By Richard P Urban, President of IFX Forum, Inc.
Rich Urban, President of IFX Forum, describes how new ISO 20022 messages will enable financial institutions to incorporate standardized remittance data into cash management services.
Payments networks were built by and for financial institutions. As such, these networks naturally excel at risk management, compliance with regulatory requirements, and efficient throughput – which are all high priorities for financial institutions. Businesses have slightly different priorities. In B2B commerce, payments are almost always accompanied by remittance information describing the transaction. Yet the major payments networks lack the ability to adequately handle remittances through payment and clearing channels.
In fact, there are strong disincentives for banks to handle remittance information. The payments networks were built to handle tightly condensed and standardized messages. By contrast, remittances often consist of extensively detailed data contained in non-standardized formats. If added to legacy payments networks, a high daily volume of remittances might tax the throughput of the network, increase the operational workload, and create new risk and compliance challenges for banks. Based on these considerations, financial institutions have been slow to incorporate remittances into existing payments channels.
Responding to this compelling market need, various providers now provide e-commerce solutions that support the electronic exchange of remittances. Yet since most businesses interact with a wide range of partners across industries and countries, they often find themselves using several different incompatible techniques and approaches for exchanging remittance data. ISO 20022, the widely adopted financial industry messaging standard, gives the financial services industry an excellent opportunity to improve services and relationships with business customers by encouraging the adoption of standardized messages for the exchange of remittance information.
In April 2014, IFX Forum submitted two new messages to the ISO Registration Authority for inclusion in the standard ISO 20022 repository. These new messages have the flexibility to adapt to current business practices while still adhering to uniform standards. The Remittance Advice message contains pertinent details about the transaction including payments, discounts, disputed amounts and invoice details.
The Remittance Location Advice message fully specifies the location where the remittance details can be found. To support electronic remittances, this message can point to a web site managed by one of the trading partners or by a third-party solution provider. Alternatively, the message can indicate that the details were sent via email or postal mail, and to whom.
As “stand-alone” messages, either of the new message types can be exchanged independent of the associated payment messages, using any number of different methods for exchanging information. Furthermore, the flexible design of these new messages easily accommodates existing business practices as well as optimized data flows.
Using these messages, financial institutions now have some very promising prospects for offering value-added services in cash management. For example, a bank can provide a combined electronic and paper-based lockbox for invoice payments; automatically link remittances to payments; and manage translations between remittance formats across multiple payment portals.
Overcoming the Adoption Challenge
New standards often face significant barriers to adoption: conversion costs; pre-existing development priorities; and the need for simultaneous adoption with trading partners. The new stand-alone remittance messages are designed to overcome these barriers.
The new remittance messages, like all ISO 20022 messages, can be sent using existing data exchange capabilities and are not tied to a specific network. Although these new remittance messages can be sent through payment networks, that is by no means a requirement. This deployment flexibility supports prevailing business practices amongst trading partners without forcing businesses to undergo expensive connectivity costs. Businesses can gain early benefits from the standard without having to make a large investment.
Over time, banks can begin to offer value-added services that combine the benefits of the ISO 20022 standard with the ubiquity of the payments networks. In the U.S., NACHA has already announced its support of the new remittance messages along with an opt-in program for banks to support transmission of the messages on the ACH network. Through programs such as these, financial institutions can ease the transition for their customers by providing real-world benefits.
Making the Business Case
These factors dramatically reduce the risk of being an early adopter. Either banks or businesses can “go first” knowing that their providers, partners and clients will eventually reference the same standard. This eliminates the risk of adopting a one-off solution while increasing the likelihood that everyone will benefit from the network effect of multiple trading partners using the standard in the future.
Given these benefits, opportunities, and the strong impetus behind the international standard by the global financial services community, a cost-effective business case can be made independently for each of those adoption scenarios:
- Businesses can exchange remittance messages with their trading partners
- Software vendors and service providers can include remittance messages as part of their solutions
- Banks can incorporate remittance data into value-added offerings
With these new remittance message types, IFX Forum has advanced the state-of-the-art in business-to-business payment processing and electronic remittance handling. The new remittance messages are flexible enough to support both direct communication between trading partners as well as transmission through payment channels. In addition, IFX Forum has made the new message easy to adopt, lowering both the risks and costs of adoption. These considerations make the new remittance message types a significant standard to follow throughout the entire trading ecosystem.