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AP Hill: No Quick Fix for Treasury

For treasury technology to work, users have to create a bandwagon. So far, it's more like a go-cart.
Abe De Ramos, CFO Asia
October 1, 2002

Corporate treasurers have long dreamed of a seamless payment solution linking customers and suppliers around the world. Instead, they have faced the reality of incompatible, and proprietary, services from banks.

That could have changed with the arrival last year of RosettaNet, an open-source, Web-based XML platform for trading among information technology, electronics, and semiconductor manufacturing companies. Promising to provide an industry standard in a range of business processes, RosettaNet is now in use in more than 400 companies in North America, Asia, and, to a lesser degree, Europe. Its users in Asia range from Taiwanese giants such as Taiwan Semiconductor Manufacturing and United Microelectronics to obscure suppliers such as Xiao Tong Networking Technology of China.

Its adoption, however, is largely due to its upstream capabilities, such as collaborative planning and ordering, and less on the downstream, such as settlement.

No wonder industry leaders are finding limited advantages to becoming first movers in linking to RosettaNet, as Nokia Treasury Services, the treasury arm of the Finnish mobile phone giant, revealed in a discussion paper released last month. Nokia's frustration is understandable. After all, it intends to buy 40 percent of its purchasing volume this year through RosettaNet.

David Blair, Nokia's Singapore-based treasury director for Asia, says Nokia still checks payments from smaller customers "the old-fashioned way" — manually. In fact, self-reconciliation of payments is one of the last few missing pieces before Nokia fully automates treasury management processes.

The large corporates using RosettaNet are having "good success in auto-reconciling," says Nokia, because the volume of business between each of them is large enough to justify advanced cash-management systems that can handle E-settlement across different service providers. "We can [discipline] the banks not to steal too much in fees and value days on our payments," according to the Nokia paper. "The success rate will drop as fast as we generalize integrating remittance advices through the community. This is why we are eager to develop more tightly integrated E-settlement solutions," it says. The theft, of course, refers to the number of days a client's payment remains floating with the bank while Nokia identifies whom it came from. "The money remains idle in the banking system — 'idle' for the corporates because the bank is profiting handsomely from it," says the report.

Reconciling the Difference
This is how self-reconciliation (3C6 in Rosetta-speak) works. A vendor issues an invoice (3C3) or a billing statement (3C5) to a customer via RosettaNet. A billing statement covers all monetary amounts due over a period of time, whereas an invoice notification is sent only on an event-by-event basis. Using the same system, the customer then informs the vendor of when the payments are to be made. (If the payment is not anticipated, the payee performs a manual process to handle the discrepancy.)

Upon remittance through a bank, RosettaNet allows the customer to send a remittance advice to a payee. The advice specifies account reconciliation information, such as amount, invoice numbers being paid for, and bank transaction reference numbers. Because RosettaNet and the bank service could link directly to all parties' enterprise resource management systems, this should be a painless process. However, not all banking systems' configurations are the same, and most banks offer payment with reconciliation as a proprietary service. As such, RosettaNet pioneers such as Nokia are eager for an industry standard. "Banks like Citibank offer proprietary solutions which we have rejected as a matter of principle," says the Nokia paper.

While banks have capitalized on the lack of standards, they nevertheless have established common platforms. Eleanor — led by 15 banks in the Identrus consortium such as ABN Amro, Wells Fargo, Barclays Bank, HSBC, and Industrial Bank of Japan — and ePaymentPlus (ePP) of SWIFT, another bank-led initiative, are able to carry data along with the payments in much the same way RosettaNet does. "Identrus will provide the verification, and ePP might also use Identrus as its certificate of authority," says Blair. "Both of them are XML standards to describe payments that can be accepted by multiple banks," he says.

"Both Eleanor and ePP are languishing with some small-scale trials because the banks are not getting sufficient pull for the technology," the Nokia paper adds. "This makes sense because most corporates still seem to be working on upstream processes. The problem is that when we do finally get excited about cleaning up the inefficiencies in settlements, the banks will not be ready."

Currently, one of these inefficiencies is that payment technologies such as Swift are only able to handle two lines of 35 characters of seven-bit user data, whereas RosettaNet can handle 500 attributes per message.

Nokia estimates that at least 20 global banks are needed for Eleanor and ePP to become the standard in at least one industry. However, it also questions the banks' commitment to providing such standards. "Banks, facing shareholder pressure and a weak economy, are loath to invest in an untried technology with unproven demand, especially having sunk hundreds of millions into supporting the exchange concept at the end of the 90s," the paper says. "Also, banks are very ambivalent about the technology which will further erode the easy money they make from customer ignorance and inefficiency."

Rearranging Rosetta
Nokia has not identified a solution to the problem other than to open a dialogue between RosettaNet users and banks. "Essentially, this is a system that commoditizes [bank services]. In a world where the basic products are already commodities and spreads are very thin, [banks] can be expected not to be delighted with these changes," says Nick Franck, director at Singapore-based consulting firm CFO Solutions. "The banks have to change, they know that, and the corporates can get what they want from the banks by assisting them to change successfully."

Nokia's proposed dialogue would focus on easing exactly the banks' insecurities. "One way out of this catch-22 might be…to get RosettaNet to specify a settlement process that would provide a viable potential market to the banks — the RosettaNet community," it says, in no specific terms.

Franck adds: "Good companies will give the banks something in return for making this concession, and it therefore becomes a duty of the corporates to see what they can give of value to the bank in return for these better systems. That 'something' would be case by case, but one example is better concentration of business with key banks. Alternatively, it could be other types of business."

But just like the adoption of new standards like RosettaNet itself, this task is easier said than done. Until then, any E-settlement standard can still go the way of the Betamax.

CFO Publishing Corporation 2009. All rights reserved.