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.

The corporate treasury agenda continues to focus on cash visibility, liquidity centralization, bank/bank account rationalization, and finally digitization to enable greater operational and financial efficiencies. Digital transformation within corporate treasury is a must have, not a nice to have and with technology continuing to evolve, the potential opportunities to both accelerate and elevate performance has just been taken to the next level with ISO 20022 becoming the global language of payments. In this 6^th article in the ISO 20022 XML series, Zanders experts Fernando Almansa, Eliane Eysackers and Mark Sutton provide some valuable insights around why this latest global industry move should now provide the motivation for corporate treasury to consider a cash management RFP (request for proposal) for its banking services.

Why Me and Why Now?

These are both very relevant important questions that corporate treasury should be considering in 2024, given the broader global payments industry migration to ISO 20022 XML messaging. This goes beyond the Swift MT-MX migration in the interbank space as an increasing number of in-country RTGS (real-time gross settlement) clearing systems are also adopting ISO 20022 XML messaging. Swift are currently estimating that by 2025, 80% of the domestic high value clearing RTGS volumes will be ISO 20022-based with all reserve currencies either live or having declared a live date. As more local market infrastructures migrate to XML messaging, there is the potential to provide richer and more structured information around the payment to accelerate and elevate compliance and reconciliation processes as well as achieving a more simplified and standardized strategic cash management operating model.

So to help determine if this really applies to you, the following questions should be considered around existing process friction points:

1. Is your current multi-banking cash management architecture simplified and standardised?
2. Is your account receivables process fully automated?
3. Is your FX gain/loss calculations fully automated?
4. Have you fully automated the G/L account posting?
5. Do you have a standard ‘harmonized’ payments message that you send to all your banking partners?

If the answer is yes to all the above, then you are already following a best-in-class multi-banking cash management model. But if the answer is no, then it is worth reading the rest of this article as we now have a paradigm shift in the global payments landscape that presents a real opportunity to redefine best in class.

What is different about XML V09?

Whilst structurally, the XML V09 message only contains a handful of additional data points when compared with the earlier XML V03 message that was released back in 2009, the key difference is around the changing mindset from the CGI-MP (Common Global Implementation – Market Practice) Group¹ which is recommending a more prescriptive approach to the banking community around adoption of its published implementation guidelines. The original objective of the CGI-MP was to remove the friction that existed in the multi-banking space as a result of the complexity, inefficiency, and cost of corporates having to support proprietary bank formats. The adoption of ISO 20022 provided the opportunity to simplify and standardize the multi-banking environment, with the added benefit of providing a more portable messaging structure. However, even with the work of the CGI-MP group, which produced and published implementation guidelines back in 2009, the corporate community has encountered a significant number of challenges as part of their adoption of this global financial messaging standard.

The key friction points are highlighted below:

Diagram 1: Key friction points encountered by the corporate community in adopting XML V03

The highlighted friction points have resulted in the corporate community achieving a sub-optimal cash management architecture. Significant divergence in terms of the banks’ implementation of this standard covers a number of aspects, from non-standard payment method codes and payment batching logic to proprietary requirements around regulatory reporting and customer identification. All of this translated into additional complexity, inefficiency, and cost on the corporate side.

However, XML V09 offers a real opportunity to simplify, standardise, accelerate and elevate cash management performance where the banking community embraces the CGI-MP recommended ‘more prescriptive approach’ that will help deliver a win-win situation. This is more than just about a global standardised payment message, this is about the end to end cash management processes with a ‘structured data first’ mindset which will allow the corporate community to truly harness the power of technology.

What are the objectives of the RFP?

The RFP or RFI (request for information) process will provide the opportunity to understand the current mindset of your existing core cash management banking partners. Are they viewing the MT-MX migration as just a compliance exercise. Do they recognize the importance and benefits to the corporate community of embracing the recently published CGI-MP guidelines? Are they going to follow a structured data first model when it comes to statement reporting? Having a clearer view in how your current cash management banks are thinking around this important global change will help corporate treasury to make a more informed decision on potential future strategic cash management banking partners. More broadly, the RFP will provide an opportunity to ensure your core cash management banks have a strong strategic fit with your business across dimensions such as credit commitment, relationship support to your company and the industry you operate, access to senior management and ease of doing of business. Furthermore, you will be in a better position to achieve simplification and standardization of your banking providers through bank account rationalization combined with the removal of non-core partner banks from your current day to day banking operations.

In Summary

The Swift MT-MX migration and global industry adoption of ISO 20022 XML should be viewed as more than just a simple compliance change. This is about the opportunity to redefine a best in class cash management model that delivers operational and financial efficiencies and provides the foundation to truly harness the power of technology.

Economic instability, a pandemic, geopolitical turbulence, rising urgency to get to net zero – a continuousstream of demands and disruption have pushed businesses to their limits in recent years. What this has proven without doubt is that treasury can no longer continue to be an invisible part of the finance function. After all, accurate cash flow forecasting, working capital and liquidity management are all critical C-suite issues. So, with the case for a more strategic treasury accepted, CFOs are now looking to their corporate treasurer more than ever for help with building financial resilience and steering the business towards success.

The future form of corporate treasury is evolving at pace to meet the demands, so to bring you up to speed, we discuss in this article five key observations we believe will have the most significant impact on the treasury function in the coming year(s).

1. A sharper focus on productivity and performance

Except for some headcount reductions, treasury has remained fairly protected from the harsh cost-cutting measures of recent years. However, with many OPEX and CAPEX budgets for corporate functions under pressure, corporate treasurers need to be prepared to justify or quantify the added value of their function and demonstrate how treasury technology is contributing to operational efficiencies and cost savings. This requires a sharper focus on improving productivity and enhancing performance.

To deliver maximum performance in 2024, treasury must focus on optimizing structures, processes, and implementation methods. Further digitalization (guided by the blueprint provided by Treasury 4.0) will naturally have an influential role in process optimization and workflow efficiency. But to maintain treasury budgets and escape an endless spiral of cost-cutting programs will take a more holistic approach to improving productivity. This needs to incorporate developments in three factors of production – personnel, capital, and data (in this context, knowledge).

In addition, a stronger emphasis on the contribution of treasury to financial performance is also required. Creating this direct link between treasury output and company financial performance strengthens the function’s position in budget discussions and reinforces its role both in finance transformation processes and throughout the financial supply chain.

2. Treasury resilience, geopolitical risk and glocalization

Elevated levels of geopolitical risk are triggering heightened caution around operational and financial resilience within multinationals. As a result, many corporations are rethinking their geographical footprint and seeking ways to tackle overdependence on certain geographical markets and core suppliers. This has led to the rise of ‘glocalization’ strategies, which typically involve moving away from the traditional approach of offshoring operations to low-cost destinations to a more regional approach that’s closer to the end market.

The rise of glocalization is forcing treasury to recalibrate its target operating model to adopt a more regionalized approach. This typically involves changing from a ‘hub and spoke’ model to multiple hubs. But the impact on treasury is not only structural. Operating in many emerging and frontier markets creates heightened risks around currency restrictions, lack of local funding and the inability to repatriate cash. Geopolitical tensions can also have spillover effects to the financial markets in these countries. This necessitates the application of more financial resilience thinking from treasury.

3. Cash is king, data is queen

Cash flow forecasting remains a top priority for corporate treasurers. This is driving the rise of technology capable of producing more accurate cash flow predictions, faster and more efficiently. Predictive and prescriptive analytics and AI-based forecasting provide more precise and detailed outcomes compared to human forecasting. While interfaces or APIs can be applied to accelerate information gathering, facilitating faster and automated decision-making. But to leverage the benefits of these advanced applications of technology requires robust data foundations. In other words, while technology plays a role in improving the cash flow forecasting process, it relies on an accurate and timely source of real-time data. As such, one can say that cash may still be king, but data is queen.

In addition, a 2023 Zanders survey underscored the critical importance of high-quality data in financial risk management. In particular, the survey highlighted the criticality of accurate exposure data and pointed out the difficulties faced by multinational corporations in consolidating and interpreting information. This stressed the necessity of robust financial risk management through organizational data design, leveraging existing ERP or TMS technology or establishing a data lake for processing unstructured data.

4. The third wave of treasury digitalization

We’ve taken the three waves of digitalization coined by Steve Case (former CEO of US internet giant AOL) and applied them to the treasury function. The first wave was the development of stand-alone treasury and finance solutions, followed by the second wave bringing internal interfaces and external connectivity between treasury systems. The third wave is about how to leverage all the data coming from this connected treasury ecosystem. With generative AI predicted to have an influential role in this third phase, corporate treasurers need to incorporate the opportunities and challenges it poses into their organizations' digital transformation journeys and into discussions and decisions related to other technologies within their companies, such as TMS, ERP, and banking tools.

We also predict the impact and success of this third wave in treasury digitalization will be dependent on having the right regulatory frameworks to support its implementation and operation. The reality is, although we all aspire to work in a digital, connected world, we must be prepared to encounter many analogue frictions – like regulatory requirements for paper-based proof, sometimes in combination with ‘wet’ signatures and stamped documents. This makes the adoption of mandates, such as the MLETR (Model Law on Electronic Transferable Records) a priority.

5. Fragmentation and interoperability of the payment landscape

A side effect of the increasing momentum around digital transformation is fragmentation across the payments ecosystem. This is largely triggered by a rapid acceleration in the use of digital payments in various forms. We’ve now seen successful trials of Central Bank Digital Currency, Distributed Ledger Technology to enable cross border payments, a rise in the use of digital wallets not requiring a bank account, and the application of cross border instant payments. All of these developments lead us to believe that international banking via SWIFT will be challenged in the future and treasurers should prepare for a more fragmented international payment ecosystem that supports a multitude of different payment types. To benefit from this development, interoperability will be crucial.

Conclusion: A turning point for treasury

A succession of black swan events in recent years has exposed a deep need for greater financial resilience. The treasury function plays a vital role in helping their CFO build this. This is accelerating both the scale and pace of transformation across the treasury function, with wide-ranging effects on its role in the C-suite, position in finance, the priorities and structure of the function, and the investment required to support much-needed digitalization.

For more information on the five observations outline here, you can read the extended version of this article.