus, an Internet browser interface that provides corporations many of the advantages enjoyed by SWIFT users. Proprietary systems such as CA$H-Register Plus only allow the corporate customer to communicate with the bank providing the system. SWIFT is trying to address the issue with the establishment of MACUGs, which allow corporations to access the global financial community via a single messaging infrastructure."

Setting standards in today's world economy is difficult, suggests Fundtech's Mazzetti. Whether SWIFT or some yet-to-be-developed format becomes the universally accepted payments method remains to be seen. "There may not be one standard, but there needs to be a significant narrowing from where we are today," Mazzetti says.

"We're in a global marketplace with no borders," Celent's Jegher adds. "When it comes to cross-border payments, ... some countries are more effective than others. But it all points toward dropping down borders and creating global standards."

Nowhere is the erasure of borders more evident than in Europe. Ever since the introduction of the euro, banks there have been struggling to keep up with the demands placed on them by European regulators, suggests IntraNet's Smith.

The most pressing payments issue in Europe today revolves around SEPA - the Single Euro Payments Area. Although it is not a regulation per se, SEPA's goal essentially is to make each country treat a euro like a euro. This has not been the case, especially with regard to cross-border payments. Despite the fact that each country in the EU is using the same currency, banks still view transactions as foreign and domestic, and price them so that those payments made across borders are more expensive, according to Celent's Jegher. SEPA says banks cannot make this distinction and must charge the same amount for a transaction regardless of the destination in Europe.

Cross-Border Margin Compression

This seemingly common-sense guideline has left banks stewing over the potential loss in fee revenue from cross-border payments. "Banks are being forced to drop fees to 1 or 2 percent of what the old foreign payment fees were," according to Accenture's Hanker.

Currently, "Margins are quite high on cross-border transactions," says HP's Lott. "The trouble is, when you lose a good piece of your margin, how do you continue to support the operations? Banks are scrambling to see what value-added services they can offer corporations around this."

Along with SEPA comes PE-ACH, the pan-European ACH system. European regulators also are touting this in the name of uniformity. The idea is to bring all ACH traffic on board one system by 2010. This is no easy task, especially since each EU country has made sizeable investments in their current ACH networks, Celent's Jegher points out. As a result, most of the ACH volume still is in the national systems.

But banks are between a rock and a hard place. They are being told they must invest in the SEPA and PE-ACH initiatives, and make the necessary infrastructure improvements while a significant revenue source is being taken from them. This just does not seem reasonable, relates Deutsche Bank's Young. Although he says he sees value in the ultimate goal of SEPA, "Payments will become so commoditized as to take on utility characteristics. When this happens, innovation goes away," he comments.

HP's Lott says more of a business case needs to be made around SEPA and PE-ACH. "If you can get an efficiency out of it, banks will embrace it," he remarks. "If not, they will only spend enough to stay compliant."

On the other side of the coin, compressed margins could compel banks to develop new products and services to recuperate losses from the standardized transaction pricing. "The European regulators thought that open competition would lead banks to develop products that they're now being forced to develop," remarks IntraNet's Smith. But, "The regulators forced [banks'] hands."

Finding New Value

Whether the pressure comes from regulations or corporate clients, banks are impelled to examine new offerings that will generate money and satisfy customers, according to Accenture's Hanker. "Some banks consider payments boring because it's not a differentiator to them," he says. "It's rare that a bank has a high-ranking officer in charge of payments. [But the corporate push] is triggering the need for banks to invest in new technology and services."

One potential value-added service is customer-specific pricing. "Clients know the price of doing business more than the banks do," Hanker continues. "They ask their bank why they are being charged so much when they do a large amount of business with them."

"The key thing to remember is that banks say their goal is to be customer-centric," Celent's Jegher says. "Banks realize relationships are changing and they have to listen more to what customers tell them. Many customer-centric themes are related to payments. Relationship-based pricing of transactions can be used as a selling point."

Another selling point is providing customers with a more consistent, universal payments experience. "The holy grail is to always have perfectly uniform services from anywhere to anywhere," explains IntraNet's Smith. "Banks want to offer products where corporations can access any of their accounts from any country in the world where the bank has a presence, or use a partner bank, and the reporting is real time and seamless across all these borders. What banks are doing is building a veneer over this fragmentation. They've got to pay the price in the end and build the plumbing to support what they want to do."

Still, the price of doing business likely will trickle down to bank customers, notes Deutsche Bank's Young. "Banks are significantly investing to extend the value proposition around their payments business," he says. "But the corporate clients have to keep in mind that value has to be paid for."

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