No strangers to the friction in payments processing and reconciliation, treasury professionals have been making do with what is available to them—inefficient electronic payments and checks. Generally speaking, electronic payment options have helped companies move away from checks, but the inability for rich remittance data to travel with payments continues to be a hang up. Without this feature, a payment may arrive separately from information about the corresponding invoice, or with no invoice data at all.
Payments Canada research revealed that, while there are fewer checks being written every year, the value of those checks continues to rise by about two percent each year. Businesses are the primary drivers of this statistic. Despite their inefficiencies, many businesses continue to use checks because they are easier to reconcile. A check allows for a certain amount of payment data directly on its surface, and often included in the same envelope is more fulsome remittance information.
Enter ISO 20022
An impending development that is likely to transform all of this and help businesses finally let go of the check is the ISO 20022 payment message standard. A global language for electronic payments, ISO 20022 helps systems around the world talk to one another and transmit significantly more data with payments. Not only will it streamline cross-border payments for multinationals—it will significantly curb the reconciliation problem.
In late 2016, Payments Canada, which operates the core payment systems in Canada, announced the ISO 20022 message standard will be rolled out across all of its modernized systems as part of its mission to modernize the Canadian payments system. Treasury professionals will begin to have access to the standard through their Canadian financial institutions as early as 2019. This is a long-awaited development by Canadian multinationals that may have seen the benefits firsthand in other jurisdictions. Worldwide, ISO 20022 is being adopted by businesses, financial institutions and financial market infrastructures and is evolving at a pace that will eventually make it the standard of choice for electronic funds transfers.
The standard is expected to have significant economic benefits for Canada—Payments Canada research indicates cost savings could be as high as $4.5 billion over five years if we eliminated checks in favour of electronic payments. That number does not even begin to quantify the additional benefits that would come from enhanced integration, compliance, interoperability and fraud detection. And while that makes it clear how the standard will benefit us in the grand scheme of things, the practical reality is that it is expected to reduce headaches at the working level for accounts receivable, accounts payable and treasury professionals.
Breaking down the benefits
On the accounts payable and receivable side, providing more information with the payment—as opposed to sending that information separately or not at all—has two primary benefits. First, it means a business can provide better service to its partners and customers by streamlining activities upon payment receipt. Second, it lightens the load on customer service or accounting teams who currently respond to inquiries about the applicability of payments made. Now they have the opportunity to focus on more productive work.
On the treasury side, there will be a much clearer view of cash positions, greater automation of payments and trade transactions, and a more consistent approach across banks—both domestic and international. Most companies, particularly multinationals, work with more than one bank for cash, trade and treasury and each will have its own processes. Greater visibility and standardized language will help to save considerable resources, time and cost in managing all of this.
As part of Payments Canada’s Modernization initiative, we expect that ISO 20022 will become widely available for automated funds transfers—also known as batch payments or electronic funds transfers, typically used for payroll, bill payments or preauthorized debits—in 2019. That doesn’t mean businesses need to wait until then; those that want to start reaping the benefits sooner should reach out to their financial institutions to see if they might be among the earlier adopters.
Opportunities lie ahead
The practical benefits for treasury professionals are quite obvious and the even broader potential of ISO 20022 is highly anticipated. Access to more data always creates the opportunity for greater analysis, and it will be interesting to see how Canadian businesses could use this intelligence to better understand their customers, vendors and partners and shape their business practices.
Jan Pilbauer is Executive Director of the Modernization Program and CIO at Payments Canada. Janet Lalonde is Director, Payments Modernization, ISO 20022.