The road ahead

Hank Farrar and Lauren Hargraves explain how the Federal Reserve Banks and The Clearing House are creating value for banks and their corporate clients.

“94% of corporate respondents say it is 'valuable' to include remittance information with wire payments”
-Business-to-Business Wire Transfer Payments report

In less than two years, the nation’s major wire transfer systems, the Fedwire® Funds Service and CHIPS®, are set to deliver significant new functionality that will streamline the wire transfer process for corporations.

By the end of 2010, U.S. dollar wire transfer  systems will be upgraded to allow invoice and other business remittance information to flow along with wire transfer payments, a significant improvement that will enable corporate customers to reconcile their payments with much greater efficiency. This will save corporations time and money by eliminating the source of confusion about why a wire transfer was sent. 

The business challenge
Payments professionals at U.S. corporations have expressed frustration for years about their inability to apply wire payments to appropriate accounts/bills because wire payments arrive with limited remittance information. For corporations, there simply wasn’t sufficient space or structure in a wire transfer message to carry the necessary information. At the prompting of these professionals, the Federal Reserve Banks and The Clearing House worked with financial institutions, global payments systems operators, corporations and software companies over the past two years to create this much- desired enhancement.

The Federal Reserve Banks and The Clearing House worked together with the Association for Financial Professionals (AFP), a leading trade association for treasury management professionals, to verify and better understand the demand for an expanded wire transfer message that could carry standard business remittance information, such as invoice numbers. 

Research studies clarify need
The Federal Reserve Banks and The Clearing House validated demand for this enhancement through a joint research project. Together, they retained Granite Research Consulting and conducted a nationwide study from February to August 2006. A total of 381 questionnaires were completed by companies that sent and/or received at least 10 wire payments in 12 months and had annual revenues of at least $5 million. As a follow-up, eight focus groups were held in Dallas, San Francisco, Chicago and New York to solicit further comment and insight from corporations.

The findings, contained in the October 2006 report Business-to-Business Wire Transfer Payments: Customer Preferences and Opportunities for Financial Institutions, included the following:

• A consensus exists among users of wire payments that there is a need to create a common standard for sending and receiving remittance information with the wire payment.
• 94% percent of corporate respondents said it is ‘“valuable’” to include remittance information with the wire payment; 65 percent% said it is ‘“very valuable’” and they are willing to pay for capabilities that streamline their operations.
• Corporations say that more than 80% percent of their payments (by volume) are still made by check, in part due to the availability of remittance information on the check stub.
• Most accounting and bank-provided cash management systems do not work together, making process automation and straight-though processing of wire transfer payments difficult to achieve today.

In addition to the joint research, the Federal Reserve Banks sought feedback in February 2008 through a web-based survey sent to thousands of banks that use the Fedwire Funds Service.  The Federal Reserve Banks reviewed 366 responses from a variety of users, in a wide range of user categories, including high volume users, low volume users, domestically focused users, internationally focused users, browser-connected users, and computer interface-connected users. 

The results of the survey demonstrated that banks understand and support the need for this enhancement. By a substantial margin, the number of respondents who were ‘“very interested’ ” or ‘“somewhat interested”’ in adding business remittance to a wire transfer message outnumbered those who were ‘“not interested’” across every user category that the Federal Reserve Banks analyzed.

New process will bring substantial benefits
The inclusion of business remittance information with wire transfer payments is a significant improvement with the potential to save time and money for corporate users by reducing or eliminating the need to research incoming wire transfer payments. A 2005 AFP survey found that corporations typically need to research 17 percent of incoming wire transfers at an average research cost of $35 and approximately 30 minutes of staff time per wire.. 

The enhancement planned for the Fedwire Funds Service and CHIPS at year-end 2010 will provide the tools for corporations to reduce or eliminate the need to research wire transfers because these payments will have sufficient information for a corporation to apply these payments to their accounts receivables systems.  Small and large firms alike will benefit from this change, but IT-savvy corporations have the potential to benefit the most – they will be able to automate the entire wire transfer process, if they so desire. 

The process improvements will result in substantial benefits. No longer will corporations incur the time and expense of follow-up phone calls and e-mails to match invoice and other key information with wire payments. For corporations, that means a significant cost reduction in managing wire transfers. For banks, it means one of their most essential payments products will be even more valuable to their best corporate clients.

To facilitate adoption of this change, the Federal Reserve Banks and The Clearing House are enlisting the support of banks, corporations and technology providers to adapt their processes for the new message format. As part of the initiative, the Federal Reserve Banks and The Clearing House are engaging high-value payment system operators from around the globe to discuss interoperability and global compatibility.

Maximizing The Opportunity

Banks
To take advantage of the opportunity to send remittance information with wire transfer paymentsts, banks need to engage with their corporate clients to understand better how customers intend to use these messages. Banks can make this transition smoother – and perhaps get an edge on their competition – by increasing staff awareness and understanding of this enhancement.  Among the steps banks should consider:

• Hold training sessions.  Banks should prepare their sales and customer service staff to publicize the significant benefits of this new enhancement to clients.
• Work with the wire transfer systems. Take advantage of training opportunities and materials from the Federal Reserve Banks and The Clearing House.
• Review and plan for changes to IT systems.  Banks need to inventory the customer portals that need to be changed, their interfaces with market infrastructures, and the core payment-processing engines they use for wire transfers.
• Prioritize the demands and capabilities of clients.  Banks need to look closely at their clients’ capabilities.  For example, are clients looking mainly for XML-based ISO 20022 information?  EDI-based ANSI 820 STP information?  Or a simple, human-readable report?
• Review statements and statement delivery channels.  Banks need to determine if these can be leveraged to transport this information to corporate clients.
• Talk to correspondents/respondents.  Banks should reach out to their correspondents and respondents to ensure that they are aware of this change.  Correspondents and respondents – especially banks that are not direct participants in the Fedwire Funds Service or CHIPS – will need to ensure that they can transport the additional information contained in the enhanced message format so that their clients can benefit from the change.
• Don’t ignore the cross-border challenges.  Banks involved in cross-border payments may want to talk with their messaging network providers, such as SWIFT®, about how they might leverage those channels using the enhanced message formats. 

Corporations
For their part, corporations need to engage with their banks to understand the type of interfaces to be supported – XML, EDI, and SWIFT, among others. Corporations should review how they use their treasury workstations, cash management software, and enterprise resource planning (ERP) software for these types of wire transfer messages. They should also work with the providers of these products to identify, plan for, and implement the IT changes that will support this initiative.

Corporations looking for ways to ease the transition of paper-based to electronic payments should evaluate the role that new wire transfer capabilities could play in that transition. From prior research, it is known that there are a small percentage of checks that are relatively high dollar, high importance, or time sensitive that continue to be written in part due to the availability of remittance information on the check stub. With upcoming enhancements to the US dollar wire transfer systems, there may be opportunities to improve efficiencies of some paper-based payments. 

Technology providers
Finally, technology providers need to identify their bank and corporate clients that will be affected by these changes, so that the required functionality is delivered on time.

After many years of discussion and planning, a new era of efficiency is arriving for wire transfer payments. By continuing to work in the spirit of cooperation, banks, corporations, and technology providers can realize even more value from the nation’s two major wire transfer systems.

Lauren Hargraves is Senior Vice President, Wholesale Product Office, Federal Reserve Bank of New York. Hank Farrar is Senior Vice President of The Clearing House, responsible for CHIPS.