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.

SAP recently introduced a new application specifically designed to simplify electronic communications between companies and their financial institutions.  The new application has not received much attention by the press or analyst community, but it should have!   If anyone is well positioned to break down the barriers of straight through processing between corporate and their financial institutions, it is SAP.  In nearly every multi-national account I visit with SAP is already established or will soon become the financial platform of choice for multi-national companies.  SAP should be able to leverage its position as the epicenter of corporate cash management to provide simplified, straight through processing between its ERP modules and the treasury applications of leading banks.

What is SAP’s Bank Relationship Management module? 

So what is SAP’s strategy to simplify bank communications?  The vision revolves around the new Bank Relationship Management application, which is part of SAP’s “Financial Supply Chain Management” suite of software which also includes online bill presentment &payment; cash and liquidity management; collections management; dispute management; in-house cash and treasury & risk management.

How does SAP BRM simplify bank connectivity? 

SAP offers three key integration features that will greatly simplify bank connectivity for multi-national corporations:

1.       ISO 20022 XML support – 20022 is the new Universal Financial Industry standard developed jointly between TWIST, SWIFT, OAG and IFX.  Read my earlier post on ISO 20022 for more background information.  ISO 20022 is a game changer as it offers one file format that corporations can use to communicate payment instructions regardless of geography or financial institution.  Instead of a corporate having to create different file formats such as SWIFT FIN, ANSI X12 EDI, EDIFACT and NACHA for each banking relationship, the company can produce all its payment instructions worldwide in the single ISO standard.  SAP BRM can output payment instructions in this one standard ISO 20022 XML format which can then be directly transmitted to the bank.

2.       SWIFTNet Integration – SWIFT is a bank owned cooperative that operates a highly reliable, secure network designed exclusively for banks to exchange messages and files with one another.  Historically, access to the network has been restricted to financial institutions, but SWIFT has recently opened its services up to non-financial corporations.  Corporate Integration to SWIFT greatly simplifies bank integration by providing a single interface for all banking communications.  Instead of a corporate establishing an individual Internet (or private line) connection with each of its financial institutions, the company can send all of its banking transactions to SWIFT who will perform the routing on the corporate’s behalf.  SAP BRM includes pre-packaged adapters for corporations to connect to SWIFTNet.

3.       Enterprise Application Integration – Leveraging the Netweaver technology, SAP BRM provides tight integration with the other Financial Supply Chain modules such as cash and liquidity management; collections management; in house cash and treasury and risk management.   As a result, corporations do not need configure file transfer scripts and complex maps to route outgoing payment instructions from their financial modules to their banking partners.  Receivables and account statements flow through directly from the bank to the appropriate financial module.  Such an approach is powerful, because corporations using the full SAP financial suite can obtain straight through processing out of the box with minimal integration work.

Will SAP succeed with its ambitious plans to simplify bank communications? Yes and no.  While SAP does offer compelling technology, its solution is limited to software technology.  The challenges with bank connectivity are not the lack of strong technology or for that matter governing regulations or universal standards.  The greater challenges are related to:

• Skill Sets – The new technology paradigms such as SWIFTNet and ISO 20022 XML promise to greatly simplify connectivity processes.  However, there is currently a shortage of IT professionals with practical experience in the new technologies.
  • SWIFTNet - Connecting to SWIFTNet, for example, requires an extensive testing and certification process as well as the purchase of proprietary security technology and the establishment of expensive disaster recovery infrastructure.  Many corporates will not have the budget or expertise to perform SWIFT integration with their in-house IT organizations. 
  • ISO Skill Sets - ISO 20022, much like any XML format, is a complex document structure that requires both specialized functional knowledge to understand the various data fields and advanced technical skills to develop maps.
• Budgetary Pressures – Both corporations and financial institutions have significant investments in the legacy payment technologies and standards.  Corporate treasurers are under pressure to reduce back office administrative costs year-over-year.  Financial institutions continue to experience price erosion due to the perceived commoditization of cash management services.  Consequently, to utilize SAP’s BRM along with SWIFTNet and ISO, both corporate and financial institutions will have to fund expensive modernization projects in an environment of ever decreasing budgets.  
• Recent Investments - Many financial institutions have payment hub projects underway to replace mainframe-based legacy applications with new SOA platforms.  However, these institutions have not necessarily factored the new standards and technologies (e.g. ISO, SWIFTNet, SAP BRM) into their strategies.  Similarly, numerous corporate have established in-house banks with file and messaging gateways in the past five years.  The new corporate banking interfaces were designed to deliver similar functionality to SAP BRM.  Although the prior investment in banking gateways should be viewed as sunk costs, it will be challenging for IT organizations to secure budget to decommission and replace technology platforms they just established.

Over a five year horizon, I predict SAP’s Bank Relationship Management will become the de facto bank communications gateway for multi-national corporations.  However, adoption will be inhibited by the economic, organizational and technological factors outlined above…

Steve Keifer

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