Electronic Data Interchange

Financial Information
Superhighway
Summary: Matching payments with
all the information needed to process
them can be a time-consuming and
hence costly process. Corporales
looking to reengineer this process are
starting to use electronic payment for
mats. They hope to automate pay-
ment processing and electronic infor-
mation disbursement in one stroke
using financial EDI. While interna
tiona/ treasurers will have to wait for
cross-border EDI compatibility (com-
ing in 1997), their domestic counter-
parts are already seeing some benefits
as more checks start to disappear.
Financial Electronic Data Interchange,
or FEDI as it also known, requires that
customers remit payment with detailed
documentation electronically. Not
only must they have the capability to
combine "dollars and data" electroni-
cally, they must also do so in form that
can be understood by the internal
company systems of their counterpar-
ties as well as the bank and clearing
systems of the country in question.
As interest in FEDI swells, the homo-
geneous standards (or the black-boxes
to translate them) needed to facilitate
paperless payment to and from a signif-
icant portion of corporate customer
and vendor bases will indeed material-
ize. Pioneering FEDI companies hope
to realized the benefits sooner rather
than later. Their focus is twofold: low-
ering the cost of controls and payment
processing and enhancing value-
adding activities generated by payment
information.
The real advantage with FEDI is that
cash flow and information flow
become almost synonymous and reach
multiple destinations at the same time.
With proper formatting and detail the
information generated by payment
receipts arrives instantaneously in
every department that needs access to
it: the finance functions-e.g. account-
International Treasurer I April 4, 1994
ing, credit, and treasury- as well as
the operating functions, e.g. purchas-
ing, sales, production etc.
"In our industry," explains Michael
Munisteri, manager for treasury plan-
ning at Colgate-Palmolive, "where we
are selling to major retail chains, each
check we receive can be accompanied
by 22 pages of documentation explain-
ing what the check is for and why it is
in the amount it is." Obviously, the
automated delivery of 22 pages of
remittance information per check cuts
administrative costs significantly for
both parties.
An end to paper processing clerks
In the eyes of some, the information
age has only led to more paperwork,
and the employment of more clerks to
process it. "Many companies find
themselves with Byzantine processes
and a blizzard of paper," notes Bruce
Lynn, a consultant with Greenwich
Treasury Advisors, "all seemingly
'required' to track the goods and ser-
vices they produce and the cash they
generate." This perception is partly
due to the poor application of technol-
ogy, and partly due to outmoded think-
ing regarding controls.
According to Mr. Lynn, "Some of the
brighter companies have begun to
question the need for the number of
controls they have in place, particular-
ly when they consider how much they
cost."
Executing prudent control measures
electronically can be a relatively
straightforward means of cutting costs,
once a company places its trust in
technology. For example, Merck's
European Treasury Center has set up
controls for its electronic payments in
Europe that actually enhance over-
sight at the parent-subsidiary level.
Given the large size of its payments,
and its small three person staff, the
treasury center uses the remote autho-
rization capabilities within its elec-
tronic banking system to allow the
Group Treasury in the US to review
the payment requests and provide
final authorization.
International Treasury Trends
More than an end to the clerk, EFT
provides corporales with the opportu
nity to completely redesign their
finance functions.
The mistake many corporates make is
focusing on headcount reduction
rather than rethinking their whole
payment and collections processes.
Companies have little to gain by
merely "putting an electronic front-
end on a 19th-century bureaucracy,"
notes Mr. Lynn.
The key to automation for 21 st-cen-
tury companies is information. They
are reallocating resources to act on
information rather than simply pro-
cessing it. Better information on cash
flow is just one benefit:
Imagine having access to real-time
sales information without having to
rely on operating managers or histori
cal accounting reports. Consider too
that this sales information also states
exactly when the resulting cash flow
will be received.
A reality check abroad
For the international treasurer, FEDI
may be an unrealistic short-term
implementation goal. While his
domestic counterpart may receive
point of sale information on which to
adjust his cash management strategy
going forward, the international trea-
surer must often be content to match-
ing payments with detailed informa-
tion in paper form.
For this reason, some multinationals
are taking a walk before you can run
approach overseas and setting up
lock-box type arrangements to speed
collection of payment information
along with payment. "In Asia, for
instance," says one assistant treasurer,
"there are too many electronic transfer
formats to expect any level of informa-
tion with electronic payments." His
company's immediate goal is educat-
ing customers on what information to
provide with payment, and then
"address it to the right PO box."
5
The Back Page
Before and After
As the chart (below right)
shows, financial risk in the
Lira:Guilder cross rate has
been entirely different since
the EMS crisis of September
1992.
International Treasurer asked
Peter Davies of Sai I fish
Systems, a New York and
London provider of risk man-
agement software, to analyze
the hypothetical currency
exposure of an MNC's Dutch
manufacturing company with
a major sales subsidiary in
Italy. We assumed that the
Dutch subsidiary was sell ing
2.2 billion Lira's worth of
value-added goods via its
sales sub with a 25% gross
margin.
The chart at right shows the
total currency risk (including
its interest rate component) as
it would have affected the
Dutch company's US dollar
P&L over a three year period.
Mild P&L risk before the
EMS-crisis has been replaced
by more dramatic exposure
after September 1992. Each
grid I ine represents 1 standard
deviation, which in this
instance amounts to just
under 51,000 dollars of P&L
variabi I ity.
Corporates concerned with
fluctuation in their monthly
P&L would clearly want to
hedge such positions much
more readily following the
European currency crisis.
Total Risk Factor- Guilder/Lira
(February 15, 1991-94)
505 r--------------------------------------------.

404
354
303 ................................................................................. ...... ,, .. ....................................................................... ....... j
253
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i

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111
1'+: _ .......... . :

.JI I'f""l'. , ... , t ................ j
. . . .. . .. . - .-11: . . ..
-152 .. . . . . . . . :I(: .. .
-202 ............................................................................................ ,.! .......................................................................................... j
t========================l======= ============J
02115/31 08115131 02114132 08111132 02115133 08/11133
05111131 11115131 05115/32 11116132 05118133 11/11133
Source: Sailfish Systems
FEDI: A Picture Definition
information contains payment instructions as well as
remittance instructions and is often related to bank bal-
ances, account analysis, lock box data, etc.
The definition of financial EDI is best under-
stood with a flow chart.
Terms
EDI (Electronic Data Interchange): Information is
passed between corporales. This information can be
financial-e.g. prices, total c0st etc.-or non-financi al-
e.g. invoice numbers, unit orders, etc.
FEDI (Financial Electronic Data Interchange):
Information passes between corporales and banks. This
EFT (Electronic Funds Transfer): Data is passed from
bank to bank or from treasury via an electronic banking
system. This data transfer results in cash changing
hands via ACH. or wire transfer.
Standards
US domestic- ANSI X12
International- UN/EDIFACT
By 1997 X72 wi ll become part of UN/ED/FACT.
FEDI=EDI+EFT
I Buyer I lsankAj
FED I
EDI
EFT


FED I
jsankBj Seller
FED I
Editor & Publisher
Joseph Neu
Associate Editor
Donald Dunn
Professional Contributors
Robert Herz
Associate National Director of
Accounting and SEC Services
Coopers & Lybrand
Peter Connors
Director, Tax Services
International capital Markets
Ernst & Young
Jeffrey Wallace
Managing Director
Greenwich Treasury Advisors
David Veres
Partner
Rogers & Well s

Michael O'Donnell
Vice President
Global Cash Management
Citibank
Advisory Board
David Rusate
Assistant Treasurer
General Electric
Arvind Sodhani
Vice President and Treasurer
Intel Corp.
A. John Kearney
Assistant Treasurer
Merck & Co.
Jean-Pierre Bourtin
Assistant Treasurer,
Canada & Emerging Markets
Xerox

Lee Remmers
Professor
INSEAD
Donald Lessard
Professor
Massachusetts
Institute of Technology
Richard Levich
Professor
Stern School of Business
New York University
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Internat ional Treasurer I April 4, 1994