ISO 20022 XML – An Opportunity to Accelerate and Elevate Receivables Reconciliation

Whether a corporate operates through a decentralized model, shared service center or even global business services model, identifying which invoices a customer has paid and in some cases, a more basic "who has actually paid me" creates a drag on operational efficiency. Given the increased focus on working capital efficiencies, accelerating cash application will improve DSO (Days Sales Outstanding) which is a key contributor to working capital. As the industry adoption of ISO 20022 XML continues to build momentum, Zanders experts Eliane Eysackers and Mark Sutton provide some valuable insights around why the latest industry adopted version of XML from the 2019 ISO standards maintenance release presents a real opportunity to drive operational and financial efficiencies around the reconciliation domain.   

A quick recap on the current A/R reconciliation challenges

Whilst the objective will always be 100% straight-through reconciliation (STR), the account reconciliation challenges fall into four distinct areas:

1. Data Quality

• Partial payment of invoices.
• Single consolidated payment covering multiple invoices.
• Truncated information during the end to end payment processing.
• Separate remittance information (typically PDF advice via email).

2. In-country Payment Practices and Payment Methods

• Available information supported through the in-country clearing systems.

• Different local clearing systems – not all countries offer a direct debit capability.

• Local market practice around preferred collection methods (for example the Boleto in Brazil).

• ‘Culture’ – some countries are less comfortable with the concept of direct debit collections and want full control to remain with the customer when it comes to making a payment.

3. Statement File Format

• Limitations associated with some statement reporting formats – for example the Swift MT940 has approximately 20 data fields compared to the ISO XML camt.053 bank statement which contains almost 1,600 xml tags.

• Partner bank capability limitations in terms of the supported statement formats and how the actual bank statements are generated. For example, some banks still create a camt.053 statement using the MT940 as the data source. This means the corporates receives an xml MT940!

• Market practice as most companies have historically used the Swift MT940 bank statement for reconciliation purposes, but this legacy Swift MT first mindset is now being challenged with the broader industry migration to ISO 20022 XML messaging.

4. Technology & Operations

• Systems limitations on the corporate side which prevent the ERP or TMS consuming a camt.053 bank statement.

• Limited system level capabilities around auto-matching rules based logic.

• Dependency on limited IT resources and budget pressures for customization.

• No global standardized system landscape and operational processes.

How can ISO20022 XML bank statements help accelerate and elevate reconciliation performance?

At a high level, the benefits of ISO 20022 XML financial statement messaging can be boiled down into the richness of data that can be supported through the ISO 20022 XML messages. You have a very rich data structure, so each data point should have its own unique xml field.  This covers not only more structured information around the actual payment remittance details, but also enhanced data which enables a higher degree of STR, in addition to the opportunity for improved reporting, analysis and importantly, risk management.

Enhanced Data

• Structured remittance information covering invoice numbers, amounts and dates provides the opportunity to automate and accelerate the cash application process, removing the friction around manual reconciliations and reducing exceptions through improved end to end data quality.
• Additionally, the latest camt.053 bank statement includes a series of key references that can be supported from the originator generated end to end reference, to the Swift GPI reference and partner bank reference.
• Richer FX related data covering source and target currencies as well as applied FX rates and associated contract IDs. These values can be mapped into the ERP/TMS system to automatically calculate any realised gain/loss on the transaction which removes the need for manual reconciliation.
• Fees and charges are reported separately, combined a rich and very granular BTC (Bank Transaction Code) code list which allows for automated posting to the correct internal G/L account.
• Enhanced related party information which is essential when dealing with organizations that operate an OBO (on-behalf-of) model. This additional transparency ensures the ultimate party is visible which allows for the acceleration through auto-matching.
• The intraday (camt.052) provides an acceleration of this enhanced data that will enable both the automation and acceleration of reconciliation processes, thereby reducing manual effort. Treasury will witness a reduction in credit risk exposure through the accelerated clearance of payments, allowing the company to release goods from warehouses sooner. This improves customer satisfaction and also optimizes inventory management. Furthermore, the intraday updates will enable efficient management of cash positions and forecasts, leading to better overall liquidity management.

Enhanced Risk Management

• The full structured information will help support a more effective and efficient compliance, risk management and increasing regulatory process. The inclusion of the LEI helps identify the parent entity. Unique transaction IDs enable the auto-matching with the original hedging contract ID in addition to credit facilities (letters of credit/bank guarantees).

In Summary

The ISO 20022 camt.053 bank statement and camt.052 intraday statement provide a clear opportunity to redefine best in class reconciliation processes. Whilst the camt.053.001.02 has been around since 2009, corporate adoption has not matched the scale of the associated pain.001.001.03 payment message. This is down to a combination of bank and system capabilities, but it would also be relevant to point out the above benefits have not materialised due to the heavy use of unstructured data within the camt.053.001.02 message version.

The new camt.053.001.08 statement message contains enhanced structured data options, which when combined with the CGI-MP (Common Global Implementation – Market Practice) Group implementation guidelines, provide a much greater opportunity to accelerate and elevate the reconciliation process. This is linked to the recommended prescriptive approach around a structured data first model from the banking community.

Finally, linked to the current Swift MT-MX migration, there is now agreement that up to 9,000 characters can be provided as payment remittance information. These 9,000 characters must be contained within the structured remittance information block subject to bilateral agreement within the cross border messaging space. Considering the corporate digital transformation agenda – to truly harness the power of artificial intelligence (AI) and machine learning (ML) technology – data – specifically structured data, will be the fuel that powers AI. It’s important to recognize that ISO 20022 XML will be an enabler delivering on the technologies potential to deliver both predictive and prescriptive analytics. This technology will be a real game-changer for corporate treasury not only addressing a number of existing and longstanding pain-points but also redefining what is possible.