Technology changes in Treasury

Generally, treasury technology is not characterised by being on the forefront of the general technological development or by landmark changes. However, over the last few years there have been a number of developments that have changed the landscape significantly, and this primarily has two reasons:

• Cloud computing has made its entry into treasury
• Corporate to bank communication has been streamlined via SWIFT

Roger’s Innovation Adaption Curve classifies buyers in five categories:

• Innovators
• Early Adapters
• Early Majority
• Late Majority
• Laggards

The technologies we will examine in this article have at best just been taken up by the Early Majority category, but in the future they will have a significant impact on treasury technology and on processes in the treasury department.

Cloud computing and hosting of treasury systems
Cloud computing has also made its way into treasury technology.

In this section, we will discuss the delivery of treasury systems as a cloud service. Instead of installing the treasury software in-house, own hardware hosted treasury solutions offer the possibility to outsource the running and maintenance of hardware and software to service providers over the internet.

A hosted solution has a number of advantages and the following have been most important for the treasury department:

• Reduced dependence on scarce internal IT resources
• World-wide access to the system
• Reduced total costs of ownership

In many ways, a hosted solution is much more flexible. It is easier to scale, both in terms of hardware and of rollout. Another example of the flexibility is that you don’t need to keep the hardware for test systems in times when you do not need a test system; you can simply rent it for a limited period of time from the hosting provider whenever you need an extra system.

Furthermore, hosted solutions open up new possibilities, since the solution vendors provide their clients with new services as plug-and-play services, such as standard rate feeds or ready-to-use payment interfaces for an extra fee.

There have been a number of concerns about using hosted treasury solutions. The fear is that you would not be able to access the system in critical situations or that outsiders may be able to access the system, which contains important information about bank details and then be able to intervene in the payment process and divert funds fraudulently.

Most treasurers have now abandoned their resistance to a hosted treasury solution and today they realise that you can get a better service level from a hosting partner than from your own internal IT department. What is especially important, is that you can get a guaranteed service level from a hosting provider. For example, treasury can itself agree with the hosting partner on the guaranteed up time and the maximum time it should take to restore a crashed server. Usually, you do not get such guaranteed service levels from an internal IT department. This way, the apprehension has turned into an advantage.

Furthermore, the risk that un-authorized individuals would be able to access the system has not been the case. Not only hasn’t there been any reported cases where fraud has been committed due to the solution that was hosted, but also other departments, such as the sales department have trusted the cloud with their very valuable data in hosted Customer Relationship Management systems.

The first dedicated hosted treasury and cash management solution started around the year 2000, take for example Kyriba, but the adoption was slow. By that time Richmond Software (later bought by Wall Street Systems) had also begun hosting their Millennium solution, but only a few customers chose this solution. It took until 2005 before hosting was chosen by other customers beside the Innovators. However, after that the pace increased and already in 2007 more than ½ of the systems sold were hosted. Today approximately 90% of new sales are hosted solutions.

The hosted solutions are now being bought by companies in the Early Majority category, since there are many in-house workstations already installed in companies that were sold before hosting took off. The majority of treasury workstations are still installed in-house.

SWIFTNet connectivity
In the late 90´s, SWIFT opened up their network SWIFTNet for corporations with limited use. It was known to be complicated, required a lot of legal work and was expensive. With the introduction of the Standardised Corporate Environment, better known as SCORE, SWIFT streamlined the interfacing and standardised the legal agreement. At the same time the price for using SWIFTNet had dropped.

In 2005 there were about 100 corporates using SWIFTNet, but today more than 700 corporates have adopted it for their communication with the banks.

The typical profile for a corporate using SWIFTNet is

• Over 1bn euro turnover yearly
• Multiple banking relationships for payments
• Based in Europe

Close to 70% of the corporates using SWIFTNet are based in Europe, but only a few of them are Nordic companies. However, recently we have seen a great interest from Nordic companies in SWIFTNet at events hosted by Nasarius or where Nasarius has participated, so we think that more Nordic companies will soon jump on the bandwagon.

The main advantage of SWIFT is that it makes electronic communication with banks more streamlined. A corporate only needs one connection to SWIFTNet instead of installing multiple electronic connections; one for each bank.
SWIFTNet allows you to send two types of messages:

• Treasury related messages such as high value payment instructions or trade confirmations
• Messages for bulk payments for outstanding invoices

Furthermore, you can also receive messages from the banks which would typically be:

• Counter confirmations on trades
• Bank statements

SWIFTNet in itself is very safe and having only one channel for banking communication allows you to focus your attention on making it more reliable and safe.

However, SWIFT is not the solution for all external communication. It only allows you to communicate with financial institutions that are members of SWIFT. This means, it does not allow you to communicate with other corporations via SWIFTNet or for example with your trading platform directly.

Furthermore, due to higher fixed cost it is rarely used when using only a few banks for payments, two or three banks for example. SWIFTNet requires higher investments up-front but the marginal cost of an additional bank connection is much lower than the traditional host-to-host connectivity.

SWIFTNet connectivity is now being chosen by companies in Europe in the Early Majority category. Adoption is still concentrated in Europe, but the acceptance of SWIFTNet is growing worldwide.

XML format for payments
While SWIFTNet only helps with connectivity, there have also been developments on the content side.

Often, corporate treasurers have been searching for a common format to communicate with their banks. The national payment formats are very different, both in function and in format. In the 90’s, the EDIFACT format was developed as a standardised format that promised to be a universal format for corporates communicating electronically with banks. However, it soon turned out that each bank had its own interpretation of the EDIFACT messages.

In 2005 the first version of XML payment formats was published as the ISO 20022 format. The big international transaction banks, such as Citi Bank and HSCB, were among the first adopters along with some of their big multinational clients, such as Merck in the US.

SEPA gave a push to the ISO 20022 format as it was agreed that this format should be used for bank-to-bank communication for SEPA payments after the start of SEPA credit transfers in January of 2008.

The first corporations that started using the ISO 20022 message discovered that the banks again had different interpretations of the details in the message structure. To avoid that it again should end in multiple bank dependent dialects, as with the EDIFACT message, there have been several initiatives to reach a 100% standard. The banks have also acknowledged the advantage of a single format. Therefore, they are willing to cooperate with other banks, large corporations and software providers on a common interpretation of the standard to the advantage of the whole industry. They are doing that in the “Common Global Implementation for ISO20022 Cash Management” group, which consists of large corporations such as IKEA, Yara and Microsoft. They are working on a common interpretation of the new XML format, together with several banks including Nordea, Deutsche Bank, and Citi Bank and three system vendors; SAP, Oracle and SunGard.

This should hopefully ensure that we will not end up with different dialects of the same formats, but we have to wait to see how it will be implemented in practice.

For some time now, the Nordic banks have already had formats for handling the SEPA euro payments. However, for the Danish, Norwegian and Swedish kroner payments it took longer to be aligned with the XML format. This year, some of the large Nordic banks have declared that they are ready to accept XML kroner payments.

The ISO 20022 format is acknowledged for its importance and is moving from only being embraced by the Early Adapters to the Early Majority. The format has reached the tipping point where ISO 20022 is gaining territory compared to EDIFACT for implementation of payment formats. Some companies see it as the safe choice for the future and not using XML for a payment interface now are not in line with their strategically perspective.

New initiatives
Looking further ahead, there are other developments that will have an effect on a treasury’s process, organization, systems and how treasury will interact with their bank in the future. It is primarily about communication between banks and their corporate customers and SWIFT is playing a leading role in most of these initiatives. Two initiatives are the Electronic Bank Account Management and a new key for personal digital signatures.

eBAM
The first of them is the electronic bank account management, abbreviated as eBAM. It is a set of new XML messages according to the ISO 20022 standard. It will automate the management of bank accounts for corporations. There are four possibilities:

• Opening new bank accounts
• Closing bank accounts
• Maintaining bank accounts e.g. change of signatories
• Requesting the banks data regarding bank accounts

Instead of having paper based and manual processes and relying on faxes and manual keying for these scenarios it is now possible to have a fully automated process with electronic interfaces where corporations can send requests to their bank and exchange information regarding their bank accounts.

Naturally, if you only have a few bank accounts and they do not change often, dealing with implementation is not worth the effort, but for some companies it has great value.

eBAM not only makes it easier to exchange information about bank account master data, it also makes the process much more safe and reduces the risk of fraud.

This technology is very new and the larger treasury solution providers are only now bringing out solutions for eBAM.
The first on the market with a solution for corporates for eBAM was Speranza Systems, which was bought by Wall Street Systems this year. However, now the other major treasury solution providers are also bringing out solutions for eBAM.
This technology is currently clearly only being adopted by the Innovators. One should also acknowledge that eBAM also competes with the banks on-line self-service offerings. So the market for this solution is much smaller than for example SWIFTNet connectivity, because you would need many bank relationships to have a software solution to manage, so it would pay off.

It is Nasarius’s experience that the Nordic banks are currently following the development, but they are waiting for a corporate that would actually demand this as a condition to use the bank before developing a solution.

3SKey
3SKey is short for SWIFT Secure Signature and it is a new key for personal digital signing of payment instructions that are being sent from corporations to banks.

Personal digital signings are nothing new, but they are always issued by a single bank and can only be used with that bank’s accounts. The unique feature about the 3SKey is that the token can be used towards multiple banks. The token you get from one bank can also be used for other banks after a registration of the token. Naturally, the bank would have to support the technology, and not all banks are ready yet.

Currently it is being rolled out in France, where the domestic corporate-to-bank standard, ETEBAC, has reached the end-of-life. The 3SKey tokens are being managed by SWIFT, from which the banks buy them before forwarding them to the corporate clients.

Not all corporations will need this. Many are happy with a corporate signature on the files that are being sent to the banks and then relying on the internal processes to ensure that the payment instructions sent are valid payments. However, in some countries personal signatures are mandatory for corporate payments.

It can be difficult to classify who will buy this product. In France, the solution is getting closer to be implemented by the Early Majority group, whereas in the rest of the work it is still only the Innovators who consider this solution.
The banks in the Nordic area do not see any need to develop a solution for this, because in the Nordic area there aren’t any legal demands for it, but Nordic corporates may still start using 3SKey if they operate in countries that require personal signatures.

Conclusion
Treasury goes through an interesting period with several new technological developments. Much of it is related to SWIFTNet connectivity and the ISO 20022 XML formats. SWIFT is a driving force for these initiatives and together with leading corporates, big banks, and software vendors they are piloting new functionality that many more corporations will benefit from later.

Not all developments would be of interest to all corporations, but Nasarius recommends that corporate treasurers keep themselves updated with the technology changes.

Author: Joergen Jensen, Nasarius

There are many conferences and web-sites where treasurers can find information and they can also get information about the new developments from their consultants and relationship banks. In case any of the new developments are interesting and could possibly fit the corporate, then the corporate should consider developing a business case to examine the ROI and pay-back-time, as well as strategic importance of the development.