As any seasoned treasury or finance practitioner knows from experience, organizations dealing with numerous banking partners must account for a broad and constantly shifting range of protocols when it comes to processing payments. For instance, if a business has relationships with six or seven banks spread across the globe, it could easily be looking at 25-plus variants of payment formats.
In a recent PaymentsJournal podcast, Jon Paquette, Executive Vice President of Solutions and Product Strategy at TIS (Treasury Intelligence Solutions), and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discuss the best practices for dealing with multi-bank connectivity and payment processes.
The Challenges of Automation
Given the variances that occur across different banks and regions for financial messaging formats, remittance data fields, regulatory reporting standards, etc., dealing with multiple banks can become very complex for organizations to manage. And it’s not just the bank connections themselves that need to be managed, but also the systems that leverage those connections. According to Paquette, operators of ATMs or payroll systems up to TMS and ERP users would all benefit from using an efficient model that allows those systems to tap into a unified connectivity structure that enables straight-through process automation.
Of course, it will never be feasible for an organization to use just a single bank relationship globally. One reason (out of many) is for insuring against bank failures. “Corporates that have relationships with non-globally systemic important banks are multiplying their number of bank relationships for fear that their deposits may not be insured beyond the $250,000 level,” Bodine said. But as the number of bank partners and underlying accounts rises, “the ability to manage all these different portals, protocols, and interfaces becomes a major obstacle.”
Bank connectivity drives a great deal of process automation within finance. Payments are a critical piece of the puzzle, but organizations also use inbound bank reporting to automate financial records and accounting entries. Treasury, for one, relies substantially on bank data as fuel for its cash forecasting and cash positioning functions. And without a unified connectivity strategy, it can be difficult to maintain visibility across each regional finance center or shared service center, as well as across various entities, business units, and bank groups.
Breaking Down the Silos
Paquette points out that it’s difficult to maintain consistent controls without straight-through processing in place, to make sure that all the subsidiaries are executing payments in the same way. A lack of standardization can introduce extra risk to the payment process, which becomes a significant issue for some organizations as data management strategies take on greater importance. Without a holistic bank connectivity solution, banks often end up operating in data silos.
“If you have a multi-ERP technology structure, for instance, you’re likely using different systems in different regions, and you’re connecting your banks to those localized systems,” Paquette said. “You end up with data trapped inside localized silos that are driven by the systems in use across those regions. Having a more comprehensive connectivity strategy (i.e. all banks or ERPs feeding into or connected by a central system) helps to break down those data silos.”
As companies are growing, trying to implement automated processes can result in extra confusion, a lack of control, and a lack of visibility. It can also become chaotic for finance to manage rapid growth as things change within the business – such as what is caused by multiple acquisitions of companies each with their own preexisting set of bank relationships and back-office systems. And without a definitive strategy in place, many companies focus on the big targets – such as the main cash management banks – but tend to overlook the outliers because they add too much complexity.
“As a result,” Paquette said, “these partial implementations don’t serve the organization the way that they were intended to.” The end result is even more siloes and continued inconsistency with reporting and visibility.
Weighing In-House Solutions
When it comes to solving the above issues, some organizations focus on developing strong in-house resources to unify their banking landscape. If a company has a large and experienced IT team with ample bandwidth, this can definitely be accomplished. But there’s always a bit of a balancing act: Is it really worth IT’s time and effort to manage a project of this magnitude in-house, or is it more cost-and-time effective to hire an external resource and focus on something else internally? Often, internal strategies appear to be the better solution early on, but end up incurring huge IT maintenance costs – not just for initial development, but also for ongoing upkeep. Accounting for those internal costs makes the business case stronger for adopting a specialized, externally managed solution.
“If you’re working with five to seven banks, there’s already enough complexity to start thinking about hiring a specialized provider for your connectivity strategy,” Paquette said. “It allows you to put in place a centralized connectivity hub where the provider is connecting your different bank relationships in a multi-protocol fashion.” That way, as your company expands to encompass potentially dozens of banks and hundreds or thousands of accounts, a strategy and solution is already in place to accommodate the growth.
“If you have a mix of protocols like API and host connections, all those can connect into that centralized hub,” Paquette continues. “That gives your business just one point of entry into their bank relationships. If you’re connecting ERP systems, payroll systems, and a TMS, one connection to that hub can give you access to your entire bank portfolio within each system, versus thinking about each individual connection and managing those back and forth. We find this to be a really effective strategy.”
With a decentralized finance structure and regional shared service centers that operate autonomously, getting visibility into those processes can also be a challenge.
“The example I like to use is with the ISO 20022 protocol,” Bodine said. “There are now 60 different implementations of this so-called standard. That’s just one example of why you would not want to manage this in-house. Organizations simply don’t have the bandwidth to do this, in my estimation. You would want to partner with an organization like TIS that really knows what they’re doing here.”
Once a company has a connectivity hub in place, major simplifications can ensue. With a single payment instruction format sent into that hub, the software can conduct the transformations into the ISO variants and pick up all the geographic nuances. It also alleviates any strain on internal IT teams to constantly maintain and update those variants in-house.
Key Questions
Treasury, finance, and IT teams aiming to take their organization through a global payments transformation or banking process overhaul should ask themselves a few questions:
- Is there a global process owner for payments? Today, many organizations are seeing their treasury teams serve as the global business owner of the payments process, driving how the business will make payments and putting scalable models in place to fuel growth. If no “global owner” exists, aligning on who the owner should be will help establish responsibility for creating a standardized and unified strategy to orchestrate them over time.
- Do you understand all the ways that your business makes payments? “Map all the different ways your business is making payments across treasury, AP, expense reimbursements, payroll tax payments, etc.,” Paquette said. “It needs to be a full mapping of how those payments are made, what systems are involved, what geographies are encompassed, and what existing controls are in place.”
- Do you have consistent payment guidelines? If not, using an approval process that’s dictated down from the treasury level that can then be adopted within the business is a great strategy. This pays dividends when the organization can bring in standardized approval processes via automated workflows through a payment hub.
- Are there gaps in your visibility? “We speak with many businesses where treasury wants to achieve a greater view of what’s happening for control purposes or even just for cash management purposes,” Paquette said, “just to know what’s happening on a day-to-day basis.” Often, one of the best places to start is by examining bank connections.