Treasury Today Country Profiles in association with Citi

Commitment issues

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The bank agnostic technology model is increasingly sought by treasurers eager not to put all their eggs in one basket. It is a risk management quest but it is also one of operational and cost efficiency. Treasury Today considers the benefits and drawbacks of stepping beyond the world of bank proprietary technology.

As the compulsion to work with bank proprietary electronic services slowly loosens its grip on the corporate community, treasurers are finding themselves readily able to exchange information with multiple banks using common channels and standard formats from a broad range of providers. They also have control of their payments mechanisms so that treasurers can effectively “turn banks on and off,” as one practitioner speaking at last year’s EuroFinance event in Budapest succinctly put it.

Indeed, that same individual offered his reasons for taking this path by describing his ideal of treasury management as “definitely not logging into six or seven different banking platforms each day nor trying to recover 150 accounts when a parting of the ways with a bank means unpicking what had been snarled up in a proprietary platform.” With this in mind, the concept of bank agnostic technology certainly sounds ideal, but is it?

Why… and why not?

There are three main benefits of a bank agnostic approach: reduced cost and effort when changing banks; the ability to harmonise processes; and the potential for improved efficiency. When ranked against a multi-bank structure where counterparty and performance risks are a genuine concern, it has certain appeal.

One company that has found benefit in bank agnosticism is Etihad Airways. Currently, the airline has 50 transactional banking relationships across the globe. Etihad is going through a major global connectivity project and is using a SWIFT service bureau (Fundtech) to drive efficiencies, explains Deputy Treasurer, Adam Boukadida. “This is enabling connectivity with multiple banks in multiple parts of the world.” By employing a bureau to implement and operate SWIFT, in partnership with treasury and the internal IT function, he says it enables the team to focus more on day-to-day activities and value-add projects.

Although progress towards an agnostic model could be seen as an attempt to put banks on the back foot in the overall balance of power, Boukadida certainly does not see it as “preventing or damaging any of our banking relationships.” Rather, he says, “the desire for more bank agnostic models is driven by treasurers wanting to be able to exchange information with multiple banks using common standards, eliminating any duplication of effort and minimising counterparty risks.”

There are clear benefits for some treasurers, however, in certain emerging markets, bank agnosticism is still only just on the radar. Luke Waddington, Head of Global Markets, E-Business, BNP Paribas, notes that the uptake of bank agnostic platforms is “somewhat sluggish” in Asia. “There needs to be improvement in the pre-trade and post-trade areas as bank agnostic platforms are largely geared around execution,” he explains.

The persistence of proprietary offerings looks set for some time as corporate adoption of bank agnostic connectivity such as SWIFT remains relatively slow. And whilst owning the network and the systems seems advantageous for the treasurer, the benefits come at the cost of being responsible for it, says Marc Vandiepenbeeck, Corporate Treasurer, Asia Pacific, Johnson Controls. “The major advantage of a bank proprietary platform is that the company shares it with all the other customers of the bank, benefitting from a larger scale infrastructure which, more often than not, is very reliable.” Taking ownership of that infrastructure means the treasury team is responsible for the normal downtime that any system can and will face. Managing that new risk internally is thus “a challenge in and of itself.”

Taking action

If the decision is taken to move ahead, there are four major treasury processes that can be disconnected from the proprietary environment, notes Vandiepenbeeck. These are payments, cash application, trade finance and FX and MM trading. Multi-bank online trading platforms already have a broad adoption of course, with providers such as FXall (Thomson Reuters), 360T, ICD and MyTreasury linking many of the major FIs in this space with corporate treasurers the world over. In the trade finance space there have been some positive recent developments (including SWIFT’s BPO) but the adoption rate has been less enthusiastic, particularly from Vandiepenbeeck’s Asian perspective. “This is mostly due to local regulation and challenges associated with the fact that a lot of economies in Asia are either paper-driven or rely on paper for final release of goods.”

However, it is the payment processing space that is the most advanced in terms of bank agnosticism. File formats have to a degree been standardised over time, with SWIFT offering corporate connectivity for a number of years through MT101/103 messaging. “Assuming a corporate uses its own SWIFT infrastructure, all payment files can easily be ported from one bank to the next, reducing the friction cost of changing bank,” he states. There are other clear benefits with this, including the facilitation of standardised connectivity between the ERP and payment factories and better control over users, signatories and approvers.

The cash application process mostly involves electronic bank statements. Again, SWIFT formats, like the MT940/942 have helped improve the standardisation of these statements but not fully (see ArcelorMittal case study below). Indeed, Vandiepenbeeck notes that each bank will have its own limitations, often driven by legacy systems and slow adoption of SWIFT standards. “This is particularly true in Asia where certain markets are falling behind because of the complexity of the information that needs to be contained in a statement.”

Case study: the in-house cash pool

The pursuit of bank independent structures means that an infrastructure needs to be put in place, the initial investment of which can be large – and this is only recuperated through process efficiencies and increased control over bank fees. These only make sense when the organisation is complex enough and when the volumes justify taking control of the transmission channel.

ArcelorMittal is one such business. It is one of the world’s leading steel and mining companies, supplying all major markets via a presence in 60 countries and an industrial footprint in 19. Laurent Guillouët is its Head of Cash Management & Back Office Financial Transactions for ArcelorMittal Group Treasury. His department directly manages cash for about 90 group entities but connects to more than 400 companies in total, including holding companies and purely operational businesses, whose treasuries are participants in a bank-agnostic in-house cash-pooling structure which ArcelorMittal first established over 20 years ago.

Today, the global cash pooling structure covers 29 currencies taking in around 40 banking partners and over 900 accounts. “One of the main interests of having cash pooling operated by ourselves is to be independent from the banks,” explains Guillouët. In effect, treasury is free to work with any bank it chooses without affecting the management of the structure whereas he feels that dependence on multiple banking systems creates difficulties for the kind of centralisation strategy that has been part of treasury for many years.

The hub of the centralised structure is in Paris but two years ago an additional treasury centre was set up in Chicago, taking care of all the Americas business. From here on out, ArcelorMittal has deployed an integrated Treasury Management System (TMS) using both in-house developed tools and third-party systems (such as for accounting and managing commodity and energy deals). The key to success with such a mix has been full integration, says Guillouët, adding that the connectivity solution itself is a purely in-house development. With its own secure intranet, the entire group can now participate in the cash pool regardless of location.

Quality first

Of course, a bank agnostic system does not mean cutting out bank relationships. Whilst these remain as important to the treasurer as ever, it does mean greater control over those partners: Guillouët is watching. “When I send an order to a bank I will define a cut-off time. At the end of the year I will count the number of times my order was not executed correctly and how many were executed without error,” he states.

Should a bank experience temporary technical or administrative issues, the in-house pooling structure enables treasury to easily redirect its flows to another provider without too much difficulty. The speed with which the flow of business can be switched off completely if the bank continues to fail in its delivery is considerably higher than if tied to a bank proprietary system.

Going agnostic

To achieve the kind of structure used by ArcelorMittal, a committed investment is required in terms of money and resources warns Guillouët. And it takes time too: “If you decided at the beginning of the year to do this you will not achieve it by the end of the year.”

Having established a firm base with one local bank (a French company would most likely have chosen a French bank simply to establish the easiest path of communication), it will then be possible to enlarge the structure. “One key point in doing that is to acquire SWIFTNet connectivity,” he says. But, notes Guillouët, the lack of standardisation of message types (usually MT940s) means that each time the structure is taken further afield it may be necessary to develop the local format. He believes the new SWIFT ISO 20022 camt messages (.052 account reporting, .053 account statements and .054 credit or debit notifications) will be a great improvement – once they are in full circulation. “But today I don’t have a single bank that is able to send messages using any of those formats with the planned enrichments.”

Collect and survive

In the context of a multi-banked global or large MNC, the difficulties of effective automation, centralisation and standardisation of data flows are immediately apparent. In an acquisitive business or where emerging markets are a significant feature this is even more so. “It is surprising how many very large companies still have cash scattered around the world and no visibility on it,” notes Eric Bayle, Director, Head of Payments & Cash Management, UK, for Société Générale. He believes the real goal for corporate treasurers in this situation should be to optimise their current processes.

But as we have seen with ArcelorMittal, the future of this relatively simple yet effective measure depends to an extent upon the uptake of SWIFT’s XML-based camt messaging standards. At the moment Bayle acknowledges that there are very few banks that are able to send these message types. This may be about to change as SWIFT seeks to promote XML’s further adoption with, bank agnosticism in mind.

Standardising the standards

With the SWIFT MT940/942 messages currently key to acquiring the basic cash position data, André Casterman, Global Head, Corporate and Supply Chain Markets, SWIFT, acknowledges that the format is not perfect. Although the header fields (the main fields) are standardised, when it comes to line item information, corporates and banks have tended to agree on different ‘standards’ according to need. “There is room for more standardisation in the MT940s, and this is what we have achieved with the ISO 20022 camt messages,” he explains. Obviously support is required to make inroads and he reports that camt.053 flows between banks and corporates grew by 143% between H1 2014 and H1 2015; although the actual starting point is not known uptake is clearly going in the right direction.

The camt.053, as the MT940 equivalent, is the main subject of promotion by SWIFT today. In Europe, SEPA has acted as a boost for awareness of ISO 20022 messaging. “Corporates involved in SEPA are increasingly keen to move payment flows into an ISO 20022 environment,” notes Casterman. “In Asia we have already seen some MNCs adopt an ISO 20022-only approach, only using SWIFT MT messages when ISO 20022 is not available.” This is clearly intended to help those firms overcome the issue of multiple bank proprietary technologies across a diverse region and to this end SWIFT proposes to increase the level of bank and vendor certification requirements to include this message type.

But Casterman knows that there is a need for more than just new message-types; there is a need to manage market practices, to avoid one side imposing its view on the other and unsettling the standardisation of processes. “The decision of each bank is driven by commercial needs; if a large corporate imposes its format onto its banks, those banks will often agree to that. This is why standards are often implemented in various ways,” he explains. Being overly prescriptive is not achievable in the short term so SWIFT has developed a number of tools to try to help corporates and banks work together more efficiently.

The key to agreement is the CGI-MP (Common Global Implementation-market practice) Group. This is the new, more focused name for the old CGI. The CGI initiative includes more than 50 participating organisations, including banks, corporates, SWIFT, vendors and consultants. It is an attempt to forge a true standard for all, and now includes all ISO 20022 messages.

In practice, CGI-MP seeks to build a uniform layer on top of the basic message formats. It recommends how these messages should be best used in the corporate world. Banks can still develop their own specifications on top of CGI-MP as a third layer as they will have some competitive proprietary tools that require this, but these specifications should be documented in the SWIFT standards repository, known as MyStandards, and are freely accessible by corporates either directly or via their own participating bank. This still means treasurers have to test their messages to see if they meet the necessary standards when moving or adding new banks. With precisely this in mind, the MyStandards Readiness Portal is the SWIFT facility for corporate-client use. This is an online automated, self-service message testing tool that provides a single view of testing activity across multiple parties. In practice, when testing a message against a bank specification, any errors or mismatches will generate a response that describes what is wrong. The user will then be directed to the bank’s relevant field definition in MyStandards so that the message can be modified accordingly whilst still online and retested straight away.

A clear role

As many large corporates and MNCs continue their journey towards centralisation, automation and standardisation, so centralised treasuries, shared service centres, payment factories and on-behalf-of operations become the norm. Communication between entities, functions and units of operation benefits from standardisation of systems and data formats – and this is where the bank-agnostic model has a chief role to play in improving integration and flow between internal systems and bank services. It is a simple and yet effective approach, but it requires commitment from the outset.