Q3 Fall 2016 • Canada’s Independent Magazine
Financial S Payables | Receivables | Collections | Data | P-Cards | ECM | Technology
The Impact of Changing Technology A look at the rapidly evolving world of technology and the challenges and opportunities it creates for the back office AR Report: Technology to improve debt collection
Market Report: Rising interest rate ramifications
Trend Report: How might mPOS change your business? PM40050803
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Contents
Q3 FALL 2016
Volume 3 Number 3
8
14
10 4 News
16 Market Report: Rate ramifications Assessing the potential impact of interest rate increases on consumer debt, lenders
21 Events
18
Features
18 AR Report: Improving debt
collection using real time data analytics and multichannel communications
The Impact of Changing Technology
8 Same day ACH: What insights can
we gain from U.S. payment system upgrades?
10 Imaging the future of digital ID&V
22
14 Chatbots: How small businesses
20 Trend Report: How might mPOS change your business?
22 Blockchain: The new technical
can embrace the next wave of emerging technology
innovation for finance
Also Publishers of
Canadian Equipment Finance
Advertising Sales Mark Henry mark@financialoperations.ca Publisher and Editor-in-Chief Steve Lloyd steve@financialoperations.ca Managing Editor Sarah O’Connor sarah@financialoperations.ca Creative Direction / Production Jennifer O’Neill jennifer@financialoperations.ca Photographer Gary Tannyan
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NEWS Basware transforms company spending behavior by engaging employees in collaborative e-procurement
Fostering spend stewardship empowers organizations to drive better spend management STAMFORD, Conn. -- Basware, a global leader in providing networked purchaseto-pay solutions, e-invoicing and innovative financing services, has adopted the WeProcurement methodology to e-procurement, which fundamentally transforms company spending culture for its customers by changing employee behavior. To reinforce desired spending behavior, WeProcurement creates a collaborative process that delivers relevance, intelligence and awareness within the e-procurement system. This systematic approach enables everyone to work together towards company goals and saving money, ultimately making employees better stewards over company funds. Ilari Nurmi, SVP, purchase to pay, Basware, explained: “Today’s employees expect the systems they interact with on a daily basis to be intuitive and relevant to their daily lives, and to deliver critical intelligence at the point needed to greatly increase efficiency. With WeProcurement we are taking things one step further. Our methodology also incentivizes employees to stick and comply with a company’s procurement processes by making it the easiest thing to do within the natural course of their work and by making them aware of how they add value to a business as a whole. This gives organizations tangible results and ensures employee contributions amount to more than just the sum of their individual parts.” At its core, WeProcurement is fueled by the “Power of We” philosophy, a crowd-sourced style process that builds its success from the collaboration of all users. Applied to a business setting, this user-driven process results in significantly higher cost savings compared to traditional e-procurement solutions and the agility organizations need to fund their missions. “By consolidating our purchasing activities across 200 locations into a collaborative process, we were able to reduce our supplier base by 96 per cent,” said Angela Watts, purchasing manager at Goodyear Tire & Service Centers. “Our users are now saving significant time in their days and getting the items they need in a cost-effective manner—ultimately saving the company millions.” WeProcurement eliminates the number one reason users drop out of a process, which is that they feel their actions are not making a difference or do not matter. By increasing employee engagement and emphasizing that everyone who buys goods and services has an important role to play, the system becomes self-managing— relieving the procurement team from having to police the organization so they can focus on more strategic initiatives. Greg Summers, finance director at DCOR, added: “While we anticipated having to force employees’ hands to use the system, we found it very easy to garner adoption. Once the employees saw the benefits and user-friendly nature, they were eager to get on board.” Ilari Nurmi, concluded: “Our WeProcurement approach for procurement systems overcomes traditional procurement management challenges by making the processes as relevant as possible to each person’s role, department, category of spend and industry. Instead of trying to force people into a mold with a system that caters to procurement or finance, WeProcurement seeks to understand the needs of each requestor and deliver a system that is designed for them—the users.”
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Financial Operations | fall 2016 | www.financialoperations.ca
MineralTree and Visa ink strategic alliance to streamline commercial AP payments
Strategic alliance provides financial institutions with a platform to help middle market businesses increase efficiency and improve cash flow CAMBRIDGE, Mass. -- MineralTree, the accounts payable and payment automation solution provider for middle market companies, has announced a strategic alliance with Visa to integrate the MineralTree platform with Visa Payables Solutions to drive the growth of accounts payable (AP) payments using commercial virtual cards. “We are honoured to enter into this strategic alliance with Visa,” said BC Krishna, CEO of MineralTree. “It is the latest example of our commitment to provide middle market businesses with marketleading invoice and payment automation solutions that improve efficiency, optimize cash flow, mitigate risk and support their growth by enabling them to do more with less. Using credit cards for business payables is something our customers want and need.” Many financial institutions have recognized the opportunity to help middle market businesses automate AP with virtual commercial cards, but have not been able to offer an easy to implement and easy to use solution that fully automates the process. Financial institutions will now be able to offer this platform to help middle market businesses improve cash flow, make real-time payments, increase security and rely less on paper checks. “Middle market businesses need solutions that can help improve cash flow while seamlessly automating financial processes,” said Vicky Bindra, head of Visa global business solutions. “Enabling Visa virtual commercial card payments through the MineralTree platform is an example of how Visa seeks to bring innovative new solutions to middle market companies and support our issuing financial institutions focused on
NEWS the needs of this critical segment.” The MineralTree platform offers a number of key features including: • Out-of-the-box integration with Visa Payables Solutions for Visa virtual commercial card payments and supplier enablement; • Direct integration with bank and credit card accounts for account balances and transaction reporting; • Out-of-the-box two-way synchronization with common Accounting/ERP applications (e.g. Intacct, Microsoft Dynamics GP, NetSuite, QuickBooks and Sage 50); • Automated invoice data capture and online approval workflow; • Payment authorization security and control: segregation of duties, dual approval, two-factor payment verification, authorization limits, Positive Pay support;
Keep up to date and informed by visiting our website daily. Financial Operations magazine posts news, insights, updates and breaking stories as they happen.
• Support payments by multiple methods: check, ACH, virtual credit card, and wire; • MineralTree guaranteed protection against online fraud; and • Private-label support for bank branding.
To send press announcements, please direct them to Sarah O’Connor, Managing Editor at sarah@financialoperations.ca
For information contact:
Mark Henry Corporate Sales Manager 905-201-6600 x 223 mark@financialoperations.ca
Sarah O’Connor Managing Editor 905-201-6600 x 227 sarah@financialoperations.ca
Visit us online at www.financialoperations.ca Financial Operations | Fall 2016 | www.financialoperations.ca
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NEWS Mobile payment technology is accelerating the consumer shift to digital payments and away from cash TORONTO -- By 2030, cash purchases will make up only 10 per cent of money spent in Canada, according to a prediction by Moneris Solutions Corporation (“Moneris”), Canada’s leading credit and debit card processor. Compared to 35 per cent of overall transactions in 2014, the 70 per cent decline will coincide with an increase in the use of digital payment technologies, especially among younger Canadians. Consumer misconceptions about (1) the security of mobile wallets and (2) the ability of mobile wallets to digitally store physical wallet contents (including plastic loyalty cards and receipts), are among the factors slowing the transition. Canadian consumers are increasingly turning to contactless technology to make faster and more convenient payments. A recent Moneris survey of Canadians found that 67 per cent aged 18-34, 56 per cent aged 35-44, 48 per cent aged 55-64, and 49 per cent aged 65 and older, preferred to use a contactless-enabled (tap) card to make purchases—the same tap-to-pay method used in mobile wallets “More Canadians—especially younger ones—are tapping their cards to pay as opposed to inserting them into payment terminals,” said Rob Cameron, chief product officer at Moneris. “We’ve seen the number of contactless transactions more than double this year, which is a strong indication that mobile payments are going to see a huge lift.” When it comes to mobile wallets, the survey found that 25 per cent of Canadians aged 18-34 preferred paying with a mobile wallet over cash or card (compared to 18 per cent aged 45-54, 10 per cent aged 55-64 and six per cent aged 65 and older). The May 2016 expansion of Apple Pay to include support from all major Canadian banks will also help spur the adoption of mobile wallets. Of Canadians aged 18-34, 46 per cent said they would be more likely to use a mobile wallet if it were available for the kind of credit card they used, and 47 per cent said they would use a mobile wallet if it were available for the kind of phone they used—responses collected prior to the full rollout of Apple Pay. When asked their reasons for not using a mobile wallet, 62 per cent of Canadians said they would be more likely to use it if they knew it was secure. Further, 50 per cent of Canadians said that they would leave their wallets at home if they could store all their loyalty cards on their phone. Other reasons Canadians are still holding on to their wallets are the inability to receive receipts via email (48 per cent) and store personal identification (41 per cent). As more consumers realize mobile devices offer a secure alternative to physical wallets because of biometric authentication and other enhancements that minimize the risk of fraud, businesses should ramp-up plans to take advantage of mobile device usage. The shift away from cash is an opportunity for businesses to offer increased value to their customers, through digital solutions and applications that offer reward programs and other loyalty options as well as omnichannel selling approaches. For more information about Moneris business offerings and solutions, visit www.moneris.com.
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Financial Operations | fall 2016 | www.financialoperations.ca
Key findings from the Moneris Mobile Wallet Survey • Younger Canadians are more likely to prefer mobile wallets • Of Canadians 18-34, 25.3 per cent agreed that they preferred paying with a mobile wallet • Of Canadians 35-44, 23.5 per cent agreed that they preferred paying with a mobile wallet • These numbers decreased with age: 45-54 (18.3 per cent), 55-64 (10.4 per cent), 65+ (5.8 per cent) • Canadians said they would be more likely to use a mobile wallet under the following circumstances: • If I knew it was secure: 61.6 per cent • More stores I shop at accepted it: 41.9 per cent • If it were available for the kind of credit card I use: 39.8 per cent • If it were available for the kind of phone I use: 37.8 per cent • More people I know were using it: 36.6 per cent
Credit cards are the most frequently used payment type. Percentages of Canadians who say they use the following payment types always or often: • Credit card: 59.7 per cent • Debit card: 55.9 per cent • Contactless enabled card (tap to pay): 31.3 per cent • Mobile wallet (such as Apple Pay, Samsung Pay, etc.): 2.5 per cent • Cash: 45.7 per cent • Retailer app (such as Starbucks app): 4.8 per cent
50 per cent of Canadians say that they would leave their wallet at home if they could store all their loyalty cards on their phone. Loyalty cards were the number one reason Canadians couldn’t leave the wallet at home, followed by: • If I could get all my receipts emailed to me: 47.9 per cent • I could make purchases at any store using my phone: 45.8 per cent • I could store my identification (driver’s license, health card, etc.) in my phone: 40.5 per cent • I could pay for public transit using my phone: 35.0 per cent The study, conducted by Leger, surveyed 1,516 Canadians between April 25 and April 28, 2016.
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Changing Technology By Viki Patterson
T
What insights can we gain from U.S. payment system upgrades? 8
Financial Operations | fall 2016 | www.financialoperations.ca
oday’s consumers seek faster and more secure payments and quick access to funds, a demand which has been attributed to faster bill presentment and payment, online and mobile transactions, direct consumer sales, etc. However, most of the infrastructure we use today operates on the demands of the pre-digital era. Consequently, we find ourselves witnessing an infrastructure modernization wave around the globe. Domestic payment systems are moving rapidly to modernize their infrastructure. According to McKinsey’s 2015 Global Payments Map, more than 15 countries, representing 45 per cent of global credit transfers, have already migrated to modernized infrastructure. If countries currently building or designing new infrastructure are added to the mix, more than 90 per cent of today’s credit transfers could benefit from modernized “rails” within the next few years. Canada is in the exploratory phase, with Payments Canada (formerly known as Canadian Payments Association) currently undertaking a multi-year initiative to modernize Canada’s payments system. As we look ahead to the future of Canada’s payments system, it can be helpful to look at how others, including our neighbours to the south, are handling these same challenges. In 2013, the U.S. Fed recognized the need to upgrade the U.S. payment system and laid out a plan with five desired outcomes for improvements, including speed, security, efficiency, international and collaboration. The Fed also created the Faster Payments Task Force to engage with industry players to identify and assess alternative approaches for implementing changes to payments capabilities that met these goals in the U.S. In January 2015, the task force published a white paper titled “Strategies for Improving the U.S. Payment System” that laid out a 36-point set of criteria for evaluating such proposals, with industry participants invited to come up with solutions. The automated clearing house (ACH) network is central to commerce in the U.S., moving money and information from one bank account to another
Changing Technology through direct deposit and direct payment via ACH transactions, including ACH credit and debit transactions; recurring and one-time payments; government, consumer and business-to-business transactions; international payments; and payments plus payment-related information. For decades there had been talk of adopting a same day solution, and with the Fed’s task force, the ACH network took their cue that the time was right to make a change. Historically U.S. ACH has been a core low-value, high-volume, low cost, payment instrument with one- to two-day settlement. But the ever increasing demand from the global market on shorter settlement times led National Automated Clearing House Association (NACHA) to announce approval of a same day ACH amendment to the NACHA Operating Rules to move payments faster; a rule was enacted enabling ubiquitous same day capability for ACH transactions (the “rule”). Under the rule, movement of funds between financial institutions will increase from once per day to three times per day. Same day ACH is a premium product offering where originating depository financial institutions (ODFI) will be charged network fees to be paid to receiving depository financial institutions (RDFI’s) for same day ACH items. The rule mandates all RDFIs receive same day transactions, creating value for end-users through its reach to all bank accounts. The rule also mandates that RDFIs provide faster funds availability to customers, making new options available for faster bill payment and receipt of funds. Finally, the rule mandates a roll-out of core functionality over three phases, the first beginning on September 23, 2016. The first phase of NACHA’s timeline includes all RDFI’s guaranteeing funds by end of their processing day and states that ODFI’s may offer origination for credits only. The second phase (to be implemented September 15, 2017) calls for all RDFI’s guaranteeing funds by end of processing day and that ODFI’s may offer origination for credits and debits. Finally, the third phase, set for March 16, 2018, states that all RDFI’s must guarantee funds by 5 p.m. their local time and ODFI’s may offer origination for credits and debits. Eventually, both credit and debit transactions valued at $25,000 and less, not
coded as IAT (international ACH) or ENR (automated enrollment entry) are expected to be eligible for same day settlement. ACH credits will be made available to the receiver by 5 p.m. their RDFI’s local time. Erin Moore, VP and Citi product specialist for ACH, notes that it is important to understand that the U.S. Treasury will not originate or receive same day transactions at the outset of Phase 1. Any entry originated from, or received by, the federal government will not be eligible for same day settlement and will continue to settle on a future date. Information regarding the federal government’s participation in later implementation phases will be forthcoming; however, state and local governments will be participating. Same day ACH can benefit all ACH network users through a variety of use cases. In their same day ACH Guide, NACHA market research identified a total of 63 potential use cases, with 10 primary use cases, projected to generate 1.4 billion dollars of same day ACH transactions. These uses will eventually benefit individuals and industries in a variety of situations and almost every transaction type. In the category of business to consumer, payroll is expected to be a popular use for same day ACH capabilities, allowing for faster payroll payments for hourly or temporary workers and faster options for offcycle payments such as bonuses or emergency payments. Urgent claims payments and refunds, including quick payout of insurance claim payments, disaster assistance payments and other rebates, refunds and reimbursements are also a primary use. Within business to business, an expected primary use is the ability to complete faster payment of invoices on or after the due date and same day remittance of tax payments. Customer to customer transactions including person-to-person payments transferring funds among family members or friends will be a main use, as will accountto-account payments, moving funds between accounts at different financial institutions, or funding of a prepaid or mobile account. Common customer to business payments are expected to take the form of bill payment, allowing faster payment of bills on or after the due date, online/internet payments for e-commerce, point-of-sale cheque conversions, with quicker collection of funds,
collection payments, enabling same day payoff of past-due accounts, and merchant debit payments, creating faster returns for consumer payments. Among respondents to the NACHA Request for Comment (RFC) Survey, the top five most commonly cited use cases include payroll (cited by 87 per cent of survey respondents) business-to-business (72 per cent) account-to-account transfers (59 per cent) person-to-person payments (57 per cent) and bill payments (53 per cent). With use cases and volume projections in mind, Citi’s clients are thinking about the options that same day ACH could open up for their organizations. As you examine possible new opportunities, you want to ask yourself the following questions: 1. How can I leverage same day ACH to create competitive advantage and differentiate my organization? 2. How will same day ACH solve for business pain points? 3. How can I use same day ACH in my organization? 4. How will same day ACH support my customers? 5. Which of my customers and prospects will most benefit from same day ACH? 6. Should I charge customers for same day ACH or pass on the fee? At this point it is unclear whether or not same day ACH, called electronic funds transfer (EFT) in Canada, will make it into Canada’s payments modernization roadmap. “To maintain Canada’s competitive position, and to support innovation at home, we need to proactively and appropriately respond to the external forces that are currently reshaping the global payments ecosystem,” says Gerry Gaetz, president and CEO, Payments Canada. “We must ensure that our payments infrastructure, and our regulatory system, are equipped to leverage innovation for Canada’s gain.” One thing that is certain is that Canadians in the payments industry will be watching closely to see what they can learn from the success of the same day ACH threephase roll out in the U.S. Viki Patterson is director, global sales solutions, treasury & trade solutions for Citi Canada. Viki is a multi-lingual cash management professional with 12 years of experience managing Citi Canada’s top corporate relationships for the TTS business.
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Changing Technology
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Financial Operations | fall 2016 | www.financialoperations.ca
Changing Technology
Imagining the future of digital ID&V By David Poole
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wo closely linked concepts like identity and verification (ID&V) have taken on an increasingly critical role in consumers’ day-to-day lives. Identification systems use a trusted ledger, process or token to identify a person or entity; whereas verification aims to answer the question “is this person who they say they are?” Both are familiar to all of us in our personal lives. From showing our passports when entering a country to showing proof of address and identity when applying for a financial product, it’s something we all do. All of these methods of identification and verification rely on the presentation of a physical document. And, of course, up until the digital commerce revolution, when the vast majority of transactions were carried out face to face, it was a tried and tested method that worked.
The challenge within the digital economy The internet has transformed the way we
shop in ways we couldn’t have foreseen 15 years ago and it is bound to continue changing in years to come. With an estimated 1.61 billion online shoppers globally, and £52.25 billion spent via e-commerce in the UK in 2015, the last decade and a half has seen e-commerce grow into a well-established, dominant method for business and commerce. Mobile (i.e. unsecured touchscreen devices such as smartphones and tablets) is rapidly winning the race to become the dominant platform. The ability to shop and carry out transactions on the go is now something we almost take for granted. Yet, all this convenience has come at a cost, and that cost is the challenge of security and managing ID&V online. Digital transactions all require ID&V to a greater or lesser extent. Online shopping often requires a password and email address; while financial products, bound by a need to comply with know-your-customer and anti-money laundering legislation, require much greater
Financial Operations | Fall 2016 | www.financialoperations.ca
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Changing Technology levels of ID&V. The problem is that ID&V is more challenging for remote transactions due to a lack of face-to-face interaction.
ID&V in the digital age It is true that remote ID&V is nothing new. Consumers have carried out transactions by mail or telephone (MOTO) for decades; however, these all relied on forms of ID&V such as address and date of birth. As such information is now readily available online, they can no longer be considered sufficiently robust to keep personal data (and money) safe. This has driven a need to develop and accept new methods of ID&V with both customers and businesses having to adapt to the new business realities. The most obvious of these is the password, which comes with its own drawbacks. Having to come up with a secure, eight-character password which includes a capital, a symbol and a number can be a challenge, especially if you can’t use the last five variations.
Anyone who owns an iPhone, for example, will be used to using a fingerprint to unlock it. And visitors to the U.S. will be familiar with providing fingerprint ID before being allowed to enter the country. A variety of methods of biometric-based authentication are currently being developed and tested although each has its own drawbacks as well as benefits: • Voice recognition: Voice recognition can verify someone in around 15 seconds, quicker than passwords. Yet questions remain about the accuracy of this method. What if someone is in a crowded room or restaurant? Could the technology cancel out the background noise? • Facial recognition: Also known as “selfie” authentication. For this to work, the lighting of the photograph will need to be of sufficient quality which isn’t always guaranteed. • Fingerprint recognition: It’s widely
From dystopian science fiction to contemporary privacy concerns, willingly handing over biometric information to a company or government is not something that individuals will do lightly. This can contribute to fundamental problem with digital ID&V—if it is time consuming and challenging then it significantly detracts from the very convenience digital commerce is supposed to bring.
Looking into the future There are a number of possibilities for future ID&V, all being currently trialled in some form or other. One of the biggest talking points is biometrics. Biometrics are, quite simply, using one or more human characteristics for ID&V. They are nothing really new in principle. After all, for over 100 years, police forces have been using fingerprint ID to solve crimes. DNA profiling for crime fighting and other purposes is around 30 years old. Yet, biometrics are increasingly entering into the world of ID&V for everyday life.
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used, it’s trusted, it’s easy but it is not perfect. Fingerprints can be copied by fraudsters using easily obtained chemicals. If a fraudster has your phone and wants access to it, they can. One of the principal barriers to biometric adoption is trust. From dystopian science fiction to contemporary privacy concerns, willingly handing over biometric information to a company or government is not something that individuals will do lightly. There was positive news around this recently, though, when a survey showed that far more UK consumers (60 per cent) would trust a bank with their biometric data than the government (33 per cent). So, perhaps, this obstacle can be overcome. This still leaves the critical issue that biometrics are not, alone, enough for a
Financial Operations | fall 2016 | www.financialoperations.ca
completely secure ID&V process. Even returning to the experiences of travellers at U.S. Immigration—they still have to produce their passport along with their fingerprints.
Machine learning Machine learning is a branch of artificial intelligence study that concentrates on induction algorithms and on other algorithms that can be said to “learn.” As a discipline with a wide variety of applications in the digital world, it has considerable possibilities in the world of authentication. Taking the use of mobile as an example, each of us have our own individual quirks in how we use a mobile device. We will hold it in a certain way, we will enter key strokes in a particular way, we will have certain and unique ways in which we interact with specific apps. All of these can be “learned” by a mobile device which can then tell if the person using the device is the same person who should be using it. Of course, machine learning, like biometrics, is not enough on its own. A password or PIN code still has to be entered for the device to know if it has been entered in the way it has come to recognize.
Passwords and PIN —a collaborative strategy Security works best when it is a combination of something you are (e.g. biometrics or machine learning), something you know (e.g. PIN or password) and something you have (e.g. your mobile device). Despite the undoubted progress being made with machine learning and biometrics they are still insufficient on their own and are unlikely to be in the foreseeable future. This means that there is still a critical role to be played by the password or PIN. The future won’t cease to amaze us. It will undoubtedly bring further possibilities and new developments that will shake the landscape for years to come. Nonetheless, fundamentally, the entry of something that only the user knows will remain at the heart of ID&V until a huge leap forward is seen, either in biometrics, machine learning or new technologies. David Poole is head of growth at MYPINPAD, a technology provider of multi-factor authentication solutions for unsecured touchscreen devices such as mobile phones and tablets. Visit MYPINPAD.com to learn more.
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Changing Technology
How small businesses can embrace the next wave of emerging technology
By Paul Struthers
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arnessing technology effectively can accelerate the growth of small businesses. With the proliferation of start-ups and their cutting edge communications and productivity tools, many of these technologies are no longer cost-prohibitive for small businesses. Business owners can maximize efficiencies by setting clear business objectives as they experiment with new tools and integrate them into their operations. A popular example of communication tool integration is the use of social media in marketing, customer services and other business functions. By using Facebook, Instagram, Twitter, LinkedIn, Tumblr, Snapchat and other social networks, large enterprises, small businesses and independent
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entrepreneurs have been able to engage with customers, receive customer feedback, generate leads and build their brands. A company’s Twitter handle or Facebook page is as important as, if not more important than, its call centre for responding to customers’ complaints or requests. So what’s next? As technologies become an integral part of our work and personal lives, we have come to expect to be able to use these tools as our personal assistants with no learning curve. One area that I have been noticing is the use of chatbots—applications that communicate with humans through a chat interface, using artificial intelligence. When it comes to taking advantage of chatbot technology, the possibilities are endless. One excellent way of deploying a chatbot is to streamline customer interactions. For example, if a customer is checking out a
Financial Operations | fall 2016 | www.financialoperations.ca
business’ website, a chatbot can help answer product-related questions or it can provide additional product recommendations and promotions based on what the customer is interested in. Chatbots can also help businesses send receipts and shipping notifications directly to customers and, given they are extremely efficient with these types of tasks, they can free up employees to tackle more complex problems. Right now, many brands are already taking advantage of chatbots to deepen their customer engagement in exciting and creative ways. For example, in April Taco Bell launched the TacoBot, a chatbot that allows customers to quickly order meals online using the Slack messaging platform. Around the same time, fast fashion retailer H&M also announced its own chatbot on the Kik
Changing Technology
platform, which acts as a “personal stylist” and gives users new outfit ideas. All users need to do is select one item of clothing, and the chatbot can build an outfit around that item. These types of creative applications of chatbots could represent the future of customer service interactions. Beyond saving small businesses time when it comes to interacting with customers, chatbots can also help build a brand’s personality and voice, since they can be programmed to use a specific tone to demonstrate the brand’s friendliness and helpfulness in answering questions or unravelling customer service issues. Furthermore, by running on popular messaging apps such as Facebook Messenger, Kik, WeChat or Slack, chatbots are meeting customers on the platforms they’re already using—meaning customers won’t need to call
a customer service line and be put on hold to get an issue resolved. Beyond simplifying customer interactions, chatbots can also directly help small business owners with their operations on tasks that they may not enjoy doing but are necessary. At Sage, we announced the release of a messaging bot named Pegg in July. The bot acts as a smart assistant, allowing small business owners to manage their finances by sending instant messages through apps they already use, like Facebook Messenger and Slack. For example, small business owners and entrepreneurs can send Pegg a photo of a receipt and ask it to file the expense. They can also ask Pegg for quick summaries of their spending and revenues, saving them from the need to comb through spreadsheets or documents. Essentially, Pegg takes away
the complexities of accounting, acting as a 24/7 business admin and making it easier for entrepreneurs and small businesses to focus on what they care about most—providing great products and services to their customers. Ultimately, small businesses have a lot to gain from harnessing emerging technology to boost customer engagement and simplify their business operations. By tapping into new and exciting technology, small businesses owners can focus on what they’re most passionate about—successfully growing their businesses. Paul Struthers is executive vice president and managing director of accounting software company Sage. He is an avid champion for Canadian small and medium sized businesses.
Financial Operations | Fall 2016 | www.financialoperations.ca
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Market Report
Rate ramifications Assessing the potential impact of interest rate increases on consumer debt, lenders By Jason Wang
T
here have been many discussions about whether Canadians have taken on too much consumer debt. Indeed, compared to the year before, as of the second quarter of 2016, credit cards, auto loans and installment loans saw balance increases of 4.7 per cent, 2.2 per cent and 2.7 per cent, respectively, all at a pace that is faster than GDP growth or inflation. One reason why Canadian consumers continue to borrow may be low interest rates, which reduces the cost of servicing debt; however, this raises the concern that when interest rates rise and monthly debt payment amounts increase, consumers may have difficulty in managing these higher payments. By analyzing how ready Canadians are for a rate increase, we can gather important insights into the scope and magnitude of the impact on consumers—how many Canadians may be impacted and how large could that impact be.
Who is exposed to a rate increase Not all loan products are created equal. Some have a fixed rate—think of an auto loan or an installment loan with a hypothetical fixed rate of 2.9 per cent for the duration of the loan. Throughout the full repayment period, the required payment will be a set amount each repayment period—monthly, bi-weekly or other. Consequently, when policymakers increase interest rates, consumers who hold these fixed-rate loan types will not be impacted. Then there are the variable-rate loans, such as variable-rate mortgages and the majority of lines of credit. The interest rates on these loans fluctuate over time and are typically structured as “Prime plus a spread,” in which the Prime rate—currently standing at 2.7 per cent—generally moves in lockstep with the Bank of Canada Target Overnight Interest Rate, which is currently 0.5 per
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cent. When the Bank of Canada implements a rate hike, the Prime rate will increase, pushing up the effective interest rates on these loans. By investigating the anonymized credit files of all credit active consumers in Canada—26 million in total—we found that 27 per cent have a line of credit account or a variable-rate mortgage or both. In other words, approximately seven million consumers are exposed to potential impact from rate increases. This study refers to these consumers as the “exposed population.”
much of a shock. Under a 0.25-point interest rate increase, 56 per cent of the exposed population have a monthly payment shock of less than $10. For the exposed population overall, the median payment shock is only seven dollars. Only 15 per cent of that population face a monthly payment shock of $50 or more. When we simulated the impact of larger rate hikes—namely 0.5-point and one-point increases—30 per cent and 40 per cent of exposed consumers, respectively, would be dealt a payment shock of $50 or more.
How big the payment shock could be
How much payment shock can tip someone over
When interest rates on variable-rate loans increase, the increase in periodic payment amounts for the consumer is referred to as a payment shock. Conceptually, calculating the amount of a payment shock is simple— multiplying the variable-rate debt balances by the level of the interest rate increases. If the variable-rate balance is $10,000 and the rate rises by one percentage point, that translates to an annual increase of debt repayment obligations of $100. Divide by 12, and you get the monthly payment shock. Fortunately for the majority of Canadians, we estimate that the payment shock is not
The size of the monthly payment shock is only one side of the equation. For some, a $50 increase in their obligations may easily be managed by forsaking a couple of restaurant dinners a month, while for others, this may mean they are not able to fill their gas tank to get to work. Therefore, we need the other side of the equation: comparing the payment shock with consumers’ current cash flow. Trended data now available to lenders on consumer credit files provide the ability to assess consumers’ available cash flow based on how much they are paying each month
Trended data now available to lenders on consumer credit files provide the ability to assess consumers’ available cash flow based on how much they are paying each month above the minimum due amounts on their debt obligations.
Financial Operations | fall 2016 | www.financialoperations.ca
MArket Report
Illustration of monthly CtA calculation Excess payments
Payment shock
CtA
Consumer 1
$1,000
$300
$700
Consumer 2
$100
$300
-$200
Number of consumers (in thousands) whose cash flows may not be enough to offset a payment shock Risk segment (score)
0.25-point interest rate increase
One-point interest rate increase
Super Prime (830–899)
239
298
Prime Plus (780–829)
112
163
Prime (700–779)
134
193
Near Prime (600–699)
132
184
Subprime (300–599)
101
133
Total
718
971
above the minimum due amounts on their debt obligations. A consumer with required minimum monthly credit card payments of $100 who is actually making payments of $400 may have $300 of excess cash flow that she could redirect to offset the payment shock. This insight enables the comparison between payment shock amount and a consumer’s available cash flow. We define a person’s capacity to absorb (CtA) as the difference between excess payments on loans and the size of the payment shock— calculated on a monthly basis: CtA = Excess Payment Amounts – Payment Shock As you can see in the accompanying “Illustration of monthly CtA calculation” chart, two consumers can have the same payment shock amount but may have different capacities to absorb that shock, simply because of different cash flow situations to begin with. In the case of the second consumer shown above, CtA is negative, meaning this consumer would have challenges meeting the increased debt repayment requirements. For each anonymized individual in the exposed population defined above, we calculated his or her CtA amount using this
method and found that with a 0.25-point interest rate increase, 718,000 consumers might have difficulty absorbing the payment shock. An additional 253,000 consumers might not be able to absorb the shock if the rate were to rise by a full percentage point. Among these consumers, more than 650,000 with strong credit—those whose credit scores are prime or better—may have difficulty absorbing such a payment shock.
What this means to lenders This is especially compelling news for lenders as hundreds of thousands of borrowers currently believed to be lower risk may suddenly become risky with an increase in interest rates and payment obligations. While lenders normally expect subprime consumers to be riskier, this potential change in the risk profiles of prime or better consumers may come as an unpleasant surprise. These findings are simulation results and reality might turn out to be somewhat different. First of all, cash flow based on credit files is a conservative measurement and does not take into consideration potential savings or other sources of cash the consumers could draw on to help
mitigate the payment shock. In addition, rate increases typically happen during “good times” when the economy is expanding, which usually benefits consumers’ cash flow through improved employment prospects and earnings. Finally, even though we identify nearly one million consumers who might struggle under a one-point rate hike, rate increases generally occur in 0.25-point increments; it could take a number of quarters to reach a one-point rate increase, giving consumers and lenders more time to adjust and adapt. Nevertheless, lenders may benefit from evaluating their own portfolios in a similar manner to determine who among their customers might be vulnerable to a payment shock and work with those customers to ensure their accounts remain in good standing. Jason Wang is the director of research and consulting for TransUnion, where he is responsible for leading research projects and industry analysis in Canada. Prior to joining TransUnion, Wang held management roles at American Express, CIBC and Citigroup. Jason received his MBA from New York University and his Bachelor degree in Physics from Peking University. He is a CFA charter holder.
Financial Operations | Fall 2016 | www.financialoperations.ca
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AR Report
Improving debt collection using real time data analytics and multichannel communication By Kevin Deveau
O
ver the past decade, technological, social and economic changes have had a profound impact on collections operations and organizations are being forced to adapt to the new environment in order to maximize recovered debt and revenues. Against this backdrop, companies, particularly those in hyper competitive industries like telecom and banking, are simultaneously competing for share of debt payments and customer loyalty—including the loyalty of delinquent customers. While these changes present challenges, they also create opportunities to adopt collections approaches that are ultimately less costly and more effective. Innovative companies and their collections operations
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and partners are adopting intelligent, agile approaches to debt collection, using tools such as real-time data analytics and targeted customer communications, which can lead to higher contact rates, improved response frequency and faster repayments.
The changing debt collections landscape The role and focus of many debt collections organizations has changed considerably in recent years. Economic conditions and technology advances have forced many organizations collecting debt into a balancing act: Maximizing their returns from delinquent accounts while ensuring they maintain positive relationships and retention with customers, even while the collection process is in progress. Running parallel to this, a number of market and consumer
Financial Operations | fall 2016 | www.financialoperations.ca
dynamics have unleashed new challenges into the collections operations landscape. While economic conditions have continued to improve since the 2008 downturn, a recent report from Equifax revealed that Canadians are taking on more debt. This trend is particularly pronounced among the large consumer base that is Millennials— consumers aged 18 to 36—whose delinquency rate rose 12 per cent in the second quarter of 2016. Another factor complicating debt collection is evolving communications technology and the fragmentation of communication channels. For example, the move by consumers away from landlines and towards smart mobile devices makes it easier for consumers to avoid taking calls from collectors or to change their contact information. Collectors who do not maintain
AR Report an ongoing relationship with delinquent and non-delinquent customers alike risk losing their up-to-date information in the rapidly changing telecommunication landscape. Furthermore, changing consumer preferences and attitudes toward debt have undercut previous best-practice wisdom. People are taking on more debt and have become more casual about repayment; yet at the same time they want more control over the payment and collections process, while expecting better service and flexibility from creditors. Traditional collection tactics, like repeated letters, harassing phone calls and one-size-fits-all SMS blasts, have become outdated and unproductive in the new landscape and can turn off customers who now expect a more convenient and personable approach.
Intelligent and targeted debt collection communication The good news is that many of these challenges can be turned into opportunities that maximize collections success, contact agent efficiency and a positive customer experience. In particular, the explosion of mobile devices and internet technologies means it has never been easier to contact customers, with a number of new avenues to efficiently reach those with outstanding payments. The mass SMS blasts some creditors send every few days to all delinquent customers are not effective. It is important for debt collectors to use specific communication so the customer feels like they are being treated individually. In many cases, without the right technology in place, the creditor has no perception as to whether these one-way outbound messages were even delivered to a valid number. FICO’s research indicates that customers actually prefer to deal with well-targeted automated communications rather than live agents when it comes to their debt management, because it saves them the embarrassment of discussing their debt and gives them more control over their repayment plan. Tailored, automated contact also enables personal, secure and convenient self-service options for making a payment or even negotiating a payment plan. In fact, a recent survey conducted by a global digital engagement solutions software company shows mobile payment systems using two-way SMS communication resulted in a 78 per
Traditional collection tactics, like repeated letters, harassing phone calls and one-sizefits-all SMS blasts, have become outdated and unproductive in the new landscape. cent rate of repayment within 48 hours of receiving a payment-due alert, compared to 26 per cent achieved with traditional collection methods.
Maximizing collections performance and repayment through real-time data analytics Intelligent, agile multi-channel communication is becoming increasingly important to collections organizations, as they look to leverage the gains in efficiency and success that can come from digital channels. The most effective platforms in today’s landscape are those which enable intelligent, automated, two-way communications for collections teams to reach out to customers in real-time, through voice, SMS, mobile applications and email. The future success of the collections organization and their ability to execute in the new environment is going to increasingly depend on how they manage, process and analyze their data. Data analytics software tools provide a wealth of valuable information on debtor profiles and are enabling collection teams to work smarter by identifying and prioritizing those with the strongest likelihood of short- or medium-term payment returns. They also facilitate broad access to data, including real-time updates, which enable collectors to track individual customer behaviour and preferences and to connect with customers over the right channel—whether via mobile application or voice, the most effective combination of communications channels and methods, tone and frequency are identified and utilized. Using these systems, the analytics directing each decision receive real time data, so any customer contact is recorded instantly and customer-specific information is retained. The system recognizes positive contact from a customer and prevents further contact in the following days. Moreover, a customer who makes a payment via a web portal will not receive a collections call to their mobile 10
minutes later. In addition, because automated systems work 24/7 and cover all channels, there are no hitches when customers are contacted through one channel and respond via another, because the system can track all account activity. It can even recognize and record a customer’s preferred contact channel to tailor future communication or track customer-specific information such as a disability, making future contact easier. Using customer information stored in the system, a company’s debt management platform decides every customer journey. For example, if a customer is flagged as a low risk, they would be sent a reminder letter and not receive a serious call. Leading companies and contact centres are also using analytics software to measure and improve the performance of their agents. FICO’s Engagement Analyzer tool provides real-time analysis of an agent’s conversation with a client and helps management understand the level of performance and identify where improvements can be made— and is able to help to boost agent productivity by at least 20 per cent. Organizations and their partners must rethink their debt collection communication strategies if they want to stay relevant and effective in a changing consumer and telecommunications environment. Treating debt like a personal problem and tailoring collection efforts to individual customers through integrated analytics are both key strategies for optimizing communication and maintaining customer loyalty without overlooking service in favour of debt collection. Kevin Deveau is vice president and managing director, Canada, at FICO. He is responsible for growing FICO’s Canadian market share and strengthening client relationships. FICO is a leading analytics software company, helping businesses in 90+ countries make better decisions that drive higher levels of growth, profitability and customer satisfaction.
Financial Operations | Fall 2016 | www.financialoperations.ca
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Trend Report
How might mPOS change your business? By Cathy Vigrass
B
usinesses large and small never want to miss out on a sale. In 2009, Jim McKelvey was operating a glass blowing business and lost out on a sale because he was unable to accept credit cards. You may know the story: out of that experience McKelvey and Jack Dorsey founded Square, in many ways launching mobile payments to the mainstream. Seven years later, mobile payments and point-ofsale (mPOS) are popular with millions of businesses of all sizes. Businesses take mPOS seriously, precisely because they never want to miss out on a sale. While small and large businesses can each relate to that sentiment, how they benefit from mPOS differs. Let’s consider both ends of the business spectrum to understand this more clearly. Historically, many small businesses struggled to accept card payments because the process to do so was too costly and too difficult. With their lengthy contracts, expensive fees and complicated set-ups, point-of-sale (POS) tools were traditionally suited for large businesses. mPOS like Square appeal to small businesses because they make it easy to accept card payments. With an affordable card reader, quick app download and the smartphone or tablet they already own, businesses can be up and running in five minutes, accepting cards at a low, transparent rate with fast access to funds. Small businesses benefit just by accepting card payments. Sales increase as customers spend more when they are not constrained by cash on hand. Card payments are frequently incremental transactions that would not have taken place without a mPOS. Customers also appreciate a business that allows them the flexibility to pay in the manner they want.
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Happier customers are more loyal customers. Small businesses also benefit from access to value-added features, like real-time analytics, available for the first time with mPOS like Square. Analytics give sellers access to sales trends, buyer insights, helpful charts and personalized data to help run operations efficiently and make important business decisions. For example, sellers can surface key insights such as “Which items have been selling the best over the last month?” or “How many of my customers are new versus returning?” without requiring spreadsheets or complicated tools. With mPOS, small businesses finally get access to tools that allow them to compete as efficiently and intelligently as their larger counterparts. Large sellers also use mPOS to transform their customer experience in unique ways. On the sales floor, mPOS improves one-onone customer interaction: an associate with an mPOS device can focus on helping the customer and then accept payment anywhere the customer happens to be in the store. mPOS also transforms the checkout process by making it easy for stores to line-bust. Having mPOS devices available reduces checking-out queues and cart abandonment significantly. Speed is key for both the seller and the customer: customers want to pay for their items quickly and get on with their day, while for sellers, line-busting increases
Financial Operations | fall 2016 | www.financialoperations.ca
the number of customers served, improving operational efficiency and driving revenue. This is especially important during peak store hours and seasonal shopping dates that see major spikes in footfall. Large sellers can also leverage mPOS to great effect to enable innovative retail formats such as pop-up locations. Traditionally, taking card payments outside their brick and mortar stores was a headache for retailers, especially in locations without electricity or a fixed internet connection; the only option was to transport a heavy, cumbersome register or to go cash only. Now mPOS offers a lightweight, easy (but powerful) way to take payments. Smartphones and tablets using mPOS can be used unplugged and can even accept payments in offline mode as needed to overcome WiFi issues. Pop-up locations provide an exceptional customer experience that mPOS helps to deliver. mPOS ultimately offers large and small businesses greater flexibility, efficiency and value. Just as mPOS has leveled the playing field for small businesses, the line between mPOS and POS is beginning to blur for large sellers. The ability to make a sale anytime, anywhere with anyone is becoming a reality. Cathy Vigrass is head of Canada at Square.
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EVENTS 2016 SEptember September 18-20 CUMA CUMA Ontario Annual Conference Collingwood, ON www.cuma.ca
September 29 Tomorrow’s Transactions Unconference Toronto, ON www.chyp.com/thoughtleaders/unconferences/
October September 20-21 Women in Payments Symposium Toronto, ON www.womeninpayments.ca
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21
Changing Technology
Blockchain: The new technical innovation for finance
By Ken Young
T
his revolutionary technology may be the most innovative to be developed within the last 25 years. It’s called “blockchain”. It’s a misnomer, as in actuality it unblocks the chain. This technology is so new that many have not yet heard of it. In essence, it is based on the concept of exchanging value instantly and globally between individuals without thirdparty involvement. We presently have a $1.2 trillion global payment industry. Blockchain is on the verge of disrupting the way the world does financial transactions. For example, there would not be the need for a bank to be party to these types of transactions. The technology could eventually redistribute wealth. This peer-to-peer concept would then see significantly more value being passed on to the individual seller who is
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providing the service. Some say this concept has the ability to transform the world even beyond the financial field. In a survey from 2014 by Accenture, it was determined that even then, three quarters of those between 18 and 34 years old said they would be willing to use a nonbank for transactions. Some firms that don’t provide a real service but rather only infrastructure to help a buyer and seller connect and exchange funds, may be headed for a downward spiral. Banks are very concerned about this and want to find some way to continue to be an integral part of this evolution. OMERS Venture (Ontario municipal employee retirement system), which is one of Canada’s largest pension fund holdings with over $72 billion in assets, have recently placed a big bet on DCG (Digital Currency Group). DCG is a venture investor and builder of bitcoin and blockchain companies globally.
Financial Operations | fall 2016 | www.financialoperations.ca
What did people say about the internet back in its early days (the 80s & 90s)? Look how that has revolutionized the world of communication and the computer field. The world wide web has opened up unbelievable vistas of information and partners for communication. It is a global infrastructure of knowledge. Could this technology be the next to transform businesses and individual lives? It could, but we are not ready to make that bold a prediction yet. Stay tuned for the blockchain revolution. The race is on. Ken Young has 25 years of global credit management experience. Most recently he was credit & collection manager at PepsiCo Beverages Canada and is now an international consultant, trainer and speaker. He has been awarded the highly esteemed CCP Emeritus Award from the Credit Institute of Canada for distinguished and meritorious service for the advancement of credit education and the credit profession. He can be contacted at young.ken@hotmail.com or www.trpaulsen.com/credit
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