Financial-i

A Global Transaction Banking Handbook

A GLOBAL TRANSACTION BANKING HANdBOOK:

Cash & Liquidity Management

Part 1: Cash & Liquidity Management

in association with: platinum sponsor: gold sponsor:

2009

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seeing is believing
in these uncertain times, the Holy Grail of liquidity management is to have a consolidated view of all your cash positions, says ParthDesai, CEO, aCE software. and what better way for companies to gain greater visibility over their payments than by streamlining banking connections.
The heat is on for corporates to cut their overheads and stay ahead of their competition as the financial crisis continues to wreak havoc across the globe. In order to survive these harsh times, corporates must focus on reining in their costs and getting a better handle on their cash flow, which is where the automation of their payments handling and central routing of their connectivity comes into play. As well as market pressures, there is also the impact of globalisation and the requirement to deal with more firms across a wide geographic footprint to contend with. Yet, despite these challenges, there is plenty of opportunity out there for corporates to reap major cost and operational efficiency benefits. Corporate treasurers must adopt a back to basics approach by focusing on their core infrastructures and investing in a centralised, flexible and scalable platform that can handle invoices and payments for all suppliers, banks and accounts. The Holy Grail of liquidity management in this market is a consolidated view of all funds available. Being able to see your cash position in a timelier and consolidated manner allows faster reaction to market events and this is now high on the radar of corporates who may have been caught out by fast moving events in recent months. There is also a regulatory imperative to comply with regulations such as Sarbanes-Oxley and Basel II, which specify levels of control and risk management. Moreover, a platform such as this will allow corporates to benefit from industry developments such as the Single Euro Payments area (SEPA), which standardises and harmonises payments processing cross-border. Under SEPA, corporates must convert their clients account numbers and bank names into BICs (Bank Identifier Code) and IBANs (International Bank Account Number). For large corporates with millions of clients and geographical disparity, asking all
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the corporate focus on cost cutting indicates that very few companies have the budgets to maintain costly in-house systems, multiple proprietary connections to their banks and large headcounts to deal with the basics of payments processing.
PaRtH DEsai

their clients for their BICs and IBANs is not feasible. A centralised payments solution must therefore also include automatic handling of IBANs and BICs. The reason for this is simple: it means that the threat of incorrect identifiers disrupting the payments workflow can be easily avoided.
Acentralhub

The corporate focus on cost cutting indicates that very few companies have the budgets to maintain costly in-house systems, multiple proprietary connections to their banks and large headcounts to deal with the basics of payments processing. Moreover, the increase in volumes and the complexity within the market will heighten the need for specialist knowledge and a partnership approach to processing. By employing a technology-based solution for payments processing, corporates are free to deal with other more complex areas in partnership with a specialist vendor. The argument for the introduction of a centralised payments hub is a compelling one. It involves significant cost reduction via the centralisation of payments processing onto a single

Financial i Cash & Liquidity Management Handbook 2009

integrated platform and payment routing across multiple banks with statement reconciliation. The elimination of point-to-point linkages results in a reduction in required headcount and duplicative technology. Corporates can therefore dispense with a large number of country specific accounts and the associated costs and complexity. Centralisation also facilitates flexibility in choice of banks via the standardisation of all current proprietary connectivity to these institutions. Solutions should include functionality for least cost routing (LCR) or credit availability, whereby the corporate can select one of several potential payments routing alternatives and thereby lower per-transaction and overall processing costs. In the current market environment, corporates will not want to concentrate their risk by routing their payments via only one bank. A surprising number of financial institutions have been taken down by the crisis and corporates must make sure they are not heavily impacted should this happen to the banks that they deal with. They need to take into consideration the potential collapse

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Diagram 1: Bank connectivity via a Payments Hub

of financial institutions and the threat this poses to their business. They can easily reduce this risk by connecting to several banks via a single payments hub (see Diagram 1). Such a solution should also provide corporate access to SWIFT, which will allow companies better visibility over their funds via the use of standardised messages and protocols. The SWIFT network allows corporates to communicate directly and immediately with a growing community of banks. The decision by SWIFT to extend its corporate access offering in 2007, with the addition of the Standardised Corporate Environment (SCORE) model, has made connectivity to the network even more worthwhile. Corporates seeking to take advantage of access to SWIFTNet will need to make some technology decisions. They must avoid a situation whereby

they are managing multiple interfaces to SWIFT. To extract the maximum benefit from SWIFT access, corporates should enable communication with banks by a number of different departments accounts payable and receivable, treasury and FX. Corporates need to choose systems that enable a single SWIFT hub to handle all these connectivity needs, thereby lowering the total cost of ownership. SWIFT changes its messages frequently and, as the banks have learned to their cost over the years, if SWIFT connectivity is embedded in numerous systems, the burden of keeping up with these changes becomes unbearable. Solutions that keep SWIFT activity separate from back-office processing systems and enterprise resource planning solutions, while at the same time enabling ease of integration with those systems, help to alleviate this burden, because changes that need to be made to SWIFT messages can be
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Diagram 2: Financial supply Chain Hub for Corporates

implemented without disruption to the core infrastructure. The implementation of an intelligent and flexible solution also supports a corporates ongoing requirement to manage SWIFT connectivity for corporate-to-bank communication and internet-based messaging for communication with other corporates. The most efficient way to handle this dual requirement is to implement one system with the intelligence to manage both connectivity with the banks via SWIFT and also to automatically route messages related to invoicing, for example, to other corporates. This takes the form of a payments hub that can quickly meet all corporates payment-related requirements (see Diagram 2).
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The solution that corporates select must be able to act as a hub for both SWIFT messaging and payments. As most SWIFT messages are payments related, this functionality is merged in many cases. However, the option to act as a hub for SWIFT messaging and payments, enables those that opt to use SWIFT messaging to be permitted to do so and to benefit from this connectivity. In the future, it will be increasingly difficult to compete without a consolidated approach to payments, SWIFT and the financial supply chain. If corporates do not invest in a centralised approach, costs will be high and they will be unable to dynamically monitor performance, risks and revenue streams. n