- Payments processing varies greatly across Asia and across companies, but if done inefficiently can lead to damaging business consequences and losses.
- Thus, a company's bank must offer suitable products, support, security, delivery channels, integration, reporting, reconciliation, local expertise and pricing.
- Only by accounting for these concerns can an appropriate partnership be formed.
- The partner bank's technological sophistication becomes essential to meeting these concerns and must easily integrate into existing payments processing systems.
Concurrent to any company's streamlining of internal administrative functions is the aim for maximum efficiency in its payments processes. Payments processing is an area within the treasury function that demands the company's full attention, both in terms of timely settlement of obligations as well as cost efficiency in carrying this out. One cannot overemphasise the importance of how a company approaches the settlement of its commercial obligations. An inefficient payments system within a company can conceivably result in circumstances ranging from a permissible delay or default in payment to serious damage in business operations (e.g. termination of relationship by an important vendor, governments fines for delays in tax payment and reputational risks).
For a regional (or global) business operation, the broad spectrum of payments requirements extends from straightforward domestic payments to paying business counterparties across the region and elsewhere. In Asia, individual countries use different formats and systems, and either paper or electronic payments may be more commonly accepted. Secure and on-time delivery of payments is clearly a critical consideration. Taking these issues into account, in the payments process - from generating payments instructions and executing them to reconciliation and advising of payments - an indispensable component of the equation is the banking partner.
While in the past banks have evolved to be an extension of the company's cashiering function, it is becoming more evident that companies require more than this. Banks are required to offer all-encompassing solutions to the companies' payments needs. Companies look for bank payment products that match their current as well as their future needs. Although there is no need to take an over-engineered solution, the company must also take into account how the partner bank is strategically aligned with its prospects in payment requirements. Subjects of concern include:
- payment products;
- operations support;
- the delivery channel;
- integration, reporting and reconciliation;
- local knowledge and expertise; and
Across banks generally, the milieu of payments products offered is hardly different, if not similar. Conventional payment products include accounts with cheque payment services, cashier's orders or manager's cheques, foreign currency-denominated demand drafts, and domestic and international transfers. Most banks offer these products. The more progressive, customer-driven banks have evolved to assume the role of the customer and have started to recognise the need to provide more value than just the conventional products. It is neither easy nor cheap for banks to embark on this venture. The capability to achieve critical mass and serve a wider customer base drives the business sense to provide more than just these standard payment products. The larger domestic banks and international banks more often are the ones that can offer ingenious ways to package these payment products into value-adding propositions.
A matching exercise, normally in the form of a request for proposal (RFP), is the basic step in identifying the right bank to be used for payments. For example, a cheque outsourcing service, which has evolved to become a standard payment product among international and larger domestic banks in Asia, is one product companies with large regular volumes of cheque payments look for. However, more than cheque printing, companies realise the need to attend to the parallel requirements of this service. Integration, reporting, reconciliation and, sometimes, payments-advising capabilities must also support cheque outsourcing. If the company is a multinational, the bank's ability to offer the same cheque outsourcing service consistently across the company's areas of operations is another key requirement. While an overkill solution may not necessarily appeal to the customer, the bank solution must still align not only with the company's immediate needs but also with its long-term requirements. If there is no pressing need for a cross-border paper payment capability, yet the company plans to expand operations in a market which largely uses paper payments, the ability to offer this service within a cheque outsourcing solution becomes relevant.
The entrustment of a company's payments means entrustment of its commercial obligations - a significant accountability. Apart from ensuring completion of payments, the bank must show a high degree of operational efficiency. Its straight-through processing (STP) rate may be an indicator of the bank's efficiency level, but must also be taken in its true context of how this is applied within the bank payments processing. Most banks have their own level of STP internally. A good starting point is to define a common ground from which to assess the bank's STP (e.g. from the time a payment instruction is received rather than after the standard account validation).
Resilience is one other important quality aspect of a bank's payments operations. Having the right technology with adequate provision for back-up is standard. Likewise, there must be well-qualified personnel trained to operate payments processing under alternative arrangements.
A central aspect of identifying the right provider of payments products is the operations infrastructure behind the bank's payment products. As indeed critical mass is a binding factor for a bank to provide its payment product offerings (e.g. cheque outsourcing, vendor payments, and payroll bureau service), banks do enter into partnerships and alliances either with other banks or third-party providers. Apart from just having the service-level agreement, which is a common practice, the company needs to have a factual understanding of how the preferred partner bank undertakes the service and fulfils its commitment. Should there be a dependency on any third-party alliance, the alliance must not only be secured by a strong commercial relationship with the bank, the alliance bank must also have a record of competence in providing the payments service, not to mention being financially sound and stable.
Understanding a bank's operations must go further than the RFP response. A bank's proposals are naturally intended to sell the bank's capabilities and, as one would expect, will contain, at the least, direct corresponding replies to specific requirements stipulated in the RFP. Evaluating written responses to the RFP can be complemented with on-site visits of the bank's payments processing facility. Independent third-party views, if available, can also provide additional information on the level of efficiency in a bank's payments processing capabilities.
Security is a critical component of an effective implementation of the company's payments activities. More than just mirroring the company's execution of its fiscal policies under prescribed dual or multiple custodianship functions, the bank's payments proposition must employ commercially acceptable standards of security. These standards ensure the accuracy and integrity of the delivery to the bank of the company's payment transactions (e.g. key cryptography authentication, 128-bit SSL web site encryption). As standards are raised alongside developments in technology, logically the bank must be able to keep itself abreast of these standards. In awarding its payments business, the company must look for the bank that not only meets the current industry standards in payments security, but is also able to keep up with the evolving standards arising from advances in technology. By taking the history (e.g. the past five years) of the developments in the market's payments security standards where the company operates, and charting this against how the bank in the same period has progressed in its payments-related security capabilities, the company can formulate a reasonable judgment of the bank's responsiveness to technological developments in payments security.
Security is akin to the delivery channel a bank offers the company when the latter sends out its payment transactions. A secure payment infrastructure is essential for whatever delivery channel is used. Banks offer encryption from the point of receipt of payments transaction through a delivery channel provided for the customer (e.g. Internet banking, but not necessarily from the point of payments generation at the customer's back-office system in a host-to-host implementation). The customer must be cognisant not only of the bank's ability to provide secure encryption, but also at which point of the payments process the encryption is made.
The range of delivery channel options (tape or diskette, proprietary, web-based, or direct host-to-host) suggests the scale of the bank's capability in servicing the mixture of requirements in receiving payment instructions from its mixture of companies. It is fair enough to recognise the right bank on the basis of the range of its delivery channel options. However, it is of greater importance to identify the bank that best provides the delivery channel suited to the company's needs and character. The bank that is strongest in a preferred delivery channel is not necessarily the bank that offers the broadest range of delivery channel options. It is useful to obtain industry information on a particular delivery channel. The number of companies serviced, the transaction volume processed and the corresponding exception rate not only indicate a bank's market share of the payments business coursed through this channel, but give empirical data useful for establishing a bank's level of experience and familiarity in a particular delivery channel.
The company must also take into consideration the prospect of changing requirements. In due course, the evolving character of a relatively conservative company may warrant the need for a more open web-based delivery channel. Thus, the selected partner bank must be able to support this as well.
Integration, Reporting and Reconciliation
Although the bank's integration capability with the company's back-office system is not the only criterion to consider, it definitely affects the chances of it being awarded business. Banks must be able to differentiate their payments proposition by offering not only a suite of payment products with the appropriate delivery channel(s), but one that also has a strong ability for customer-end integration. This must provide a seamless way for the bank to integrate with the company's enterprise resource planning (ERP) system to offer real-time and straight-through payments processing. ERP systems have started playing a significant role in most industries. For various historic reasons, companies with discrete back-office systems like to look for a higher level of process- and application-integration efficiency, and this includes their payment activities. Embedded bank capability with ERP vendors can enable the full scope of service offerings to a company.
Indeed, the level of integration a bank offers must extend from the company's payments generation to reporting and reconciliation of information using the same delivery channel. From the beginning, the company must have full knowledge of the quality and depth of information for reconciliation that is made available through the integration solution. Supplementary reports are not as efficient if they are not incorporated within the integration solution.
A bank's alliance with leading ERP vendors, such as SAP, Oracle, PeopleSoft and JD Edwards is a practical consideration for any company making use of one of these ERP systems. It is, however, equally important that, despite a matching ERP alliance with its identified partner bank, the company must still assess the fine-tuning efforts that would require the integration to function. There are many cases of companies not having acquired a leading ERP system and when the bank does not have an existing alliance with one either. Commercial sense requires the bank to provide an integration capability that minimises the company's re-mapping exercise of its payments, reporting and reconciliation files into the bank's proprietary file formats. As the company is likely to be obliged to work on the re-mapping exercise, the extent of this work must be explicitly established. In certain instances, it can be quite costly as it may mean an overhaul in the interface module of the company's back-office system.
Local Knowledge and Expertise
Local knowledge and expertise, especially in Asia, is critical to the effective implementation of a bank's payments proposition. There is a broad spectrum of requirements demanded by the different markets in Asia. Various payments infrastructures running across the countries are nothing like each other. Although many payments systems are owned and run by the local central bank, some are run by a consortium of banks and, in a few instances, by a central bank-appointed financial institution. It also follows that support for the local automated clearing house (ACH) and real-time gross settlement (RTGS) systems is vital to the efficient implementation of in-country payments. The level of maturity of the local payments infrastructures varies. RTGS systems, which allow immediate funds settlement, have been running for some time in Hong Kong, Singapore and Australia, but not in countries such as the Philippines. Indonesia runs its system in selected locations and only at bank level, as opposed to the beneficiary account level.
In awarding a local payments business, it is not difficult to identify a bank experienced in local payments. On the other hand, in awarding a regional payments business, it becomes a challenge to identify a single bank that can provide a cohesive payments proposition across many countries. Despite the technological advantages of an international bank, which now usually meet the requirements of the different country-specific ACH or RTGS systems, the knowledge of local compliance must also be reflected in its payments-processing solution. There are a number of in-country regulations on payment transactions such as foreign exchange reporting, withholding and reporting of taxes, and amount-triggered reporting required by anti-money laundering decrees. All these, where physically possible, must be reflected in the automation support required to process the payments. Otherwise, as it becomes costlier for a bank to operate in some markets, it also becomes more expensive for a company to use that bank.
Local payments practices are also areas of concern. While most domestic payments in countries such as Japan and Korea are in RTGS and GIRO, cheque payments are significantly used in Malaysia, the Philippines and India. Paper authorisation, in some instances, is required to complement electronic authorisation of payments. In a number of Asian countries such as Japan, Korea and Thailand, support for local language capability on the front end is almost mandatory. On the whole, an in-country payments solution must cater to the payments practices in that jurisdiction.
International banks, as an option, may arrange to subcontract the payments business to a local bank with existing mechanisms that efficiently process payments and, at the same time, comply with local requirements. Companies need to be wary of how the pricing is derived in this arrangement. It may or may not be costlier if consideration is rightfully given to the overall regional business rather than taking up the domestic business in isolation.
Pricing is certainly not the least important factor to consider in selecting a partner bank in payments. The identified partner bank in consideration of the right payment products, operations support, security, delivery channel, integration, reporting and reconciliation, and local expertise is expectedly the bank that will offer reasonable pricing. Although reasonable pricing is not necessarily the cheapest, it makes sense to check if the company is paying more than it should. The company must also be mindful of the other businesses it is or will be giving to the bank. The deposit balances associated with the payments business are likely to affect significantly the pricing offered by the bank. The associated balances can be conveniently used to challenge the fee price of a tender.
At times, a payments proposition may be too comprehensive if it includes functionalities or even products that are not required. There could be too many canned reports available or too many file formats supported. Companies must be perceptive of how the pricing is derived, given the milieu of payments services made available to them. Ultimately, the overall efficiency in the bank's payments processing from payments generation to report and reconciliation harmonised with the right products and functionalities determines the economics of reasonable pricing.
The process of selecting a banking partner in payments is by no means simple. Yet the requirements of payments are better served today, not only through advances in technology, but also because of initiatives taken by the banks themselves. Heightened competition in banking plays a prominent role in enabling a company to choose the best from the available solutions. A company can now fully embrace the benefits of leaving the bank to carry out its payments activities while it puts more focus on its core business competencies. In the end, the important task is being able to identify a suitable banking partner for the company's payments requirements.
By Nolan S. Adarve, Senior Vice President, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong