In FY 22/23, the Reserve Bank Information and Transfer System (RITS), Australia’s interbank settlement system for non-cash payments, settled the below values per business day:
- $217 billion worth of transactions (excluding Fast Settlement Service (FSS)), up 9% on 2019;
- $14 billion via its Low Value Settlement Service (LVSS);
- $3 billion via FSS which supports the real time New Payment Platform.
The volume of these transactions was significantly up on 2019 figures per business day, for example:
- There was an average of 53,000 RITS (excluding FSS) transactions, up 5%;
- 2.5 million FSS transactions, up 20%.1
In FY 22/23, fraud on payment cards increased 35.6% to $677.5 million, and the overall card fraud rate returned to near pre-pandemic levels.2
Calendar year 2023 saw multiple points of network failures, and online banking platform and payment system outages resulting in countless issues for individual customers and businesses. These issues included daily cash and liquidity management challenges due to no internet connectivity, merchant terminal failures impacting business operations, and breakdowns and delays in making payments, impacting the ability to meet borrowing and vendor requirements, to name a few.
Transaction banking in focus
The figures above indicate the size and importance of the payment landscape in Australia. The importance of transaction banking as a business enabler has gained traction in the current high interest rate environment due to the increased cost of holding cash, increased cyber risks, changes to business operating models with the introduction of digital offerings, standardisation attempts of the payments landscape, and diversification of business-to-consumer (B2C) channels.
In line with this focus, the PwC 2023 Global Treasury Survey indicates that 6 of the top 10 treasury priorities of CFOs and Treasurers globally, as well as in the Australian market, are related to transaction banking activities.3 However, many corporates are facing transaction banking challenges ranging from uncompetitive fee structures, subpar customer service, outdated banking solutions that have frequently led to operational difficulties in terms of time and effort spent on manual interventions, reconciliation and tracing issues, and data security limitations, amongst other related issues.
Transaction banking related challenges and solutions
Consider whether the following six challenges resonate with your company’s transaction banking activities. If so, you may have scope to review and improve your transaction banking strategy.
Your company’s bank account structure is no longer fit for purpose.
The challenge: Your company may have inherited a legacy bank account structure or have multiple accounts across different transaction banking partners that may result in having cash trapped in various accounts with limited visibility over them.
The impact: The situation described above can limit your awareness of your overall cash position, and result in paying overdraft fees on some bank accounts despite having cash in others. It may involve excessive transaction banking arrangements and increased efforts required for managing bank relationships including complying to cumbersome Know-Your-Customer (KYC) obligations. Additionally, you could be missing out on preferential benefits in terms of cost economies and supplemental services due to lack of bargaining power or be working with transaction banking partners that are not experts in your areas of need.
Potential solutions: To resolve this challenge, you could undertake a bank account and transaction banking partner rationalisation. As part of this exercise, you will first need to identify ‘best of breed’ product offerings, service levels, technology and innovation that align with your business needs. This will then assist in discussions both internally and externally on how to optimally structure your bank accounts and banking relationships. Additionally, it will be beneficial for you to consider using cash pooling structures, virtual accounts, end of day cash sweeps, and offset accounts.
While it is possible that there may be some constraints, such as the existence of entities which are not fully controlled (such as from joint ventures), there is likely to be scope for improvement to optimise the existing banking structure at your organisation.
You have poor cash visibility and cash flow forecasting.
The challenge: Your company’s cash is sitting across multiple banks, and you lack overarching visibility across them. This leads to difficulties in accurately forecasting your cash position in the short, medium, and long term.
The impact: Poor cash forecasting may lead to unplanned excess or shortage of cash for operations, and unnecessary drawing down of overdraft facilities, and result in unnecessary overdraft expenses. A lack of automated processes for cash visibility and forecasting may require you to undertake excessively manual and tedious cash forecasting processes that can lead to potential errors.
Potential solutions: The first step of rectifying this challenge could be to analyse the current cash flow forecasting process and understand potential drivers of inefficiencies, such as breakdowns in data quality, processes, or systems. You could consider the suitability of automated cash flow forecasting tools offered by banks as part of their online banking platforms, which can be integrated into your internal processes or the Treasury Management System (TMS). Therefore, you could consider assessing the capabilities of your current TMS and better engage its data analytics and visualisation capabilities. Likewise, you could consider opportunities to integrate your TMS with online transaction banking platforms in a more optimal manner.
The second step could be improving connectivity to your bank to automatically and frequently receive bank balances. This can be achieved with the Application Programming Interfaces (APIs) developed by some banks and is potentially a cost-effective way to obtain real-time balances across multiple bank partners and time zones.
Alternatively, you may opt to transition to ISO 20022 messaging standards. When doing so, you could use the equivalent messaging formats to the Message Type (MT) formats which are gradually being phased out from November 2024. For example, ISO message type camt.052 replaces MT942 messages and provides intraday bank details and near real time balance information on an account at a given point in time. Meanwhile, ISO message type camt.053 replaces the MT940 format and offers detailed and structured information on all entries booked to the account the prior day.
You lack visibility of your foreign currency payments.
The challenge: You lack visibility over your foreign currency payments and receipts, or over the transaction and intermediary fees related to cross-border payments.
The impact: This can lead to wasted time following up the status of cross border payments, financial loss due to missed and/or untraceable payments, duplication of work, increased reconciliation efforts, and strained vendor relationships.
Potential solutions: SWIFT GPI can assist in tracing cross-border payments from initiation to settlement. It can request an amendment to a transaction in flight, perform sanctions clearance and pre-validation, and enhance transparency of processing times, fees, and FX rates.
However, SWIFT GPI currently uses ISO 20022 based MX messages together with MT messages for data exchange. As mentioned previously, MT messages will be phased out and transition to data rich ISO 20022 messaging from November 2024. Therefore, it’s beneficial to consider using SWIFT GPI as the payment landscape starts adopting the ISO 20022 payment messaging format.
Your company’s payment reconciliation process is cumbersome and inefficient.
The challenge: Your organisation may lack automated reconciliation processes or have incomplete transaction data to support reconciliation of transactions, leading to wasted time and resources spent on these processes.
The impact: This can create difficulties in tracing and reconciliation, require more back-office effort, and multiple liaisons with multiple teams within your banking partner(s).
Potential solutions: Improving bank connectivity to receive real time and/or more frequent bank statements and integrating these information flows with your TMS/ERP, could assist in automating the reconciliation process. As an initial step, this could be made possible by using MT940 which can provide detailed bank transactions (all debits and credits) for each bank account daily; or MT942 which can transmit detailed and/or summary information about entries debited or credited to the account since the last end-of-day balance report or interim statement.
However, with the move towards data rich ISO 20022 messaging, corporates can reap the benefits of its enhanced features such as the ability to transmit 280 characters of unstructured data, that could ease the identification and tracing of transactions for reconciliations. In the lead up to full implementation, banks and SWIFT are offering translation support, although there could be fees associated with this in the future. TMS and ERP vendors may also provide translation services, but it's possible that even higher charges may apply.
You spend time combating fraudulent payments or making erroneous payments.
The challenge: Your company may be uploading manual payment files that are not encrypted, lack data security, or not be performing sufficient account and payee validations.
The impact: This can open potential for cyber-attacks, ransom threats, identity theft, erroneous payments due to human error, and reputational damage for your organisation.
Potential solutions: One of the solutions you can consider implementing would be Straight Through Processing (STP), that automates the exchange of critical file-based transaction banking information including payment instructions and bank account balances. These files will be transferred via Secure File Transfer Protocols (SFTP) which ensure data integrity and confidentiality through encryption of the data transferred.
You could also consider using bank-built APIs for immediate validation of transactions on a real-time basis. Non-bank web-based plug-in services are also available that support you in checking payment files in online transaction banking portals. They can automate verification of Australian Banking Association (ABA) files or single Electronic Funds Transfer (EFT) payments and assist in detecting fraudulent invoice payments before releasing funds. APIs can also enable the smooth integration of data or file exchanges between ERP, TMS and transaction banking platforms. This avoids manual handling of data, setup segregation of duties protocols, and automated payee validation to ensure transactions take place securely.
Your company lacks an effective transaction banking Business Continuity Plan (BCP) or Disaster Recovery Plan (DRP).
The challenge: You may not have a transaction banking BCP or DRP or have inflexibility around payment arrangements in the event of a breakdown in BAU operations.
The impact: Lack of a BCP or DRP can lead to issues such as unpaid vendors and employees, debt or interest payment defaults, failing to meet contractual obligations, and result in reputational damage.
Potential solutions: You can review if your transaction banking partner(s) has a BCP or DRP in place and understand their process for manual or phone-based instructions, and how they verify authorisations during a disaster. You may need to consider whether their BCP or DRP requirements align to yours, and if you have suitable and documented internal policies and procedures for response in these circumstances.
A complex web of challenges
Clearly, many of these transaction banking challenges and solutions are interrelated. For example, rationalising bank accounts could reduce the need to integrate multiple banks and bank accounts, in turn saving time and money in implementing bank connectivity and internal system integrations. Meanwhile, improved bank connectivity can lead to more secure data transmissions. In addition, the adoption of ISO 20022 messaging formats can decrease reconciliation issues, enhance the visibility of foreign currency transactions, and reduce the potential costs of translation services.
The implications of the challenges explored above may also be significant across internal teams. For example, lack of visibility of the cash position may impact the ability of accounts payable or payroll teams to make timely payments. Poor transaction reconciliations may require increased effort by finance teams within your organisation. A cyber threat and a weak BCP may impact the credibility of the supplier management teams due to the inability to meet contractual vendor payments in time.
If these problems and concerns sound familiar to you as a CFO, Treasurer or a member of a corporate Treasury team, the time has come to assess whether your current transaction banking arrangements support the needs of the Treasury department and those of your overall business.
In such an instance, a strategically thinking CFO or Treasurer has two options available. You could:
- Engage with your current transaction banking provider(s) to understand how they can help you address the challenges and explore the innovative solutions and capabilities that they can offer.
- Undertake a market scan of the transaction banking providers and related ecosystem to determine if a better solution is available to meet your company’s unique situation. You may find this through another transaction bank, or through an optimal mix of banks and fintech.
