Making payments is generally an expensive process for large organizations, in terms of both time and money. The process tends to be particularly expensive when an organization has its own in-house bank connectivity for connecting its payment systems to its bank – connectivity that is maintained either by its own internal IT function or by an external consultancy.
With in-house bank connectivity an organization builds its own connectivity to its banking partners from scratch as an internal IT project. It develops a round-trip payment event where the payment is taken from the organization’s enterprise resource planning (ERP) system in the bank-required format, usually via an application programming interface (API) or SWIFT, with the bank then sending an acknowledgement of the payment back to the ERP.
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There are several reasons why in-house bank connectivity is extremely inefficient from a cost perspective:
- It puts the organization in a poor position to negotiate lower bank fees and better deals on products and services. Since the investment that is required to support connectivity between the organization’s ERP system and each individual banking partner is so great, the organization will usually only connect with a small number of banks. As a result, it is probably paying too much in bank fees because it can’t take advantage of competition between different banks. When banks know that you are unable to change services, they have less incentive to offer better pricing.
- The organization has less ability to take advantage of new innovations. Today a huge amount of innovation is happening in the world of payments, but organizations that are tied to in-house bank connectivity may not be able to take advantage of advanced payment systems or technology because they are unable to take advantage of integrating to bank platforms via APIs, for example. Missing out on payments innovations limits their opportunities to add value to the business and reduce costs.
- Ongoing maintenance of in-house bank connectivity is difficult and expensive. In-house bank connectivity must be regularly updated to support new banking requirements or industry standards. An obvious example is the movement to the ISO 20022 global messaging standard. Organizations either need to update the payment formats of their ERPs or pay a third party, such as their banks, to translate legacy formats into ISO 20022 XML Pain. Either scenario ensures significant cost and planning.
- In-house bank connectivity prevents the organization from standardizing payment controls, increasing the risk of unauthorized payments. Many organizations today have multiple payment systems and multiple payment workflows. While treasury might initiate payments using a treasury management system, accounts payable might use an ERP module instead and other departments may even access the bank portal. Multiple, disparate systems also make implementing a consistent set of payment controls impossible, which creates risk of mistakes or unauthorized activity.
- A lack of payments visibility results in an opportunity cost for the organization. It is often the case within organizations that accounts payable will make a payment and simply assume that treasury will be able to fund that payment. Yet treasury needs transparency across all of the organization’s different payment platforms be able to optimize cash management. Without visibility, treasury often estimates cash requirements or leaves idle cash in the bank – neither of which maximize the return on excess cash nor minimize the working capital targets.
While technological advances are improving the global payments landscape in many respects, organizations relying on internal IT and in-house connectivity solutions are missing the opportunity to modernize payment strategies, increase value, and reduce payment costs.
Related reading: 3 Key Areas Where CFOs Say Treasurers Need to be More Strategic
Fortunately, while technology presents a problem when it comes to enabling cost-effective payments, it also presents a solution. This solution comes in the form of a payment hub, which offers an organization standardized bank connectivity to all banks globally, enabling greater mobility of bank relationships and mitigating the risks posed by disparate payment formats, systems and workflows. Since the hub connects directly to the bank using multiple protocols, including SWIFT, APIs, and FTP, the organization will centralize payment workflows via a single system, reducing spend on bank service fees, software costs, internal support and external consultancy charges.
With a payment hub, the CFO gains a high level of control over the money that is flowing out of the organization. The hub provides centralized visibility of all payments, which enables the organization to better manage its working capital and reduce the need for it to secure overdrafts or emergency funding. In addition, a payment hub screens for fraudulent transactions, allows the organization to immediately migrate to new banking formats and technologies, and increases the speed at which finance can support the business in new markets. In fact, payment hubs enable payments to become less of a transactional process and more of a strategic tool.
This article first appeared in The Global Treasuer: Payments at a Price: theTrue Cost of In-House Bank Connectivity