The biggest challenge in B2B payments for the receiving company is capturing the remittance details. This had been a growing problem with the increasing use of ACH and credit cards for commercial payments, especially in situations where multiple invoices are being paid or payment deductions are being taken.
The move from paper checks, where remittance details typically accompany the check, to e-payments served to disintermediate the payment from the remittance advice. EDI, XML, and expanded ACH messaging protocols failed to alleviate all the problems. Consequently, many accounts receivable functions have had to resort to concurrently capturing remittance details from emails, spreadsheets, AP portals, and wire, and ACH messaging sent separately from the funds.
This has put a strain on receivables organizations and remittance processing platforms, which continue to evolve in complexity. Where cross-border payments are involved, and when there are additional banking intermediaries in the payment chain, payment visibility has been especially poor. In fact, the challenges involved in cross-border payments provided the initial focus for the development of the ISO 20022 standard.
What's New and Exciting
The ISO 20022 standard delineates the data content and formatting needed to automate the conveyance of electronic remittance (e-remittance) information. E-remittances utilizing the data structure stipulated by ISO 20022 will enable receivables organizations to more easily automate the AR cash application process and reduce payment costs while also boosting productivity. This is because ISO 20022 facilitates the transmission of richer data sets, allows users to harmonize formats that previously were incompatible, and expands interoperability between different financial market structures.
At the present time, the domestic payment systems for all the major currencies, including ACH, Fedwire, and SWIFT, are either already live or in the process of going live with ISO 20022. This standard has been in existence for some time. By 2015, there were already mature adopters of ISO 20022 in Europe. In 2018, the Federal Reserve Board of Governors began the process that would result in migration to ISO 20022 by 2023. As a result, real-time, high-value payment systems have already moved to the ISO 20022 standard. SWIFT estimates that 80% of global, high-value payments by volume will be processed using the ISO 20022 standard by 2025.
The good news for credit managers is that ISO 20022 provides for expanded remittance details. The ISO 20022 payment message, which is similar to the addendum on an ACH payment, appears to have the flexibility and capacity to handle any type of remittance information. In addition, ISO 20022 provides for stand-alone remittance messages, that can be used to replace legacy EDI communications. There are two of these stand-alone message protocols:
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- REMT1 transmits complete remittance details
- REMT2 transmits a link, or other instructions, for accessing the complete remittance details
In order “to support straight-through processing of remittance data for business-to-business payments,” the Accredited Standards Committee X9 Inc. recently published the ISO 20022 Remittance Content Market Guide. This document provides detailed information and real-world examples of remittance content structured for ISO 20022 and thereby encourages automated processes.
An Opportunity for Receivables Organizations
There are several things that credit managers can do to take advantage of the emerging acceptance of ISO 20022. First, you need to identify the gaps in your remittance matching process:
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- Identify those customers where remittance advice is sent separately from the actual funds – E.G., customers that send an EDI remittance message, a spreadsheet, or an email but pay by check or ACH
- Identify those customers whose remittance advice does not provide all the details needed for matching to the AR – E.G., customers who pay by ACH and the addendum is not sufficient for providing complete remittance details
Secondly, you need to make sure your accounts receivable systems are ISO 20022 capable. This primarily involves the payment platform and remittance processing software you use. If these systems are not capable, you should find out if and when your vendors are implementing ISO 20022 capabilities in their products and service. On the off chance, that ISO 20022 is not on, or even not high on, their product development calendar, you may want to consider other vendors who are ISO 20022 ready.
The final step is to work with the customers identified above to incorporate ISO 20022 messages with their payments. You may also need to work with your vendors to capture these ISO 20022 remittance messages in order to fully automate your remittance processing. By first working with those customers who provide the highest payment volumes, you should be able to quickly reduce your remittance processing workload and, assuming you are automated, increase automated match rates.
To a large extent, migration to ISO 20022 standards is going to occur organically because the banks and payment processors have already bought into it, at least in concept if not in practice. Even so, this migration will take several more years. Savvy credit pros, especially those working in high payment volume environments, will recognize that early implementation of ISO 20022 capabilities presents a huge opportunity in terms of AR performance.
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David Schmidt
Contributing Editor, Credit Today Dave is an order-to-cash and SME risk expert with over 27 years of experience. He focuses on the order-to-cash side of the working capital coin applying his knowledge and expertise with receivables, credit, and collection best practices and technology to maximize clients' performance. Dave aims at providing insights into the small and medium enterprise (SME) community by delivering actionable intelligence solutions for clients to drive efficiency, manage risk and grow revenue. |
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