SunGard study reveals requirements for increased connectivity between suppliers, buyers, banks and other trading partners.

INTRODUCTION

This corporate commercial EcoSystem of suppliers, buyers, banks & other trading partners is likely the most inefficient marketplace in the world. This market is inefficient because of lack of access and transparency of data combined with poor infrastructure and connectivity and the pervasive use of manual processes. The result is a high degree of friction across the EcoSystem.

The basis of this study is grounded in the concept that the intrinsic value of any corporation is based on its ability to drive free cash flow in a predictable fashion. This study aims to uncover the primary areas to target to drive increased transparency, efficiency and networking across the EcoSystem.

Many corporations still operate in a complex web of paper, disparate systems, multiple "standards", protocols, and networks which creates redundancy, error, and lags in data delivery. This study looks to understand the major obstacles around improving settlement times in business-to-business transactions. In contemplating commercial trade, the concept that settlement of corporate to corporate transactions often takes 30, 60 or even 90 days clearly indicates that there is an enormous opportunity for improvement. The demand today for a single point of connectivity for access to banks, SWIFT and even corporate to corporate communications can be facilitated with technology.

The Internet has certainly enabled easy communication between corporations; however there remains the need for a more structured and secure exchange for communication between business applications and EcoSystem partners. Primary areas to target include bank connectivity, supplier / buyer relationships, data aggregation and relationships between these entities.

Removing the Friction

Core to the strategy behind payments innovation is the value that can be generated for trading partners when true collaboration and connectivity is created. The value is in gaining data transparency and the ability to accelerate the velocity of free cash flow. This can only be accomplished when true connectivity exists across the EcoSystem of suppliers, buyers, banks and other trading partners.

The future of supply chain finance relies on market neutral / vendor neutral connectivity and collaboration across the EcoSystem. This study looks at the topic from the perspective of payments processing, workflow and execution. What elements need to be in place in order for corporations to streamline the settlement process and how will these changes help to foster true supply chain finance?

STUDY SCOPE

The global study on payments and connectivity contained 358 responses from corporations throughout the United States, Europe and Asia across 20 primary industries. Due to the nature of the study, the results are often viewed by segmenting the small to mid sized entities from the Enterprise or Large Enterprise.

Of the responses, 44% are considered small to medium with annual revenues below $500M. The Enterprise category considers the range of $500M - 5B, representing 34% of the responses. The remaining 22% are considered Large Enterprise with revenues above $5B.

From a regional perspective, the responses span a global view: Americas (59%) and EMEA (30%) and the remainder in APJ (11%).

The industry categories span corporate entities only including insurance companies. Responses from financial institutions / services were removed as the focus of the study is to better understand corporate requirements around connectivity and commercial transaction management; particularly around payments processing.

KEY STUDY FINDINGS

Increased Requirements for Connectivity

30% of corporations in the 5B+ category are managing with 21 or more cash management banks. The requirement for bank communication is not new. However, while several years ago there was a movement to consolidate banking relationships, today there is a trend toward the multi-banked corporate. Traditionally bank communication has been resolved through distinct solutions that maintain interfaces to the various institutions. The demand today is for single point connectivity allowing for access to banks, SWIFT and even corporate to corporate communications.

Check to ACH Conversion Requires a Global Directory

Only 12% of the companies responding have reached the point where they are able to pay 75% of their vendors electronically. There is no doubt that companies realize the cost savings associated with electronic delivery of payments and remittance advice. However, for many companies true adoption has still not been realized. Much of this is as a result of the fact that there has not been an easy way to obtain and mange vendor data or bank account details. By creating a general directory, companies can self register payment details so that they can be invited into Payer communities.

Increased Demand for Next Generation Payment Factories

For companies with 5B+ in annual revenue, 40% report that they are operating with 11 or more payment initiation systems, and 25% of the total has more than 21 systems. Payment factories have now reached a level of sophistication that supports complex organizations with multiple backend systems and sometimes hundreds of banking relationships. Internal approval workflows and diversity in formats and standards adds another layer of complexity. A comprehensive payment factory will have a dramatic impact on cost structure as well help to mitigate risk of fraud.

Bank and Enterprise Connectivity Demand will Help Make Supply Chain Finance a Reality

Advancements in bank and enterprise connectivity are helping to set the stage for the future of supply chain finance. The Internet has certainly enabled easy communication between corporations, however there is need for a more structured and secure exchange for communication between business applications in the financial EcoSystem. A connectivity approach which contemplates multiple formats, protocols, systems and entities is required to facilitate true supply chain finance.

For example the exchange of remittance information outside of clearing houses or networks for electronic bill presentment are examples of inter-corporate exchanges based on centralized communication service enhanced with a public directory. Supply Chain Finance depends on this networking and data transparency.

BANK COMMUNICATION

Although bank communication isn't a new problem, the timing is right to introduce bank communication as a service. With the rapid acceptation in the market of Software-as-a-Service (SaaS) solutions in the treasury space, centralization of bank communication becomes a hard requirement.

The Internet has certainly enabled easy communication between corporations, however there is need for a more structured and secure exchange for communication between business applications in the financial EcoSystem. The primary driver rests in the ability to now deliver value-added services via these connections. For example the exchange of remittance information or the ability to perform bank account management examples of enhanced services available via bank communication.

DOMAIN OF THE MULTI-BANKED CORPORATE

There has been a shift away from a single convergence of one banking institution to utilize multiple banks and look to connect to them via a single point -- SWIFT is a component of this. However, companies are looking for a broader spectrum of connectivity. A single connectivity service will allow corporations to connect once and gain access to SWIFT as well as other trading partners and exchanges.

This approach helps to greatly reduce friction across the EcoSystem as corporations can streamline data transfer and gain transparency to transactions.

30% of Corporations in the 5B+ category are managing with 21 or more cash management banks. Global connectivity across that spectrum helps to improve transparency and drive efficiency. Bank independence is key component of corporate cash management strategy.

Recent market evolutions have emphasized the vulnerability of financial institutions and created awareness with corporations that diversification of their bank partners is crucial to ensure healthy liquidity in times of crisis. To benefit fully from larger group of core banks, corporations have to look at their infrastructure and the flexibility to switch their transactions flows from one bank to another.

A centralized bank communication solution helps in this process by:

• Simplifying the ability to connect to a new bank

• Lowering the cost of increasing the number of bank partners

• Delivering value-added services offered by their banks

Many corporations are now looking to improve bank connectivity. Some through SWIFTNet, and these include many firms that we spoke to two or three years ago. At that time, they thought that there might be something in it for them, but wanted to wait to find out what others were doing before they took the plunge. Many corporates want to be seen as leading edge, but they don't necessarily want to be 'bleeding edge'.

The drivers to join SWIFT are often a combination of a number of factors. There are companies that are motivated to join SWIFT because they are convinced that it can bring value to their organization in terms of cost reduction and improved visibility, but it has to fit into a project timeline - and an investment timeline - that is much broader than simply a bank connectivity project.

For example, if a corporation is working on centralizing its treasury, SWIFT can bring value to this project in terms of getting a real-time view of liquidity, or at least a consolidated view of account and liquidity positions. Or if a corporation is working on implementing a shared services centre or payments factory to centralize its payments, then within that project they can also look at how they organize their bank connectivity. Either way, the SWIFT connectivity project is typically embedded in a more strategic initiative.

SWIFT is still a solution that is particularly suitable for larger, often multinational or multi-banked corporations because the problem the corporate faces has to be big enough to allow for a project that includes SWIFTNet connectivity. It's not only the size of the company but also the complexity of the bank relationships and the need for centralization, either by setting up a payments factory or a treasury centre/central treasury system. If a corporation has only one or two banking relationships and is active in just one or two countries, then traditional proprietary e-banking solutions may be adequate.

There are some large multinational corporations that work with only one or two banks, so probably they won't replace host-to-host connections that they have put in place. On the other hand, there are many mid-cap companies, for example in the distribution sector, that have quite complex bank relationship structures because they need local banking partners in almost every country - and sometimes even more than one per country. If a corporate sets up a shared services centre or a centralized payments factory and out of that centralized solution it then wants to set up 20 bank connections, then the straight-through processing (STP) dream is shattered.

CORPORATE ADOPTION OF SWIFT

In the past years, there has been a substantial increase in the uptake of SWIFTNet for corporations compared to previous years. Organizations are now realizing the advantages that SWIFTNet can bring in terms of harmonizing bank connectivity, and the technical component is also now better understood.

Part of the increase in adoption can be attributed to the fact that it is now easier to access SWIFTNet. This is attributed to adjustments made within the SWIFT model and also to the increased adoption of member concentrator models provided by vendors. First, SWIFT is putting in a lot of effort to make the on-boarding process simpler and less costly; and second, vendors are filling in the gap by offering connectivity as an extra service to their customers. Therefore, instead of squandering a number of days attempting to figure out dense paperwork, vendors can provide it as a service on top of a global offering for the corporate client.

Most corporate customers have opted to connect via a member concentrator service, where a technology firm, such as SunGard, not only takes care of the SWIFT connectivity (effectively outsourcing the technical part) but also takes responsibility for the administration duties. This is a critical factor in the adoption rates as previously, many corporations found that filling out the technical documents for the first time was not only difficult but also costly in terms of the time spent.

When viewing companies in the $500M and above range, on a global level, 44% are reporting that they are now connected to SWIFT. Of those not connected, it is predominantly organizations in the $5B or higher range with concrete plans to migrate -- 53% stated having a SWIFT initiative.

Benefits of a Service Bureau Approach

As corporations evaluate the costs and operational requirements for SWIFT connectivity, they often realize that they do not want to bear the upfront investment and ongoing management overhead of connecting to SWIFT directly, using their own in-house infrastructure. For many organizations, managing a SWIFTNet connection is not a core competency. For this reason, corporations are turning toward a Service Bureau to provide the infrastructure, connectivity and to manage the day-to-day operation of their SWIFT connection.

The SWIFT Service Bureau allows corporations to outsource the management of their SWIFT network and connectivity while still containing the same benefits and level of access afforded through a direct connection. The added benefit is a lower total cost of ownership as well as lower operational costs compared with the support and administration costs required for an in-house solution. The STN for SWIFT Service Bureau is a less expensive, faster and easier alternative to direct connectivity, allowing for a full range of SWIFT messages including securities, treasury, derivatives, payments and corporate actions in a fully serviced and secure environment.

THE ROLE OF SEPA

SWIFTNet connectivity is part of the single euro payments area (SEPA) discussion because every time a corporation sets up a new solution, whether at the payments factory or collections function, or in a treasury management system, at a certain point in time they need to decide how they will reach out to their bank.

There is a growing adoption of SEPA Direct Debit (SDD) and Credit Transfer (SCT). SunGard is working with direct debit issuers, both from a debtor and creditor perspective, which are typically utilities companies looking for new solutions that cover local schemes and also international schemes. Banks will start offering services in November 2009 but the mandatory date for 'reachability' is November 2010.

Considering just those respondents from EMEA, 40% of the respondents report having already implemented solutions to address SEPA requirements. Of those that have not yet implemented technology, approximately 30% report that there are plans to move forward with this initiative.

Regardless of company size, multi-national corporations have the option to comply with the standards set by the Single Euro Payments Area (SEPA), and as a result, can benefit from lower bank fees. Many large or enterprise companies will satisfy these requirements as part of larger initiatives such as implementing a payment factory. However, for the smaller entities with revenues at the $50M or even $150M range, there exists a bigger challenge in compliance to SEPA.

For this reason, these companies are looking to solve their challenges by leveraging SaaS delivered solutions that are available on demand. A utility that can be used to convert files as needed and when needed. While they may never completely eliminate the bank fees, there is an opportunity to reduce the costs dramatically; and equally important, to be able to communicate faster and with less intervention. This goes back to the concept of reducing friction across the financial supply chain.

ENTERPRISE CONNECTIVITY

The other key issue is that there are so many different initiation points -- systems, and businesses within one corporation. This is of course driving adoption of payment factories as well as increased requirements for a single connectivity hub. In the 5B+ category, corporations range, 40% of the companies are operating with 11 or more payment initiation systems, and 25% of the total has more than 21 systems.

Corporations today are under ever more pressure to devise ways to manage their cash more effectively. Currently, many of these corporations are managing their payments processing and bank accounts in one of three ways -- regionally, at the business unit level or at the subsidiary level. While these methods may offer a certain degree of flexibility, at the same time they often result in poor visibility and high ownership costs.

Implementing a payment factory can support organizations in gaining control over cash management, as it helps to automate and centralize payments processing across regions and multiple systems. Utilizing a single channel for payments processing also improves visibility of cash flows for better liquidity management and significantly reduces operational and transaction costs; basically helping to drive transparency.

Payment factories have been around for some time now. Typically, they have been implemented at large multinational organizations wanting to streamline their accounts payable organization (or part thereof) by defining common payment processes across various locations and subsidiaries in a shared service center.

Most of the CFOs and Treasurers who pioneered the concept of payment factories are enjoying a sound return on investment (ROI) on their payment factory because it provides tangible operational efficiencies for their organization, including:

• Driving down banking fees, as it becomes possible to deal with a smaller amount of banking relationships across various locations and subsidiaries, resulting in a better negotiating position.

• Adopting the new SEPA Payment instruments for Euro cross border payments, driving down banking fees further and opening up the door for enhanced payment services.

• Handling larger payment volumes with less staff due to increased automation and straight-through processing (STP).

• Replacing proprietary e-bank connections that typically cost about 20K USD/year per bank connection, resulting in substantial savings.

• Routing payments to the least cost option based on configurable rules.

• Offering flexibility for dealing with many different payment instruments and payment types, adding value to enterprise resource planning (ERP) systems that are often not capable of dealing with certain instruments and for which building customizations is a costly exercise.

• Centralizing the payments business process in a central system, resulting in changing the process only once in case of changes due to business and regulatory pressures. Again, this means a substantial cost saving compared to changing many different systems.

• Facilitating compliance with internal control procedures as imposed by regulation such as Sarbanes-Oxley and the 8th European Union directive.

• Preparing for growth. Modern, scalable Payment Factories can facilitate growth within the Corporation through being able to handle the increased volumes and complexity that can result through acquisition and organic growth.

These advantages are obvious and are in most cases compelling enough to build a strong business case for payment factories. The first wave of payment factory implementations has focused on the operational benefits for the CFO, treasurer and accounts payable director. However, the advantages do not stop there.

THE NEXT GENERATION OF PAYMENT FACTORIES

Traditional accounts payable systems are good at invoice management and payment runs, but are typically not able to give timely information about the payment status itself; nor are they able to provide digitized remittance advice to the suppliers. This can be provided by a payment factory. Exposing this information to the accounts payable team and the supplier is something that enhances the supplier relations and leverages the investment in payment factories.

Another benefit can be realized by 'extracting' the information from the payment factory and using it for cash management purposes. As payment factories already contain information from various systems (ERP systems, payroll systems, treasury management systems) across the organization or enterprise. Modern payment factorie also include workflows for getting intraday and previous day account statement across a range of bank accounts. This information is crucial for cash management decisions.

Extracting information for short-term cash management decisions or implementing cash management modules that are integrated with the payment factory are therefore a logical next step. It leverages the information of the payment (and collections -- remember direct debits) factory. It leads to better cash utilization and improved working capital management.

The current generation of payment factories is offering much more than just a series of payment formats and workflows, but additionally is providing strategic information for better working capital management. Payment factories offer timely information about payment status that can be shared with suppliers, a key element in supplier relations management.

All of these components are contributing building blocks to establishing true supply chain finance. With the ability to provide timely access to data across multiple networks and formats will essentially lead to a monumental change in the way corporations do business.

PAYMENTS NETWORKS LEVERAGE SOCIAL NETWORKING

Accurate payments processing and communication of remittance advice to vendors or suppliers can vastly reduce costs of each payment. Much of this is as a result of the fact that there has not been an easy way to obtain and mange vendor data.

Only 12% of the companies reporting from the Americas, have reached the point where they are able to pay 75% of their vendors electronically.

The issue is that most companies have not taken a practical approach to transition AP disbursements to electronic payments. Breaking down traditional barriers to electronic payments means that companies need to find easy ways to get vendors to register to receive electronic payments versus a check. Ironically, the obstacle is on lack of information from the Payee side.

Payers cannot obtain and maintain bank account details across their entire vendor portfolio. For this reason, converting from check to ACH is difficult. For this reason, the emerging trend is to create a global directory of bank account details that are accessible to all Payers. It makes more sense to have each Payee self register in a global directory. Once in the directory, much like a social networking site, Payers can invite the Payee to their closed network. Once in the network, the Payee can enter bank details and receive payments.

The cost savings associated with receiving electronic payments goes beyond the paper based processing of checks and extends into areas such as lockbox processing and the ability to utilize digitized remittance advice.

Via the payment network, the vendor or service provider being paid links to the central site to view, print, or save the remittance advice. They can even download the data in

Less than 10%

11-25%

26-50%

51-75%

76-90%

% of Vendors Paid Electronically

29%

20%

18%

21%

12%

their specified accounts receivable system data format. This technology is designed to easily work within existing banking relationships, using non-proprietary, Web-based communication.

From the Payer perspective, the A/P user uploads a payables data file. Analyzing the data, the technology first splits the file, differentiating disbursements to be paid by ACH, Wire or SWIFT from those to be paid by check. Passing electronic funds transfers, such as ACH payments on for routing to the vendor's bank, the associated remittance data is forwarded directly to the vendor. The system will leverage the centralized Vendor Database to optimize least cost routing of payments.

Unique to this approach, an electronic remittance advice is available with each electronic payment created, in a format for potential importation to a Payee's A/R system. Remittance handling is another key advantage to joining the payments network.

THE FUTURE OF SUPPLY CHAIN FINANCE

In contemplating commercial trade, the concept that settlement of corporate to corporate transactions often takes 30, 60 even 90 days and compare this to any other financial transaction, it is evident that there is an enormous opportunity for improvement. Reducing friction and attaining visibility across the EcoSystem of buyers, suppliers and other trading partners will facilitate supply chain finance and help uncover hidden cash and opportunities.

"Taking out the friction:" Core to the strategy behind much innovation today is the value that can be generated for trading partners when true collaboration and connectivity is created. The survey findings around requirements for bank connectivity and enterprise connectivity represent even further that until these areas are addressed, true supply chain finance will not be as seamless as desired.

Bank Communication has always been a major obstacle to develop multi-bank cash management and treasury solutions. Traditionally this is solved by developing modules in the distinct solutions that try to optimize the specific aspect of bank communication. Although these are not new problem, the timing is right for corporations to now leverage Software-as-a-Service technology and service delivery of technology. With the rapid acceptation in the market of SaaS solutions, centralization of bank communication becomes a hard requirement. However, for the more forward looking organizations, this requirement goes further to demand value added services -- for everything from simple bank account management to fully engaged supply chain finance.

The Internet has certainly enabled easy communication between corporations, however there is need for a more structured and secure exchange for communication between business applications in the financial EcoSystem. For example the exchange of remittance information outside of clearing houses or networks for electronic bill presentment are examples of inter-corporate exchanges based on centralized communication service enhanced with a public directory.

By creating a common framework or network leveraging SWIFT, as well as direct bank connectivity, corporations can then engage in true supply chain finance. Imagine connecting a receivables solution to the EcoSystem service. Buyers can download their invoices directly and then place them into the marketplace with payment instruction. Suppliers can view these invoices and opt to choose to obtain payment earlier, leveraging a low financing fee based on the buyer's credit rating. Participating banks can fund the payment requests.

Supply Chain Finance promises to forever change the commercial marketplace, and integral to this shift will be the ability for corporations and financial institutions to gain transparency, efficiency and networking capabilities for the transfer of detailed data such as invoices, payments, remittance advice, and exception processing.

For more information on AvantGard please visit us at www.sungard.com/avantgard or email: avantgardinfo@sungard.com

About AvantGard

SunGard's AvantGard is a leading liquidity management solution for corporations, insurance companies and the public sector. AvantGard provides chief financial officers and treasurers with real-time visibility into cash flows and increased operational controls around receivables, treasury and payments. AvantGard helps companies drive free cash flow and reduce inefficiencies across the EcoSystem of suppliers, buyers, banks and other trading partners. For more information, please visit http://www.sungard.com/avantgard.

About SunGard

SunGard is one of the world's leading software and IT services companies, serving more than 25,000 customers in more than 70 countries. SunGard provides software and processing solutions for financial services, higher education and the public sector. SunGard also provides disaster recovery services, managed IT services, information availability consulting services and business continuity management software. With annual revenue exceeding $5 billion, SunGard is ranked 435 on the Fortune 500 and is the largest privately held business software and services company on the Forbes list of private businesses. Continuity, Insurance & Risk has recognized SunGard as service provider of the year an unprecedented six times. For more information, please visit SunGard at www.sungard.com.

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