The Untapped Potential of ERIWindy City Summit 2012June 7, 2012

Michael Bosacco Stephen Wojciechowicz, CTP, AAPProduct Management Global Cash ManagementSunGard AvantGard 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

Remittance Information• Up to 9,000 characters of the following types of business remittance information:

1. Unstructured

– Block of data formatted according to another standard (e.g., EDI, ISO 20022), but not edited by Fedwire.

2. Related

– Used to identify a reference number and the location of remittance information if exchanged outside of the wire payment.

3. Structured

– Specific “tags” edited by Fedwire and CHIPS to carry invoice details

Payment Notification Improved Cover Payments

What is included in the new format?

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

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

What Makes This a Complex Implementation?

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

Why This is Not Just a Local Development?

Engage banks in a dialogue Engage internal IT / vendors Refer to the best practices document published by Federal Reserve

addressing originators, banks and beneficiaries

Corporate Implementation Check-list

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.

Originator’s Bank Translate to a common

denominator format.• Fedwire CTP

structured remittance format

• X12 820 format (STP 820 is recommended)

Beneficiary’s Bank Translate from a common

denominator format. Report to the Beneficiary

in any mutually agreed upon format.

Beneficiary Before requesting ERI from

the Originator, validate that Beneficiary’s Bank can report in agreed upon format.

Intermediary Bank Pass on data to next party

as received.

Domestic Remittance Best Practices Core Philosophies

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

Benefits and their Measurement

Remitter: ABC Company Payment Amount: $5678.99 Transaction Detail: Detail Type: 188 Availability: S $5678.99 0.00 0.00 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

From This…

To This…

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

Benefits of Payment Notification

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

New Payment Notification Field {3620}

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 Guidelines

Fedwire Funds Service

Tag {3620} Payment Notification Notification Indicator = 1 Notification electronic address= Notify@1stBank.com Notification reference number = XXXXXXXXXXXXX

1st Bank

Advice

Originatorrequestswire with

notification

2nd Bank

Beneficiary

Payment Order

With Notification

Wire FeeNotification

Fee

Notification e-mail – 2nd Bank must participate for 1st Bank to offer notification

Notifications

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

Payment Notification

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

Early Adopters

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. Please note that regulations and practices change from time to time and the reader is advised to consult HSBC Global Payments and Cash

Management, and confirm with independent legal and tax experts prior to the implementation of any cash management structure.

The products and services described herein are subject to the previous authorization of the corresponding local entity of HSBC Group and to the terms and conditions of their corresponding agreements. The execution of every agreement is made on a case by case basis according to

the market practice and the applicable local legislation. Therefore, neither this document nor any part hereof is intended as an obligation to celebrate any contract and its exhibits or annexes are only for information purposes.

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