Treasury Today Country Profiles in association with Citi

Straight through reconciliation: the fundamentals

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Eliminating inefficiencies is hardly a new topic for treasurers. To garner the most significant benefits, we have seen centralisation, streamlining of flows and process automation persist as key themes among treasury professionals for over a decade. But where next? Can straight through reconciliation (STR) help the treasurer move beyond straight through processing (STP) to reach another level of efficiencies and improve working capital?

It’s no secret that many corporates have been busily eking out their days payables outstanding (DPO) as a way of improving working capital. What some companies are still overlooking though is the fact that shifting their focus from DPO to days sales outstanding (DSO) and the overall accounts receivable (AR) process could prove more attractive as it can have a greater impact on a company’s bottom line. In fact, just a few days’ improvement in the DSO metric can correspond to significant cost savings and substantially enhance the working capital cycle.

Gautam Jain, Global Head of Client Access, Transaction Banking at Standard Chartered Bank agrees, saying: “The most time consuming activities in the corporate treasury actually start after the money is received. Most corporates have started focusing on the whole STR concept as it not only drives process efficiency, it is also going to reduce costs and give them a host of other benefits too,” he says.

But what exactly is STR and what does it mean for you? The first thing to realise is that the term ‘STR’ means slightly different things to different institutions. Rather like the eBAM concept, there are different ‘levels’ of STR in the market today and different ideals for what STR can deliver. In short, there are banks that think of STR at a fundamental level – ie automating reconciliations – and there are others that look to the deeper, end-to-end process efficiencies that can be achieved, as well as the all important information that can be mined out of the flows.

But even at a basic level the STR concept delivers a number of benefits to corporates – not just from a cost and a man power perspective – but also from a working capital perspective as it enables faster cash flow realisation, auto reconciliation, and cash visibility via near real-time statements. STR also builds on the advantages that STP brings – cost reductions, more efficient reconciliation, full visibility of cash across entities and regions, and ultimately, greater operational efficiency.

Similar, but different

Despite the similarities and synergies, STP and STR are really more like cousins than sisters. For example, in the generation of payments, it is the corporate that needs to provide enough data to manage and achieve a high STP automation rate but in the provision of reconciliation data, the main obligation is on the bank through which the payment is made, according to Mike Rayfield, Senior Manager Global Channels, Lloyds Bank Wholesale Banking and Markets.

As the onus is primarily on the banks to provide this data, he believes it will take a considerable amount of time to reach the utopian 100% automation rate. “The reason for that is banks themselves have evolved over time and they may have some legacy infrastructure. So until those systems get replaced, or upgraded over time, the banks will still have gaps between them where they simply can’t meet the richness and consistency necessary for STR,” he says.

Some banks would probably argue that there are different reasons behind the challenge of hitting the 100% target though, such as the fact that those companies that wish to implement STR are also dependent on the initiator of the payment. For example, the payer must include all the necessary information, which leaves significant margin for human error or emission. Technology on the corporate side is another hurdle. Chris Errington, CEO at Gresham Computing concedes that the STR capabilities of technology have allowed corporates to reach an automation rate of 80%, but the remaining 20% is something that will be a lot harder to achieve. “There is always a battleground with this figure and it has quite a lot to do with the attitude of the payment maker. They may not wish to share with you exactly what they are paying and that can be a problem,” he says.

However, Errington agrees that even when a payer actually makes the payment with 100% of the information required, the financial institution it travels through can still unravel this good work. “As the payment moves through the banking system, virtually all of the quality of that information gets stripped out just as the payer makes the payment or as the transaction moves through the process,” he says.

Ironically, another factor that prevents this ideal goal being reached is the current standard for payments and messaging that are being adhered to, according to Neil Vernon, Development Director at Gresham Consulting, as when these standards are being created, it is not with an eye on the STR goal. “A sad reflection is that a modern payment message format such as that used for SEPA has a field for the remittance advice that is only 140 characters in length. There are projects in place now to turn those 140 characters into something bigger and structured that is capable of carrying a comprehensive remittance message. Until that is done, however, we’ll remain at that 80%,” he says. Even if that is the case, there is still an awful lot that can be done with that 80% and we will explore this concept in more detail next month. For now though, let’s take a look at what’s available in the STR market.

Industry solutions

Pioneering work began in the STR space around three years ago with big name players such as Bank of America Merrill Lynch and Citi introducing the concept to the wider market. Today, there are a host of so-called STR applications and solutions on offer. Examples of these include CashActive Fusion from ANZ (as part of their CashActive product suite), Standard Chartered’s Straight -2Bank Access and the platform Clareti Transaction Control (CTC) from Gresham Computing.

But what do these systems do and how do they differ? Of course, speaking to providers in the space will give you the best idea of which solution is right for your company, but be aware that:

  • Some banks are offering banking internal solutions that essentially pre-filter remittances coming into the bank using target bank account numbers. This allows the corporate to identify and segregate these payments into certain accounts to manage their funds more effectively.

  • Another solution incorporates a matching reconciliation piece of technology allied to a virtual accounting system – a matching engine that can enhance transactions and improve payment information before using the virtual accounting system to act as a record and allow you to manage those payments.

  • Complex artificial intelligence (AI) can be incorporated to help remember the pattern of manually matched items from an exception report. Once the exception is matched manually, the system actually remembers this solution as it goes along. As the corporate continues to use the tool, the more intelligent the solution becomes, the more automated reconciliation becomes

  • A crucial feature in any of these solutions is having the capability to give the corporate a statement enriched with all of the initial payment information.

The role of ERP

While the expense may be high, a lot of ERP providers have actually started to integrate STR tools into their offerings. Corporates that have the budget should therefore be looking at STR at the implementation stage, according to Jain. However, they need to be wary of the intricacies and nuances involved. “The trick is to integrate the STR module to your financial services provider. If you are multi-banked, it is especially important as you need to work with the bank to find the correct format which works for you. Different banks’ reconciliation statements can vary dramatically and differ to what the ERP is configured for,” he says.

So STR, at a fundamental level, is predicated on both the client and the bank having robust technology, and crucially, having systems that will ‘speak’ to each other. As such, although there is a definite appetite for STR, there is also a need to recognise that in order to leverage it, there is a certain amount of change required at the corporate end. Says Rayfield: “The barriers to STR are largely going to be in terms of the richness and consistency of the data that the banks can provide. For a corporate using a particular ERP, in order to deploy a STR service, they are going to need to do some sort of development or build a new code and that will be borne of a set of rules that try and deal with the data coming in. Clearly those rules can only be used if the data is consistent and complies with those rules consistently,” he says.

If discrepancies in this new process are introduced, the system will ‘break’ and then the corporate will need to throw out that reconciliation exception and process that manually. The value of integration is only realised if rich and consistent data can be delivered and processed accordingly. But that in itself is part of the challenge of building a holistic STR solution, not just introducing automated reconciliation.

Chart 1: Standard Chartered’s STR Solution
Chart 1: Standard Chartered’s STR Solution

Source: Standard Chartered Bank

What’s the catch?

Having looked at the benefits and the challenges, we now turn to suitability. Why isn’t everyone embracing STR already? In certain industries, such as regulated and cyclical businesses, the receivables strain is felt more acutely than in other areas. This is because there tends to be a particular day in the month/ year when the company gets inundated with payments receipts. The receivables portion of their processes is absolutely essential to their business success – or indeed failure.

Rather than being encouraged by the benefits of STR, however, the possibility of making an error using the new system deters some of these companies, according to Errington. “The prospect of bringing in an electronic system, or automation through STR is a great idea but in implementing this sort of system, the company must be sure that it works perfectly. If they don’t get it right, the likelihood is that it will cause them a serious working capital problem and they may go out of business,” he says. Furthermore, there is a more general fear that there is so much information locked in people’s heads that if the company starts to lose employees following STR implementation, then that information will also be lost, believes Vernon. “It’s the matter of extracting that human intelligence and putting it into the intelligence in the reconciliation product that is creating some concern and doubt,” he says.

Of course, there are always the corporates that will decide not to adopt the STR approach because they simply do not see the need for it within their treasury. And in some cases, this might be the right decision, but in others, perhaps the true end-to-end benefits of STR have not been made clear.

Looking to the future

Despite some of the obstacles outlined above, the uptake in STR is expected to grow considerably in the next few years – particularly in those industries mentioned with cyclical cash flows, believes Errington. “These companies are really in the last stages of margin improvement and STR is perhaps the next level. They are generally mature industries looking for an advantage by being able to do things more quickly and more efficiently to better satisfy their customers and demands.”

In general, the gradual shift to richer data and convergence of standardised processes are what is called for – and expected – in the STR space in order to reach optimum efficiency levels. Rayfield agrees that there are mechanisms in motion that will further push the rate of uptake of STR. “The reconciliation trend will follow the same kind of evolution as payments – a convergence of standards across banks and across regions so that corporates of all sizes can leverage the true value of STR,” he concludes.

In next month’s issue we pick up the theme of ‘the true value of STR’ and explore the concept of information as the currency of the future. We also discover that the ideal of STR is no longer theoretical, it is a reality that is here to stay.