The Untapped Potential of ERI Windy City Summit 2012 June 7, 2012 Michael Bosacco Product Management SunGard AvantGard Stephen Wojciechowicz, CTP, AAP Global Cash Management HSBC Bank USA, N.A. Background for Format Change For many years, U.S. corporations have been asking the Fed to change the wire transfer message format – In 2005, AFP estimated that 17% of incoming wire transfers require manual research costing $35 each time – Numerous surveys of corporations and banks were conducted by the Federal Reserve Banks, the Clearinghouse, and the AFP in subsequent years – In 2010, AFP Electronic Payments Survey estimated top barriers to the adoption of electronic payments • Inability to send or receive automated remittance information (77 percent) & • No standard format for remittance information (72 percent) New Fedwire® and CHIPS® format change announced in 2008 – Implemented in November 2011 What is included in the new format? Remittance Information • Up to 9,000 characters of the following types of business remittance information: 1. Unstructured – 2. Related – 3. Block of data formatted according to another standard (e.g., EDI, ISO 20022), but not edited by Fedwire. Used to identify a reference number and the location of remittance information if exchanged outside of the wire payment. Structured – Specific “tags” edited by Fedwire and CHIPS to carry invoice details Payment Notification Improved Cover Payments Benefits of Extended Remittance Information (ERI) Reduce costs associated with existing wire volume Opportunity to electronify urgent/high-dollar payments Inclusion of remittance details in wire payments will expedite processing/posting – Improved STP rates – Originators may receive discount for paying electronically via wire – Receivers may begin asking trading partners to pay them via wire – Opportunity to leverage existing AP applications or ERP systems that today create ACH payments with remittance information in EDI, STP 820, ISO20022 or other formats ERI – Bringing Wires Up the Curve Other payment modes in the US provide rich information remittance options (check / ACH) Lack of ERI reduces the incentive to make or receive payments through wires Clear end-user support for ERI voiced through multiple independent surveys Staggered but sustained growth expected What Makes This a Complex Implementation? Banks typically utilize different internal systems for processing of wire payments and processing of information Multiple clearing channels and multiple customer delivery channels further complicate pathways necessary Multiple formats make it difficult to focus development Local versus international payments Why This is Not Just a Local Development? Many wires originated in the US are for cross-border payments ERI passage to the beneficiary will be a function of international banks participating in the MT103 REMIT MUG or creation of an industry utility Definite global movement towards provision of information that aids STP reconciliation; PMPG taking a lead within banking industry Corporate Implementation Check-list Engage banks in a dialogue Engage internal IT / vendors Refer to the best practices document published by Federal Reserve addressing originators, banks and beneficiaries Domestic Remittance Best Practices Core Philosophies Originator Validate that Originator’s Bank and the Beneficiary can receive ERI before sending. Send to Originator’s Bank in any mutually agreed upon format. Beneficiary’s Bank Translate from a common denominator format. Report to the Beneficiary in any mutually agreed upon format. Originator’s Bank Translate to a common denominator format. • Fedwire CTP structured remittance format • X12 820 format (STP 820 is recommended) Intermediary Bank Pass on data to next party as received. Beneficiary Before requesting ERI from the Originator, validate that Beneficiary’s Bank can report in agreed upon format. Benefits and their Measurement To Originators: • Reduced overhead cost of alternative communication channels for sending remittance information • Reduced follow-up calls from vendors seeking clarifications on wire payments To Beneficiaries: • Reduced time and cost of reconciling wire payments • Better and more updated MIS on Days Sales Outstanding From This… Remitter: ABC Company Payment Amount: $5678.99 Transaction Detail: Detail Type: 188 Availability: S $5678.99 0.00 00009823638334930 Originator: ABC Company Account Number: 83423747239 Attention: Accounts Receivable, XYZ Company PO Box 27273 Anytown MD Bank: 123 Bank ABA: 001562818 Beneficiary: XYZ Company Detail: 214 spigots for invoice number 56675434 PO number 1576565 Date: 09122011 Time: 0715 hours 0.00 0.00 To This… Benefits of Payment Notification Provides corporate originators the ability to track their payment through the payment chain and confirm that their payment has been processed. • Particularly when the payment is high-value, critical, time-sensitive Popularized by shipping companies New Payment Notification Field {3620} Includes optional data elements that banks can use to provide payment notification services to their clients. • Contact electronic address (could be e-mail or URL) • End-to-end identification number Market practice conventions or bilateral agreements will specify how the data elements will be used • First industry-wide use case recently developed – Originator Model (Payment Notification Indicator = “1”) • Other models have also been discussed (named for the party being notified) – Beneficiary Model – 3rd Party Model Payment Notification Guidelines Product of industry workgroup led by the Fed Creates the concept of a Payment Notification User Group (PNUG) Establishes set of market practices surrounding the use of tag {3620} that PNUG members should follow. • Ultimately designed to provide notification to the originator when the funds transfer is credited to the beneficiary (i.e., the “originator model”) Fed maintains list of PNUG members on its public website. Fed requires PNUG members to sign an agreement indicating intent to follow the Payment Notification Guidelines • New Appendix E to Operating Circular 6 available on FRBservices.org. – Appendix E-1 – for “Participant Members” – Appendix E-2 – for “Agent Banks” acting as agent for “Non-participant members” Payment Notification Fedwire Funds Service Tag {3620} Payment Notification Notification Indicator = 1 Notification electronic address= Notify@1stBank.com Notification reference number = XXXXXXXXXXXXX Notification e-mail – 2nd Bank must participate for 1st Bank to offer notification 1st Bank Wire Fee Notification Fee 2nd Bank Notifications Originator requests wire with notification Notification E-mail Content ABA or BIC or UID of party sending the e-mail Notification reference number Status code : Accepted Settlement Complete or Rejected Time Stamp when status was achieved Beneficiary Early Adopters During March 2012: • About half of Fedwire Funds traffic utilized the new Customer Transfer Plus (CTP) message (primarily using traditional rather than new fields) • Usage of new fields on Fedwire Funds: – 115 institutions sent about 10,000 cover payments per day – About 300 institutions sent about 9,000 messages per day using the new originator Option F field – 15 institutions sent about 110 messages per day using the extended remittance fields, primarily using the “narrative” code for free text • Five Fedwire participants joined the Payment Notification User Group DISCLAIMER This information was prepared exclusively for the benefit and use at the Windy City Summit on June 7, 2012 and contains information proprietary and confidential to HSBC Bank USA, N.A. (“HSBC”) and the Federal Reserve Banks. Neither this presentation nor any part thereof may be used for any other purpose or disclosed to a third party without the prior written consent of HSBC and the Federal Reserve Banks. The presentation provides an overview of certain relevant activities concerning US dollar wire payments. It is not intended to provide specific compliance guidance. Attendees should review compliance concerns with their internal legal and compliance counsels. The information herein reflects our services and activities as of this date and are subject to change. The information herein is not intended as an offer or solicitation for the purchase or sale of any financial instrument nor to amend or supplement any agreement. Any information herein obtained from independent sources is believed to be reliable, but HSBC does not warrant its accuracy or completeness. 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