Financial services firms provide a wide array of products and services to their clients, both retail and commercial, across commercial banking, securities, cards and merchant services, insurance and employer services. Particularly when supporting commercial clients, the industry relies on the ability to manage complex information flows whether processing payables and receivables, supporting post-trade securities flows, transmitting merchant settlement files, or enabling group benefits eligibility claims. For years, many of these processes were manual and paper intensive. However, the introduction of technologies such as EDI has enabled the financial services industry to automate many of the day-to-day process between counterparties.
The growth of international trade has created interdependencies between buyers and suppliers across geographies, resulting in the globalisation of the financial supply chain. Complexities arise when working across international boundaries, including differences in currencies, regulations and accounting practices. EDI mitigates these complexities by aligning financial supply chain information flows with the movement of goods in the physical supply chain. A fully automated financial supply chain enables the seamless, accurate and timely exchange of financial data between buyers, suppliers and their financial institutions.
With EDI, an organisation can electronically receive an invoice and initiate a payment. Eliminating the paper in payables and receivables flows enables organisations to reduce days sales outstanding and days payables outstanding, optimising their cash conversion cycles. EDI also provides a lower-cost alternative to traditional paper-based payment methodologies, while eliminating errors associated with manual processes.
Due to the global nature of the financial services industry, there are numerous file format and communications protocols in use today, along with a number of regional EDI networks. The structure of the financial supply chain and a description of the communication protocols and file format standards used are described below.
Supply Chain Structure
All industries use some version of a supply chain to track the flow of goods and services it uses and produces. Financial services is no different. Financial transactions are an integral component of the physical supply chain. By connecting business partners from order placement to settlement, the financial supply chain carries the flow of financial information in the direction opposite to the flow of goods and services.
The financial supply chain is one that is closely aligned with and triggered by processes in the physical supply chain as demonstrated by the diagram shown below. Financial supply chain services include transactions related to purchase order processing, letters of credit, open account management, pre & post-shipment financing, reconciliation, invoice presentment, dispute management, foreign exchange and insurance management.
Buying firms initiate the process when they source materials and/or finished goods from suppliers within their supply chain. Financial institutions may help advise the buyer on issues related to credit issuance and financing. Once an order is placed, the financial institution may provide partial payment against the negotiated terms or supply an approved letter of credit to show the supplier that the buyer has the means to pay once production begins. Once the goods are produced and shipped, the financial institution may help insure the goods and, upon receipt, settle the account according to the terms of the contract.
The financial institution may also help the buyer to forecast cash flow based on cash management services it may provide to the buyer. The financial institution may also help to reconcile disputes, validate data related to the goods and finally release funds and remittance detail.
Communication Protocols Used
EDI is widely used by commercial firms to initiate transactions with their financial services counterparties. EDI facilitates financial supply chain transactions such as the direct deposit of payroll checks by employers, the direct debit of consumer accounts, and the electronic payment of government taxes by businesses. With the increasing emphasis on security, the financial services industry has added a number of secure communication protocols along with the more common ones used for other industries.
While many organisations use FTP and FTPs, others use AS2, OFTP, ZENGIN, HTTP/S, MQ Series, and VPNs. The Financial Information eXchange (FIX) protocol is an electronic communications protocol initiated in 1992 for international real-time exchange of information related to the securities transactions and markets. In Europe, specifically in France and Germany, EBICS is gaining in acceptance as the transmission protocol for corporate-to-bank communication using the XML format which supports the Single Euro Payments Area (SEPA) initiative to standardise clearing protocols in the interbank networks.
Document Standards Used
In addition to traditional EDI formats such as ANSI X12 and UNI/EDIFACT, other popular standards for treasury, cash management and securities are ISO 20022 XML, NACHA, BAI2, SAP IDOC, Microsoft Excel, SWIFT MT/FIN, FIX XML, FpML, and ISO 15022.
For international financial messaging and bank-to-bank communications, SWIFT is the dominant worldwide standard. SWIFT is a member-owned cooperative that includes more than 10,000 around the world including central banks like the Federal Reserve, regional payment systems, commercial banks, securities firms and more recently, corporations.
Standards are a core element of SWIFT’s services. SWIFT develops and defines messaging and standards for the financial services industry, enabling communication and collaboration between financial counterparties. SWIFT provides standards financial messaging including payments, trade services, securities and corporate actions. The most common SWIFT message standards are MT and MX.
The financial services industry has long utilised industry-specific networks to exchange data in a secure fashion. The industry standard is largely regarded as the SWIFT network. With more than 9,000 member banks and financial institutions, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the most widely used network for exchanging financial data. In addition to SWIFT, however, many banks and corporates also use some variation of the ACH network.
Automated Clearing House (ACH) is an electronic network for financial transactions that originated in the United States. There are similar clearing and settlement systems for electronic payments, including state and regional networks such as the Wisconsin Automated Clearing House Association (WACHA) and the Mid-Atlantic Clearing House Association (MACHA), as well as global variations, such as the Bankers’ Automated Clearing Services (BACS) and Clearing House Automated Payment System (CHAPS) in the United Kingdom, scheme for the electronic processing of financial transactions, the Pan-European Automated Clearing House (PE-ACH), which is an ACH that is able to settle SEPA-compliant credit transfers and direct debits across the Eurozone. In Japan the Zengin system is just one of three clearing houses, operated by the Japanese Bankers Association to handle domestic fund transfers. China also has three clearing systems which are: The Electronic Interbank System (EIS), Electronic Funds Transfer System (EFT), and the Local Clearing House (LCH).
Even though all of these networks were developed and customised to meet regional requirements, in September 2009, NACHA—the governing body of the U.S. ACH Network—adopted new rules for international ACH transactions (IAT) to facilitate easier cross-border transactions. IAT may be the first step towards global ACH as envisioned by some of the largest global banks.