By George Ravich
Facing a deadline of September 18, 2009, financial institutions are working through rigorous compliance efforts for the International ACH Transaction (IAT) standard. But IAT is much more than a compliance exercise – and the strategic opportunities are significant for those who understand the emerging landscape and how IAT may impact customer relationships, business strategies, technology infrastructures and the service mix at financial institutions.
At the very least, every financial institution that uses the ACH network has to be ready to accept an incoming IAT. Base requirements include having IT systems that can handle the extra data fields, establishing connectivity to OFAC databases, implementing processes to deal with exception items and training the back-office operations staff.
Perhaps greater than the operational challenge is the task of helping clients to understand the new requirements. Here are the key points that banks should raise with their clients:
Banks and their clients share responsibility for IAT compliance. Although financial institutions will be responsible for collecting data at the point of initial funds transfer to a foreign bank, it is the customer who will be ultimately responsible for providing truthful, complete and accurate details about their international transactions. Just like evading income taxes or smuggling Cuban cigars, failing to provide accurate beneficiary information is a crime punishable by U.S. law.
Identifying IATs may be tricky. Potential IATs include certain payroll payments from foreign companies, payments to foreign vendors, money transfers to foreign receivers, pension payments to overseas recipients and several other scenarios. The differences between an IAT and an ordinary ACH payment can be extremely subtle, so it requires a careful reading of the rules and sample scenarios to determine it precisely.
Banks can assist customers in finding the most appropriate international payment product. While clients are responsible for providing the facts and circumstances regarding their payment needs, financial institutions can assist in matching customer’s payments to the most appropriate products and services.
The NACHA Operating Rules place no restriction on how financial institutions price their services. This gives ACH product managers the opportunity to decide if, when and how to pass along any costs related to IAT implementation. Consider potential pricing and service strategies in the following grid below.
By default, many financial institutions will end up in the dissuaders camp. These are the banks for which IAT is an unwelcome distraction, whose customers neither originate nor receive significant volumes of international payments. Such institutions will do the minimum required to comply with the regulations, attempting to cover some of their costs with high fees for processing incoming or outgoing IATs, which in turn will lead to very low origination volume. While this strategy allows management to minimize upfront expenditure, it creates the risk of lost business.
To mitigate the risk of customer defection, financial institutions can become service leaders who realize that bankers shouldn’t act like surly border guards even if they perform a similar screening function with regard to IATs. By working closely with customers based on their particular situations, the service leaders can identify which transactions require IAT treatment and identify opportunities to optimize payment methods. In addition, service leaders will discover retention benefits from establishing ongoing processes to extract the required data from corporate HR and payroll systems. These advanced services will be reflected in a higher price for IAT. This would be a good strategy for community and mid-size banks to pursue.
The largest commercial banks have the opportunity to become volume leaders. By matching the delivery capabilities of the service leaders at lower prices, volume leaders can gain scale efficiencies and valuable experience incorporating IAT into the international payments mix.
Certain financial institutions will develop business models as self-service sites. Particularly for financial institutions that specialize in services for individuals and small businesses, a self-service site can provide customers with the ability to initiate IATs without hand-holding from their bankers, and without the need for custom integration to HR and payroll systems. Customers would be responsible for entering recipient data into an online banking system and confirming that they understand the legal implications of the IAT.
IAT standard represents the first step towards greater connectivity between the U.S.-based ACH network and payments systems in other countries and regions. By embracing the IAT standard as a business opportunity, financial institutions will gain deeper knowledge of their customers’ global activities and may benefit from increased international opportunities that result. As their clients’ funds travel overseas, financial institutions will find lasting benefits from ensuring that their strongest client relationships also make the journey.
George Ravich is Executive Vice President & Chief Marketing Officer for Fundtech, a a leading provider of global payments, settlement and cash management solutions for financial institutions worldwide.. For more information, call FundTech at 201-946-1100.