In my last post I outlined the five primary forces that I think are fundamentally changing the way corporations approach back office finance functions and their banking partners.  However, one of the dynamics I did not explore is the dependency of the business model changes on technology.  Changes to accounting systems and bank connectivity will be critical factors in the success of corporate transformation efforts.  To realize cost efficiencies, A/P organizations must be able to efficiently route payment instructions to their key banking partners using highly reliable, secure and cost-effective communications channels.  To benefit from a centralized treasury, cash managers must be able to obtain detailed, up-to-date account statements from their financial institutions in order to perform end-of-day investment and borrowing activities. 

I have compiled a list of the top five forces I think are transforming the technical interfaces banks and corporate customers use to communicate electronically.  These five forces are the technology changes complementary to the business model changes outlined in my last post:

1.       ERP Consolidation – More multi-national corporations have a project underway to standardize and consolidate the various ERP applications being utilized within their enterprise.  Standardization enables consistent business practices across divisions and the creation of shared service centers.

2.       SWIFT Connectivity – Several hundred large corporations have registered to participate in SWIFT’s corporate access programs (SCORE).  SWIFT connectivity can reduce the costs and complexity associated with corporate banking communications by replacing the mix of web, fax and host-to-host transmissions with a single connection to banks worldwide.

3.       ISO 20022 XML – Otherwise known as the Universal Financial Industry (UNIFI) standard, ISO 20022 XML is designed to replace the myriad of local file formats (e.g. EDI, NACHA) used for payment processing around the world with a single, global message scheme.  See my blog entry on ISO 20022 for more details.

4.       Multi-Bank Cash Reporting – Multi-bank reporting applications aggregate end-of-day and intra-day balances for all accounts onto a single web portal.  Treasury personnel with visibility to all cash positions at bank accounts worldwide are better equipped to perform cash forecasting, borrowing and investment activities.

5.       Bank Relationship Management Software – Bank connectivity has become such a complex issue for corporations that several ERP vendors have introduced specialized software modules to simplify integration.  For example, SAP recently introduced its “Bank Relationship Management” application.  See my blog entry on SAP BRM for more information.

For those interested, I published a more detailed view of the 10 Forces Transforming Corporate Banking Connectivity on the www.gxs.com web site.

More bad news for the banking sector this week as five of the largest US financial institutions (Wachovia, SunTrust, Fifth Third, Regions Financial and Washington Mutual) announced a total of $11 billion in quarterly losses.  Just when you think the worst is over, the financial services industry finds a way to deliver more surprises.  But believe it or not, there are other interesting things happening in the banking industry in addition to the subprime mortgage crisis.  In my last post I talked about the Single European Payments Area (SEPA) launched earlier this year, which I believe will have as big of an impact on banking going forward as the subprime fallout.  One of the other trends that I find interesting is the changing dynamics between corporations and their banking partners. 

During the past 18 months I have spent a lot of time visiting with both corporates and financial institutions throughout North America, Europe and Asia.  In total I have probably met with 75 companies during the past year and half.  One of the conclusions that I have reached is that almost every major multi-national corporation of $5 billion or larger has a major transformation project occurring in their back office.  What are they changing?  A better question is what is not changing?  Multi-national corporations are reorganizing their treasury and accounting functions; re-evaluating their approach to payment processing; renegotiating agreements with key banking partners and re-architecting their financial information systems. 

I have spent some time in recent months analyzing the underlying forces driving these dramatic changes with a goal of understanding the market dynamics better.  Some forces are obvious such as the desire to reduce costs and operate more efficiently.   The other forces are more specific to financial processes including changing regulations, disruptive technologies and increasing globalization.  I compiled a list of the top 5 forces that I think are driving the transformation projects at multi-national corporations.  The first five are business oriented forces:

1.       Conversion from Checks to EFT – The past 10 years has seen a migration away from paper based check instruments to electronic funds transfer.  The most significant transition is occurring in the US, which historically utilized checks as the primary B2B and B2C payment instrument.

2.       Payment Factories – Multi-national corporations are rethinking the organizational structures for their Accounts Payable (A/P) groups.  Corporations are moving from country-centric A/P organizations towards shared service centers operating on a regional or global basis.

3.       Centralized Treasury – In addition to creating shared service centers for A/P, corporations are centralizing treasury functions as well.  Centralization enables a number of efficiencies in the areas of cash forecasting, foreign exchange and cross-border payments.

4.       In-House Bank – Corporations are establishing their own in-house banks to complement centralized treasury functions.  The in-house entities operate much like a commercial bank by offering payment processing, cash management and collections functions to the various subsidiaries.

5.       Consolidation of Banking Relationships – Along with centralization of internal functions, multi-national corporations are also rationalizing the number of banking relationships they maintain.  In many cases, corporates are reducing banking providers from over 100 to 2-3 global relationships.

Some multi-national corprorations are in the early phases of these transformation projects while others have nearly completed them.  It will take another five years for the transformation to fully occur.  However, once complete the dynamics of corporate banking will have changed forever…