Improving Process Transparency End-to-End
Companies always aspire to improve their operational efficiencies, and recognise that leveraging latest technologies can help them achieve this goal. One area that stands out in this respect today relates to enhanced and extended processes for both payments and receipts, with further opportunities for some to provide Embedded Finance options for their customers, suppliers and service providers.
An important point to stress here is that these changes are taking place simultaneously within suppliers, customers and service providers, albeit at different speeds. Therefore, any direct inter-connections between them will potentially result in further overall and deeper efficiencies.
Let’s take a deeper look. Specifically, at what has changed regarding process enablement capability within corporates. Then the same for banks, and lastly how government supported regulatory change for financial services (using Open Banking API’s) is levelling the playing field in payments through the encouraging of new entrants into that space.
Corporations
Corporations: How have their business systems changed?
There are three core non-banking enablers for internal business systems to explain here. The first is the ability for corporate processes to be defined ultra-granularly x-application. This enables them to efficiently capture timely high quality information for decision making on both a repeatable & auditable basis, and also removes the need for complex spreadsheets.
The second is the ability to extend processes x-ecosystem as well: examples here would be to payment processors, sanctions check service providers, customer / supplier / employee checks etc, noting that as the process is granular that this can be done at any point within the process. This powerful capability provides opportunities for corporates to significantly streamline their processes, where it makes sense of course, to drive increased business efficiency.
The third, particularly relating to overseas payment processes, is that there are now newer options emerging as new entrants enter the payments market to compete with the incumbents. This change, as mentioned above, has primarily been driven by regulators to shake up existing banking related markets, through the introduction of increased competitive pressures.
These three enablers allow your processes to be more easily automated (partially or fully) according to your needs, and as a result efficiencies from these integrations run much deeper.
Corporations: Handling Regulatory Change
In parallel, there are new broader and deeper regulatory demands on corporates that relate to the onboarding and ongoing management of your customers and suppliers. Specifics here relate to knowing the exact identity of your customers & suppliers (for example names of individuals and company ownership structures), not to mention the fast evolving requirements to formally structure the disclosure of relevant information surrounding your multiyear sustainability initiatives.
Data managementcompliance on an end to end basis is another vital area to continually focus on, especially around those involving personal information and cross border data transfers. Management here, focuses on where, why, how, and when data is processed, how it is stored and encrypted @rest @transit, and ultimately when it is to be deleted.
Regulatory fines can be high for data management non-compliance, and more recently is now a criminal matter in a few jurisdictions. Your business systems increasingly need to handle regulatory change on an ongoing proactive basis, recognising that underlying rules and definitions (e.g. including that for personal information) can be different or further sub-divided across jurisdictions, and of course noting that governments are using the similar technologies to enforce compliance regulations.
Corporations: Enriched Business Processes
Changes in technologies allow you to enrich your payment and receipts related processes. This drives timely accurate high quality data driven information across the board.
Taking some examples:-
The benefits for the payment function includes greater levels of end-to-end processing transparency, lower overall transactional related costs, as well as faster, more efficient integrated payment and reporting cycles for supplier and employee related activities. Note also, that this would include comprehensive reporting and actionable contextual workflows within other dimensions e.g. for segments, contracts etc.
The benefits for the receivables function comes from being able to extend your processes to your customers, providing them with different payment options thereby simplifying processes as a result, and this would also include the ability to drive actionable contextual workflows as above.
There is a lot more to explain here around specific capabilities, particularly surrounding the granularity of processing that can be applied to any area of your business, so more details are provided below for different functional domains.
Enhancing Processing Capability
Most significantly, because the latest system processes can work x-application and x-ecosystem, they work for you rather than vice versa. Describing this more simply at a technical holistic level, the overall solution structure can be positioned as including Apps + Processtech + Multiple Business Applications. This leads to timelier and richer data sets for decision making, whether that be for operational decisions, process controls, decision support, or other management activities. In other words creating a data driven organisation!
What is Processtech:- Illustrating this to get the point across, the creation of smart digital processes includes all or some of the following steps: Data collection (including RPA, if required for document onboarding, that can be with or without Artificial Intelligence – AI), through all required data transformations / enrichments (might be deeply transforming different data from multiple applications) to contextual actionable reporting / visualisations +/or workflows @anywhere @anytime within a process + API’s @anywhere to other applications or ecosystems (including the leverage of Open Banking API’s w/payments @anywhere, third party AI models etc) + Simulations.
This creates a highly flexible, transparent digitally enabled intelligent process that can be reused in many cases, re-engineered iteratively, or even replaced from scratch. This results in providing corporates with unparalleled flexibility for both qualitative and quantitative processes, including the powerful ability to enrich information e.g. providing the calculation details of a multi-tiered allocation within the detailed line item for traceability or the originating company within detailed consolidations.
Driving Change Within & Across Functional Areas
Many types of digital transition are achieving their intended goals, but in a high number of these cases much of the existing work has been highly focused and driven within domains, and not across them.
This is due to the presence of mainly more inwardly focused functional domain groups, and to a lesser degree the fact that only relatively recently has modern technology dealt comprehensively at ultra-granular level with both inter- and intra-company workflows for both qualitative and quantitative type data flows, including the support for multiple data types.
Generally across all providers, processes that fail during implementation typically do so for the following reasons: 1) project teams do not have full representation from all of the functional areas impacted by the intended change. This includes the presence of senior management to break through any “walls” / inertia for change, and 2) a lack of focus regarding the skills required to effect systems integrations and critically who might provide them. As corporates focus on deeper x-functional area change, continued focus on these two areas will be critical to success.
Banks
The above described changes within the corporate world are just one part of the overall equation. Let’s now look at the transactional banking world for payments, and specifically on how changes here will facilitate corporates in the near future to achieve even greater levels of competitive advantage (or face greater competitive pressure if no action is taken).
Bank Infrastructure: Digital Connections
Three macro changes to consider here. Open Banking API’s, more efficient messaging standards, and improved global electronic communications, have each played a role that when combined will lead to more efficient, better integrated, and more transparent processes between banks, corporates and of course vice versa.
There have always been some types of process links available between them, but historically the actual functional areas addressed were limited in number, tightly fixed in scope, and came with a much higher technical and investment overhead.
Looking at each of these in turn:-
Bank Infrastructure: Open Banking API’s
High level government initiatives with Open Banking API’s are at the forefront of the open banking transition as highlighted above, and these activities continue to be rolled out across the world by local financial regulators using mutually agreed shared principles. Although starting with banks, these initiatives have extended to or empowered other types of providers as explored below.
The Open Banking API’s initiative can be described as global, but with local implementation. It is coordinated by financial regulatory bodies on a global basis, with overall recommended execution guidelines being presented / described at a more summary level. This leaves plenty of room for local regulators to sort out the details within their existing financial and legal frameworks, with the driver for each bank being the ability to provide global services to their customers through the leveraging of the resultant extensive network.
Open Banking API’s are simply the electronic data “connectors” that enable the managed linking of banking and business systems together. Each API is developed to handle specific types of financial instruction. Within countries, individual API types are typically being rolled out in “semi-controlled” phases that have defined milestone execution end dates, but with banks able to work at their own speed up to that point.
Each phase can typically be described as seeing more sophisticated API’s being made publicly available within a specific banking provider through a managed process, and this in turn provides corporations with even more detailed access to greater levels of transactional banking functionality, ultimately enabling processes to be fully integrated together.
Thinking more laterally, corporates can build their own app, or leverage existing standard apps from third party vendors to achieve specific functionality for their customers. The overall intent here is for them to achieve the desired level of functionality within the allowable scope of available API designs.
However, the overall scoping for a full end to end corporate process can be very sophisticated in nature ie it might enable multiple API’s from different providers to achieve specific things within an end to end process.
Embedded finance, that sees banking activities fully integrated into corporate or consumer processes is set to rapidly advance to bring advantages to all connected stakeholders within a process. Think FinTech, Insurtech style processes, but applied to a greater variety of general corporate based processes.
Bank Infrastructure: Messaging Standard ISO20022
Being adopted by many banks, ISO20022 (open global standard for financial information) enables a greater amount of richer information to accompany a payment when it is executed between the sender & receiver.
The standard provides much improved traceability & transparency, but it makes logical sense that this can only happen if the transactional journey between the sender and receiver operates the whole way within a ISO 20022 environment, otherwise the richer details will be lost.
The SWIFT network is an extremely popular messaging system currently used and owned by multiple banks globally. It supports both the new ISO20022 standard, as well as previous standards, with proactive transitional support for a period in time. It fits everyone’s needs, from those who want to use ISO20022 now, to those who cannot move to the new standard just yet. Additionally, the SWIFT messaging format also works with fax for those who have to rely on this communication mechanism.
Logically, any different or new payment provider framework that utilises SWIFT or equivalent network e.g. China CIPS, the Cross-Border Interbank Payment System, a renminbi-based interbank payments system , will benefit from broader global interconnectivity as well. It is important to note that CIPS can use its own messaging system or the SWIFT protocols.
Complicating matters further, there are in fact multiple settlement networks that work differently. For example, they can be real time or batch with each requiring integration into the end to end payment network. These include ACH for US settlement; Real Time Gross Settlement Systems (RTGS) – an example being CHAPS in the UK; FPS real time settlement – Hong Kong only but also facilitated by ISO 20022 as are similar type systems in other countries. Each one has its own operational quirks i.e. each requires different levels of supporting information to be provided, and this can impact the overall efficiency as input mistakes can be made within the sender to receiver process.
Bank Infrastructure:- Global Electronic Communications
In general, electronic communications are far better than ever before, recognising that communications infrastructures used to be a seriously expensive operational barrier to overcome (hence the formation of SWIFT).
This has changed over time, and infrastructure can now be readily set up or even leveraged from other existing third party communication providers, at far cheaper costs. This trend is certainly going to continue into future years e.g. low satellite orbiting data oriented space based networks.
Corporate + Bank + Embedded Finance
Combining the benefits of changes within corporate and banking systems enable deep structural change to take place i.e. seamless digital enablement across functional areas with embedded finance.
What are the types of market players that now act as banking providers, and how have they positioned themselves (so far)?
Bank Players: Existing Banks
Already providing extensive customer services they are opening their internal systems to offer Open Banking API’s (regulatory driven), and in this process are leveraging ISO 20022, and continually leveraging improvements in communication technology.
Faced with new types of competitive players in some areas of their business, they are having to change some aspects of their go-to-market model (albeit in a very controlled manner), so as to protect their other revenue streams (at least to the degree they deemed necessary today), whilst also trying to remain competitive. At the same time some major existing banking players are also establishing themselves as Neo Banks in parallel to their traditional business models.
Example of a changed business model: https://www.merchantbox.business.hsbc.com.hk/. Note the pricing model is more transparent from the start.
Bank Players: Neo Banks
These have no internal legacy systems, no branch networks and operate at lower costs per customer than traditional banks. They are able to deploy their systems using the latest technologies. This means that their digital processes flow more smoothly with less friction, but with more limited types of interpersonal interactions (the metaverse might change the playing field here). Worthy of note is that they are regulated, with bank balances protected under government initiatives.
They can be new entrants from different fields or an offshoot of existing banks. Examples of the latter: Mox by Standard Chartered Bank in Hong Kong, ubank by NAB in Australia, Mettle by NatWest in the UK. Sometimes the new style business models do not work as planned and the Neo Bank will close.
Bank Players: New Payment Entrants
As core Open Bank API connectivity becomes available, and as overall new market entry costs become much lower, traditional banking incumbents are finding themselves competing with new types of entrants, start-ups or well established corporates, who are entering into specific areas, like the payments market.
These New Entrants are not banks, nor Neo Banks, and can be described as non-regulated electronic money accounts (some other names include Stored Value Facilities, e-Wallets, Digital wallets etc). Bank balances are typically not protected by government initiatives, and they are also not regulated as traditional banks.
However, these entrants are often focused, and leverage unique commercial advantages that make them stand out. They are agile, nimble and aim to selectively disrupt the well-established banking market, but sometimes lack overall depth e.g. geographical reach, currencies handled etc, meaning that they are either a good or bad fit to your business (see more in the notes at the bottom of this page).
It is also true to say that corporates may use the services of these New Entrants on a trial basis, and as an adjunct to their existing banking relationships to gain benefits in very specific situations.
To what extent will these different types of market players solve the current issues faced by corporations today?
Corporate Challenges with Banks: General
As a starting point, note that both the sender and receiver of funds operate within broadly the same set of challenges for any single transaction. There is a breakdown of these challenges within functional areas below to specifically highlight where corporates are challenged, but also to indicate that not all corporates necessarily face the same banking transactional related operational issues within each domain functional area i.e. their pain points can differ that they operate.
Corporate Challenges with Banks: Extensibility and Interoperability
Banks, Neo Banks and New Payment Entrants can present operational and integration challenges with your business systems. Whilst many seemingly equivalent payment handling options are available to corporates on the surface, you really need to look very carefully at the underlying details, on an end to end basis, to see whether your specific vendor solution sets will actually work for you in the way that you require.
For example, integrated payment processes and corporate business systems both have to be extensible and interoperable, so careful due diligence is required to ensure that, 1) your internal systems can handle granular workflows to process inbound and outbound transactions, 2) that the payment handling provider (Bank, Neo Bank or new payment entrant can meet your end to end requirements e.g. FX, currency handling, geographic location support etc, and 3) that you can connect your internal systems and integrated payment processes together to the extent required for your needs.
One critical decision point here for #3 is for you to figure out the level of integrations for your operational needs. This is based primarily, but not exclusively, on transaction volumes, time + costs to manage the direct and indirect intricacies associated with each transactional type + cybersecurity.
Corporate Challenges with Banks: Costs.
Corporates do not have an exact handle on how much their banking relationships are actually costing them per annum. This is due to the costs not being fully visible and transparent within the sender to receiver process, leading to a multitude of direct and indirect transactional costs for each and every bank account. There are also other ongoing periodically billed annual costs that are often charged by financial institutions at a more granular level.
One overall benefit going forwards is that costs associated with banking are going to be a little more transparent / predictable as new pricing models emerge. On the positive side, your costs will be lower with more competition, but on the negative side (only due to the $ involved) you will have a better appreciation of the costs already being incurred as direct and indirect costs.
To start with it might be hard for you to compare costs on an apple to apple basis as costs may fall into different budgets ie indirect transaction cost & fixed costs + direct transaction costs & fixed costs + banking interface costs / ongoing management costs + API costs / ongoing management costs. Also headcount costs, training costs and softer costs associated with actions around traceability.
Corporate Challenges with Banks: Visibility.
With no real end to end transparency, international payments remain problematic for corporates with regard to understanding the timing of monies being paid or received by them, as well as the timing of costs that accompany a transaction, particularly in relation to overseas bank charges (depending on whether these are being paid by sender or receiver).
Not only that, but this uncertainty extends into other areas e.g. the administrative time plus costs that are associated with making payments, as well as any post payment execution administration in understanding / recovering payments should they get lost in transit.
Corporate Challenges with Banks: Differing Payment Details.
During payment initiation, working with different banking settlement networks (as touched on above) can introduce administrative based errors and omissions i.e. the information required to make a specific payment differs in some way. At the same time fx rate driven differences can drive execution delinquency where delayed charges can come into play (this can be months).
Corporate Challenges with Banks: Banking vs Books of Account.
Looking backwards in time, banking processes have run mostly at a distance, and of course always exist in parallel to the books of account. As technology has advanced, there have been some major improvements in these parallel areas to bring them closer together at any specific point in time i.e. full or semi automation of bank reconciliations, ease of accessing e-statements to check receipts & payments, and being able to aggregate cash positions (i.e. balances) for the books of account that enable a corporate to reach a local, regional or global cash position when the information is presented in different dimensions.
Think also here of communications between sender and receiver and the language of currency / fx rates / language spoken during discussions, where both parties are working in their local one. This leads to frustrations, but it is worth noting that modern day financial systems offer unprecedented flexibility surrounding inter-company handling. Examples: FX revaluations / reconciliations in the required currency (i.e. can toggle between currencies), including at segment level, as well as the ability to enrich transactions with source company details for traceability purposes.
Corporate Challenges with Banks: Domestic Transactions
It is also true to say at the outset that domestic payment execution has certainly become much more convenient with e-banking, and with the technologies explained above there are options for payments not only to instantly reach a payee’s account, but for the receiver to be notified of the transaction. Some organisations will be satisfied with these arrangements.
Corporate Challenges with Banks: Overseas Transactions
Execution of overseas transactions remains a challenge for some (but certainly not all) depending on the amounts, transaction volumes, and countries involved in the process. As a result, corporations will come up with opposing views as to whether they actually face banking related issues. However, those with multiple bank accounts (for sake of further discussion say in the double digits) are more likely to face significant challenges that they are eager to solve in order to improve their productivity.
Corporate Challenges with Banks: Large Corporations cf SME’s
In this regard, a company’s turnover will determine your access to banking facilities, including global pooling, net offs of debit and credit balances (where legal) across your entities to reduce overdraft fees, but as you might guess your organisation has to be of significant size and reach with turnover historically at c. US$1B to even be entertained by banks at this level.
Moving Forwards: Business Systems: So how can you move forwards?
It can be challenging! To start with, gain a broad understanding of what is possible to achieve as well as technically deliverable before you focus on execution to solve your specific pain points to avoid the pitfalls highlighted above. In the notes below there are more details about electronic money accounts that will provide some other operational pointers prior to making a decision.
It is important to think about this in detail from: 1) from the perspective of bringing your actual books of account and your banking transactions much closer together in the shortest time period possible, and 2) exploring how your business systems can leverage from the first point, across other functional areas, for any ongoing actions and workflows.
The following are examples only and non-exhaustive:-
Accounts Payable: Payments can be integrated into your business processes to reduce administrative costs, improve efficiencies and reduce costs related to execution. This ensures that transactions are only executed within budget with fully compliant processes i.e. only valid deliveries are paid for; settlement and contractual volume discounts are maximised etc. Holistic management of each supplier, qualitative and quantitative, also provides deeper controls for risk management and sustainability related activities..
At another level, this includes extended processes to mitigate against Business Process Compromise, where threat actors attempt to use social engineering techniques to divert your funds to bank accounts under their control; think here of bonus, supplier payments, capex etc. To mitigate against this risk, more sophisticated and controlled payment sign-off processes that contain more actionable contextual information can be put into place.
Accounts Receivable: Extending payment workflows for your invoices, so that your customers have streamlined processes for settlement helps drive efficiencies at both ends. Different payment options can also be provided to align your processes more tightly with those of your customer, making it easier for them to execute payment, one example being QR codes.
At another level, actionable contextual workflows for delinquent payments can also be put into place and holistic management at this level can feed back into fine tuning of overall business models.
Budgets and FP&A
Capex requirements and larger purchase items can be managed by richer more contextual processes that provide more detail. Examples: Is the item to be insured, any special cyber security considerations, any building changes required to fix an asset in place, more detailed information relating to how specific parts of a single asset are being replaced etc. To this end processes can be extended to other entities i.e. the process is owned and managed by a regional or global entity with the local entity completing the details.
At another level strict sign off processes can be put into place to ensure that budgets are only submitted once there have been the required number of approvals.
Consolidation, Cash Roll Ups: As touched on above organisations want to net off debit and credit balances to reduce banking costs. Others, out of necessity and where it is possible, use a more manual based approach of moving excess cash to a regional or global centre to manage scenarios where some entities are cash positive and others cash negative. This requires timely information at a macro level to ascertain upcoming cash requirements to effect such decisions, not to mention detailed record keeping.
Payroll in a global context: At a macro level, being able to manage your aggregated payroll expenses requirements in the context of funds that you need to receive from your regional and / or global HQ to make the payment. In other words, book and bank processes are seamlessly connected for treasury purposes.
Procurement and Expenses (T&E): Tighter integration of procurement and T&E expenses with your policies ensures within budget execution, and can really help in those more challenging management areas. For example, 1) decisions taking into consideration any approved expenses that have not yet been executed and 2) provision of multi-level, multi-criteria contextual based authorizations, including the ability to refer to original authorisations.
Some Electronic Money Accounts are able to leverage physical or virtual debit cards.Spending can be granularly controlled re expense limits and types of expense. In the notes below you will find a non-exhaustive listing of aggregated operational constraints which may / may not be an issue for your selected provider, so be sure to undertake due diligence.
Conclusion
Significant improvements in banking platforms, particularly around Open Banking API’s and the availability of electronic money accounts has moved the goal posts for banking to provide improved transparency and reduced costs. Advancements in process tech allows for granular end to end processes to be deployed x-application x-ecosystem and for payment options to be incorporated @anywhere within a process for customer, supplier and employee transactions. As always you will need to set priorities, and particular attention should be given to include 1) all relevant stakeholders in a specific process design and 2) ensure that skills are available for systems integrations, including their longer term management. The end result: timely and high quality information that will empower users to drive and execute decisions. A game changer!
FlexSystem is a financial, human resources, and operations business software vendor to 1 in 10 Forbes Global 2000 (May 2020), and 1 in 5 Global Fortune 500 (August 2020), operating at the intersection of new digital process and payment technologies, whether on-premise or cloud, providing both corporates and banks with iterative opportunities for value creation within a compliant data management environment.
Other Notes:-
- Providers: Examples, 1) Global banks 2) Global Banks plus SWIFT 3) Neo Banks 4) Electronic Money Accounts, noting that some use SWIFT (maybe extra $) or other alternate point to point settlement networks.
- Electronic Money Accounts (EMA). Would emphasise that any transaction fees should be compared holistically across your short list of providers. Also note, that as touched on above, some payment and receipt transfers are immediate and others are not. This is due to how the underlying settlement system works i.e. batch or immediate. EMA’s typically are very focused so you need to work through the details.
- Here are some example aggregated areas (appear in some providers, but not all) :- 1) Transaction limits can be by transaction as well as aggregated volume $. These limits may be fixed with no process for increasing either of them, 2) Regulations in the payment sending country typically means having a physical office presence. This means that some currencies might be switched to an allowable base currency. This might incur charges, 3) FX rates may or may not be averaged across other similar providers. As a result there is no immediate rate visibility. 4) In the main text above, we referenced integrations with business systems. Some EMA’s do not support API integrations. Where they do, any updated API implementation is to be undertaken by the user, noting that for critical changes no service is possible until updated. Check for SSO services and also check all related security options. 5) Charges / Fees can be variable and incurred in different ways so look at the details.eg Sign Up Fees / Monthly Fees / Integration Fees / Receiving cash fees / Holding cash fees. Some providers aim at higher transaction amounts and achieve this via their fee structure to discourage certain transaction $ levels. As described above the challenge here is that your current banking costs are not in one place so it is hard to compare all costs in detail. 6) Point to point country transfers are not always possible. For Europe some providers have no support for the required International Bank Account Number (IBAN) and Bank Identifier Code (BIC) which are required for SEPA, the Single Euro Payments Area. 7) Support levels vary re access to account management and support for messaging platforms are not consistent. Check support for your preferred communications options: email, phone, WhatsApp, WeChat, etc. 8) Wallets may not aggregate across balances. 9) Some providers have white label credit cards that may or may not have transaction mark-ups for currency. Cards are typically virtual and are downloadable from APP stores (some have monthly fixed fees / subscriptions) and might have other features like one card for one expense type and limits set by day / month or year. Note aggregate limits in place across all cards. Physical cards are not available in each country / might not work in ATM’s.
- ISO 20022 messages for cross-border payments and cash reporting businesses started on August 2022 on an opt-in basis, with a 20th March 2023 date being in place for general availability. After this the go-live date for ISO 20022 for CBPR+ will first see co-existence of old and new messaging formats from March 2023 with the end of the coexistence period in November 2025
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