Financial Operations Magazine Winter 2015

Q4 Winter 2015 • Canada’s Independent Magazine

Financial S Payables | Receivables | Collections | Data | P-Cards | ECM | Technology

& COLLECTIONS REPORT Technology Report: International payments made simple

Business Matters: Payments

Jennifer O’Neill

Best practices for 2016 and beyond

Transformation Trend Report: The future of payments is digital PM40050803

Contents

Q4 WINTER 2015 Volume 2 Number 4

Features Credit & Collections Report

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8 How Invoice Automation Solution Can Accelerate You Payments Cycles There is power in automation

10 AR and Collections Automation Through a Documents Management Lens

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Reducing the potential for human error

12 Analytics for Credit and Collections

New strategies for 2016 and beyond

14 Technology Report

International payments made simple

18 Payments Transformation Options

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Jennifer O’Neill

are Migrating North

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Payments digitization offer potential for substantial savings

22 Trend Report

The Future of Payments is Digital

Also Publishers of

Canadian Equipment Finance

Advertising Sales Mark Henry mark@financialoperations.ca Publisher and Editor-in-Chief Steve Lloyd steve@financialoperations.ca Editor Karen Treml karen@financialoperations.ca Creative Direction / Production Jennifer O’Neill jennifer@financialoperations.ca Photographer Gary Tannyan

For subscription, circulation and change of address information, contact subscriptions@financialoperations.ca Subscriptions available for $40.00 year or $60.00 two years. ©2015 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Financial Operations should be directed to the publisher.

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NEWS Toronto region’s fintech sector poised for growth The Innovation Policy Lab at the University of Toronto’s Munk School of Global Affairs has released a report on the region’s financial services technology (“Fintech”) sector and its impact on the region’s future economic success. The report, which was commissioned by the Toronto Financial Services Alliance (TFSA), states that although there is great potential in the region, there is no true Fintech ecosystem and various factors are inhibiting its development – this comes at a cost to the region’s overall economic growth.

Professors Dan Breznitz and David A. Wolfe, Co-Directors of the Innovation Policy Lab at the University of Toronto’s Munk School of Global Affairs, with support from Assistant Professor Shiri Breznitz, undertook a strategic mapping study of the key Fintech players, resources and innovation assets in the Toronto region. The report’s findings led the authors to make recommendations on how to support Toronto’s financial services industry and the Fintech sector, and to establish the Toronto region as a global Fintech hub.

“We have most of the right ingredients, but we are operating far below our real potential,” said Professor Dan Breznitz. “Our study revealed that on a global basis, Toronto’s Fintech growth is falling behind in comparison to other cities that have established hubs, such as New York and London.”

Between June and August of this year, researchers interviewed a number of key decision makers from banks, insurance companies, professional services firms, industry associations, Fintech firms, government incubators and venture capital firms in preparation of the report. The key findings from the report include: • Despite having the necessary components, the lack of strong connections between Fintech firms and financial institutions is undermining our ability to create an effective ecosystem to drive economic growth.

• While progress is being made, Canadian financial institutions do not act as true partners to Fintech start-ups to the same extent that other leading global centres do – where relationships do exist they tend to be located at the margins of the financial institutions’ main operations, in incubators or accelerators.

• The consequence of this disconnect is that the successful Fintech firms in the region become disruptors: they create products and strategies that do not require the banks as partners and customers, and instead become competitors of the banks.

• Canadian banks may be more vulnerable to unbundling and disintermediation than has been assumed; Canada’s regulatory environment provided an effective ‘moat’ around the banks to

For breaking news and in depth news features, visit our website at

weather the financial storm in 2007-08, but this protection has made the banks slower to react to the emerging challenges posed by the Fintech start-ups than in other global centres.

• Also, current regulations make it very difficult to undertake the low-level-rapid-experimentation that is necessary to develop safe, useful Fintech products – even what are considered the most basic Fintech offerings such as crowdsourcing and loans cannot be developed and offered in Canada without the participation of a licensed bank.

• A critical element that is missing in Toronto is the presence of large, inexpensive incubator centres within the financial district, offering basic services with high connectivity at highly discounted rates. While a number of incubators exist, they are either more expensive than their counterparts in London and New York, are located far away from the financial industry or are not yet working collaboratively as they need to.

• Although the federal and provincial governments have made efforts to increase the supply of seed and early venture capital to start-ups, there is still a shortage – a more direct approach through grants or conditionally repayable loans should be considered as policy reform by government.

“Both Fintech innovators and what we have defined as the ‘traditional’ financial companies are both essential to our growth and prosperity,” said Janet Ecker, President and CEO of the Toronto Financial Services Alliance. “The benefit of collaboration between these two groups is that financial companies have large existing customer bases that the Fintech community can leverage and cross-sell to, and the Fintech start-ups tend to have effective and significantly lower customer acquisition costs that can help financial companies. Partnership could be a solution to the issues each group is facing.”

This approach is supported by the report’s authors, who also argue that a vision is critical – one that determines what the best policy interventions are to increase connections and opportunities that will lead to the development of a successful Fintech sector as a regional and global advantage.

Professor David A. Wolfe added, “The findings of this report are an important call-to-action for the TFSA and its partners, like the Ontario Centres of Excellence, to address the current silos between Fintech firms and the large financial institutions, if we’re going to drive future growth. The impact of not seeing and grasping the opportunity could result in a slow decline in relevance and importance of both the financial services and the Fintech sector in the Toronto region.”

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© 2015 Citigroup Inc. All rights reserved. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. The World’s Citi is a service mark of Citigroup Inc.

THE WORLD’S CITI. IT’S WHEREVER YOU ARE.

Every day, in cities around the world, people are doing amazing things. They’re creating, innovating, adapting, building, imagining. What about a bank? Shouldn’t we be equally ingenious? Strive to match our clients’ vision, passion, innovation? At Citi, we believe that banking must solve problems, grow companies, build communities, change lives.

Citi® Payment Exchange is an integrated and highly flexible payment-digitization solution that helps our clients achieve significant cost savings by migrating from cheques to electronic payments.

To find out more visit www.citi.com/paymentexchange

citi.com/progress

NEWS Fraudsters sent ‘out of office’

by Kount, Emailage Kount, a provider of fraud detection and sales boosting technology has announced that it has integrated Emailage, an innovative new fraud prevention solution that gives merchants the ability to assess and leverage risk based on a user’s email address.

Email addresses are universal data points that are already collected during most transactions and, sometimes, the only data point available to a merchant. Yet even with this limited information, Emailage can provide intelligent fraud risk assessment using the email address as the key data element to identify transactional risk and streamline transaction approvals.

The combined solution leverages a vast global consortium of data across all industries and utilizes powerful machine learning methods to interpret the key elements and characteristics of a fraudulent transaction. It is a scalable, enterprise SaaS technology that is already implemented and integrated into Kount’s API. Brad Wiskirchen, CEO, Kount explained; “We are constantly developing new and innovative ways to assist our customers in their efforts to boost sales and beat fraud. Effectively fighting fraud is all about having access to the best information possible at the moment of a transaction. By integrating Emailage directly into the Kount platform, our industry leading technologies are at a merchant’s fingertips allowing them to make informed real-time decisions. “ “In an e-commerce environment, we’re always looking for ways to stay one step ahead of fraud.” said Cindy Roach, manager of risk management at a leading online travel site, Bookit.com. “Emailage is very user friendly and its integration onto the Kount platform that we are already familiar with gives us a quick glance option to separate the good bookings from the fraudulent ones. So far it’s been a great tool to use.”

“Emailage and Kount are great complimentary partners because both provide enterprise-class services that help eCommerce and mCommerce merchants. By integrating Emailage’s service directly into the Kount platform, customers can perform a single integration with Kount and immediately take advantage of this unique combination of fraud-fighting technology.” added Wiskirchen.

Kount’s platform gives customers a quick and easy way to integrate all of the tools they need to prevent fraud. Emailage adds on another layer of protection with no integration costs.

The Emailage solution also gives Kount customers the ability to analyze email addresses with machine learning thus allowing them to see fraud trends. Most email fraud prevention tools are a simple blacklist or whitelist with no real intelligence behind them. Emailage gives Kount customers a new, global risk analysis data point.

Emailage CEO, Rei Carvalho , said: “Emailage and Kount are leaders in the global fraud prevention space. Both companies are agile and fill customer’s needs before they become a problem. With the rise of EMV, the upcoming holiday season, and consequently the increase of Card Not Present (CNP) transactions, customers need the best solutions available to protect their bottom lines.”

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Financial Operations | WINTER 2015 | www.financialoperations.ca

Cambridge Global Payments debuts intuitive trading and payments platform Cambridge Global Payments has launched Cambridge Link, an intuitive trading and payments platform. Designed with an intuitive user interface, Cambridge Link simplifies the complex rules of booking foreign exchange deals and initiating international payments, making global payment processes more efficient and cost-effective.

“The more consumers are being inundated with user experiences that are intuitive and agile, the greater the expectations are becoming for enterprises to conduct business in a digital format that provides the same, if not better, user experience ubiquitous today,” said Corinne MacMillan, Chief Technology Officer at Cambridge Global Payments. “Cambridge Link is a reaction to the changes in the payments technology landscape. Our focus is on a simplified experience that guides the user through making international payments while ensuring accessibility across all modern devices, including desktops and tablets.”

Cambridge Link’s key features: • Robust bank routing and regulatory data validation mechanisms to ensure payments are delivered to their intended destinations on time and with reduced rejections and return rates • User interface explicitly notifies users of exact payment requirements; streamlining transaction process • Architected with developers in mind, providing flexible integration with existing proprietary and accounting systems • SWIFT and in-country payments to over 170 countries, backed by Cambridge’s industry-leading StraightThrough-Processing capabilities “As we move forward as a company, we are excited to launch our most ambitious product yet. Cambridge Link aligns with our overall expertise in optimizing technology to execute integrated payment services,” said Gary McDonald, Chief Executive Officer at Cambridge Global Payments. “Cambridge Link is the gateway to our unique banking footprint that provides payment delivery to over 170 countries through an array of delivery channels.

Above all, the platform enables organizations to focus on their business growth, leaving the complexities of making payments to Cambridge Link.”

.ca

NEWS Saxo Payments unveils community for fast, low cost cross border transfers Saxo Payments, a global transactions services provider, has unveiled its new brand – Banking Circle – for its international payments community. A marketplace that disrupts the status quo of traditional international B2B banking, Banking Circle delivers significant advantages for FinTechs and their merchants, providing transaction fees lower than any traditional bank; highly competitive FX rates and transfers in minutes or seconds rather than days.

“Our goal in creating the Banking Circle banking platform is to help payments businesses extend their value chain, from simply disrupting the user experience to disrupting the entire cross border bank transfer process”, explained Anders la Cour, Chief Executive Officer, Saxo Payments. “With a number of key payments brands already members of the Banking Circle, including First Data, Tuxedo Money Solutions, Credorax and Allied Wallet, Banking Circle is playing a fundamental role in global trade.”

By becoming a Member of the Saxo Payments Banking Circle – which is open to any FinTech business (card acquirer, payment gateway, P2P lending business) or other tech related enterprise- a business can provide bank transfer capabilities in its own name, competing directly with the banks in terms of offering the ability for merchants to pay suppliers and partners around the globe at low cost. Merchants also benefit by joining the Banking Circle.

Merchant Members can reduce the cost of international bank transfers significantly, sending and receiving transfers instantly and without incurring a landing fee to a recipient within the Banking Circle - no matter where they are in the world. Payments made to non-members of the Banking Circle can be made at low cost typically enabling the non-member to receive payment in one day irrespective of location.

Benefits for Banking Circle Members • A global banking platform providing the facility to enable merchants to make cross border transfers and settle suppliers and partners in seconds, regardless of location

• Enhancing the value proposition to attract more merchants • Supporting growth targets by expanding the capability to handle greater volume and value of transactions • Full control of funds through a segregated IBAN account from payments can be made and received

Benefits for Banking Circle Merchant Members • Enabling rapid business growth by giving access to new markets without the need for multiple banking relationships • Pay or receive funds in seconds and free of charge within the Banking Circle • Pay or receive funds from non-members as next day payments at a low rate • Low FX rates • Automatically convert incoming payments into any currency requested • Easy reconciliation • Add value to supplier and partner relationships by encouraging them to join the Banking Circle to pay invoices or receive money in seconds rather than days

To send press announcements, please direct them to Karen Treml, Editor at

karen@financialoperations.ca

www.octacom.ca 1.888.739.1934

Financial Operations | WINTER 2015 | www.financialoperations.ca

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CREDIT & COLLECTIONS

How Invoice Automation Solutions Can Accelerate Your Payment Cycles

By Brent Halverson

I

n today’s technology driven society, customer and vendor expectations are high. Companies are constantly faced with ever-increasing pressures to provide faster payment cycles and superior service.

Meeting this demand is crucial to the future success of their companies but, in order to do so, strategic innovation and optimization of business processes is required. With the role of the accounts payable department expanding to include vital tasks such as

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CREDIT & COLLECTIONS of a company that found value in implementing an invoice automation solution that did not use OCR. A distributor of hydraulic hoses, fittings, assemblies, tube bending, and fabrication, Royal Brass & Hose serves numerous sectors, including the OEM, transportation, mining, agriculture, and mobile equipment industries. With a reputation for always going the extra mile to exceed customer expectations, they have expanded to ten locations across the U.S. However, with such a diverse customer base, they also work with thousands of leading suppliers to stock more than 78,000 products. Before implementing an invoice automation solution, not only did their accounts payable team manage customer service and orders, but they also tackled the arduous task of keying in hundreds of invoices a day before verifying them against their original purchase orders.

Faced with this colossal task, costly mistakes were inevitably made, slowing payment cycles and risking their excellent reputation for customer service.

Pairing a sales order automation solution with an invoice automation solution proved to be the perfect solution to their problem.

Eliminating manual entry for both sales order and invoice processing, it reduced operational costs, improved order-to-payment cycles and helped staff reconcile purchase orders within seconds rather than hours through the ability to provide invoice line-item details.

Most importantly, it allowed their accounts payable team to refocus their attention away from manual entry and onto more strategic priorities, such as spend analysis and vendor relations.

Ultimately, an invoice automation solution can make the dream of automating and accelerating payment cycles a reality.

Using them, companies can eliminate the inefficiencies of human interference, moving from invoice to payment more rapidly and with 100 per cent accuracy, strengthening their relationship with vendors and increasing their profitability.

“Removing the need for manual entry, through automation of the invoice process, is a significant step towards real procedural efficiency …” vendor relations and spend optimization, one key area primed for this form of improvement is AP invoice processing.

While most companies have already introduced ERP systems to automate repetitive administrative tasks, such as inventory control, many (in fact 80 per cent globally) have yet to do the same for their invoice processing. This means that accounts payable teams must take time away from other important tasks to open mail, organize and sort invoices, re-key the information into their ERP system, review it, manually code it, and verify it against their original purchase orders before receiving approvals to make the payment. In addition to being a laborious and clearly inefficient use of staff time, it is both expensive, costing on average $15 per invoice, and prone to embarrassing errors which ultimately damage the relationship with vendors as they lose faith in the reliability of the company.

Consequently, removing the need for manual entry, through automation of the invoice process, is a significant step towards real procedural efficiency. It not only reduces transactional costs by up to 80 per cent and eliminates costly mistakes entirely, but it also enhances a company’s profitability. With faster and more predictable payment cycles, a company can better manage its cash flow and make capital available to reinvest.

Meeting the difficulties of automating the invoice process In view of the evident benefits of automating the invoice process, why have more companies not done so?

The answer is simple. Companies are sticking with their existing processes of manual entry as the status quo, with the misconception that implementing new automation technologies will be costly and disruptive for their vendor relationships.

Unfortunately, many of these vendors have neither the technical resources nor the

inclination to help introduce these solutions into their business communications. Most already have their own long-standing internal processes in place. Some prefer to communicate via fax, others via email, and there are those that still choose to mail their invoices in. They are reluctant to invest the substantial resources and valuable time needed to apply an EDI solution.

If companies want to maintain strong relationships with their vendors, it is clear that asking them to significantly change the way they do business is simply unacceptable.

Faced with the inefficiencies of having staff members manually process hundreds of invoices in different formats every day, what can be done?

The power of the invoice automation solution Invoice automation solutions that do not rely on optical character recognition (OCR) can now bridge the difficult divide between each vendor’s unique internal processes and a company’s increasing need for automation to accelerate payment cycles.

They allow companies to treat email, fax, and printed invoices like standard electronic documents, capturing critical invoice data from them with 100 per cent accuracy. This not only eliminates the need for error-prone manual entry but also allows accounts payable departments to rapidly reconcile invoices with their original purchase orders. Using these solutions, invoice approvals can take minutes as opposed to the manual processing average of a month. So no more delayed or missed payments. No more late fees or missed opportunities for early payment discounts.

No more duplicate invoice payments which cost companies on average $100,000 for every $10 million spent. Staff can refocus their time and energy away from these laborious chores and onto the more important task of building lasting relationships with their vendors.

Royal Brass & Hose is an ideal example

Brent Halverson is President and CEO of ecmarket, a cloud-based solutions developer and creator of Conexiom – an invoice automation solution for companies seeking faster payment cycles.

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CREDIT & COLLECTIONS

AR and Collections Automation Through a Document Management Lens “One of the major drawbacks of a typical, manual AR process is the potential for human error…”

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CREDIT & COLLECTIONS

By Steve Divitkos

R

egardless of which industry you operate in, monetizing your Accounts Receivable (AR) and shortening your Days Sales Outstanding (DSO) is of critical importance. Unpaid or late invoices aren’t simply pieces of paper – they represent actual cash that you could otherwise be reinvesting into other areas of your businesses. Studies have shown that late or unpaid invoices often aren’t related to poor counter-party creditworthiness, but instead are often the result of missing, incomplete, or misfiled information.

How much could you improve your cash cycle if you could automate the process of generating invoices (including all supporting documentation) and collecting on them?

How much time and money would you save if you completely eliminated manual sorting, printing, copying, filing and mailing?

Process automation – sure – but within what framework?

Automating AR processes within a Document Management (DM) framework overcomes the challenges of remote locations, allows for the quick receipt of supporting documents, and makes a same-day billing process a reality.

Before we look into how a DM system can deliver this type of process automation though, we must first ask:

What’s wrong with the way that it’s currently done?

One of the major drawbacks of a typical, manual AR process is the potential for human error. Managing the order-to-cash cycle relies on multiple instances of human intervention to receive and process orders, generate a paper invoice to the customer, receive and process the payment, and finally recognize the payment in the accounting system.

A manual AR process also requires more time to perform simple invoice processing activities such as matching supporting documentation to an invoice, the absence of which is one of the most common reasons for late or unpaid bills. The more people involved, the higher costs become.

Manual processes also tend to be inconsistently applied, leading to a lack of process control and visibility. Combined with the inability to send billing documents as they are generated, this overly manual paper-

based process is likely inflating your DSO and preventing you from monetizing those receivables in a timely fashion.

Leveraging a document management framework for AR and collections DM technology tools can turn these process inefficiencies into a streamlined system. A DM system for AR automation stores all relevant information in a secure, central repository. Imaging and electronic workflow automate the validation of data, activation of exception alerts, and forwarding of supporting documents to the appropriate person. For example, in the transportation industry, a DM system could electronically transmit a Bill of Lading (BOL) and associated documents from the point of delivery to the head office, triggering the invoicing process. This billing automation ensures customers are invoiced quickly with all of the supporting documentation they need to process the payment.

What are the key benefits of using DM technology for AR automation?

A DM system captures and tracks documents electronically to improve invoice processing efficiencies and reduce human errors.

Documents arrive at the right billing desks, in the right format and at the right time.

Process efficiency is improved. Better access to the proper billing documents results in faster time-to-bill. Billing departments are able to issue their invoice faster, in many cases the same day, with the required supporting documentation.

A DM system provides a single home for different types of documents – be they Excel spreadsheets, emails and attachments, scans, pictures, and anything in between – that can be easily organized, and quickly searched.

This also eliminates the inefficiencies associated with storing files in a mix of network drives, accounting department file cabinets, file-sharing services, and personal computers. Users can securely search and retrieve documents from a central repository via a familiar interface.

Finally, the administrative burden is significantly reduced. Costs and tasks associated with printing, folding, stuffing, stamping and mailing of invoices is reduced or eliminated.

Seamless integration with existing enterprise accounting systems ensures continuity and enhanced visibility to the overall process.

How would this work for Collections?

The goal of automated collection systems is, ultimately, to reduce customer payment delays. How is this achieved? Automaticallygenerated billing reminder packages save time on clerical tasks that can consume most of a collector’s day. These packages include copies of all supporting documents with a copy of the original invoice and a configurable cover message detailing aging or past-due status.

They are automatically emailed to the correct customer contact in your accounting system without any manual intervention.

This allows you to: • Automate the collections process with pre-set and consistent customer notifications • Improve the efficiency and results of your collections team • Increase management visibility over the status of outstanding receivables After implementing Collections automation and workflow, many companies report a 10 per cent to 20 per cent reduction in DSO. Automation of collections can provide significant cost savings and benefits beyond DSO, including a reduction in dispute volume and cycle time, productivity gains and reduced bad debt expense.

Automating AR processes with Document Management technology delivers continuous business and process improvements which are measured by improved cash management, reduced billing errors, shorter billing cycles, increased labour productivity, and reduced DSO. Steve Divitkos In his role as CEO of Microdea, Steve has broad oversight over strategy, finance, and operations. Prior to joining Microdea in 2014, Steve oversaw RedLeaf Management Partners, a private investment firm that he founded in 2012. Prior to RedLeaf, Steve worked in the Infrastructure Private Equity and Private Debt groups at the Canada Pension Plan Investment Board, the independent investment management organization formed to help sustain the pensions of 18 million working Canadians. Steve holds an MBA from the Harvard Business School and a Bachelor of Business Administration from Wilfrid Laurier University, where he graduated with distinction.

Financial Operations | WINTER 2015 | www.financialoperations.ca

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CREDIT & COLLECTIONS

Jennifer O’Neill

Analytics for Credit and Collections – New Strategies for 2016 and Beyond

By David M. Wallace

T

he business of lending has changed a lot since its depiction in the classic movie It’s a Wonderful Life.

The evil Mr. Potter evaluates main character George Bailey’s request for a loan using the Five C’s of credit (character, capacity, capital, collateral and conditions) and turns him down because he lacks sufficient collateral. Instead, lending today is a reflection of the digitization of financial services. Increasing numbers of digital-only customers who research and apply for loans online may never be seen in person by lending officers or finance departments.

The business of lending itself, once primarily owned by banks, has also become fragmented with new digital-only FinTech

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(financial technology) firms, often called alternative lenders, which seek to remake both consumer and business lending into online-only, peer-to-peer businesses. In one recent survey of global credit experts, 75 percent of respondents reported that alternative lenders pose a real threat to banks and traditional lenders. In the same survey, 73 percent voiced concern over the lending methods being used by alternative lenders.1 What should banks and other lenders focus on as they move into 2016?

Credit scoring: which comes first, analytics or data?

Credit scoring is the set of decision models and underlying techniques that aid banks

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and other lenders in granting credit. These models, which rely on predictive techniques like logistic regression and decision trees, describe who gets credit, how much credit they should receive, and the likelihood loans will be repaid. Credit scoring models use data to score borrowers based on the credit policies determined by banks and other lenders. The data includes loan application information, credit bureau data, and internal transactional data from credit cards, mortgages and deposit accounts.

Banks and other lenders often lack a complete picture and insight of a customer’s creditworthiness by relying on traditional credit scoring tools with long development and deployment cycles. Modern credit

CREDIT & COLLECTIONS scoring software can reduce these cycles through automated development tools, prebuilt end-to-end workflows, model management and deployment directly into data warehouse appliances.

One large South American bank using modern credit scoring software reduced modeling dataset development time from 75 days to under one hour, and total model deployment time from 18 months to three months for a customer base of more than 100 million accounts.

Credit scoring data: what’s new?

Using unstructured external data from social networking platforms and modeling that data using text analytics can predict character (one of the Five C’s). Analyzing the customer’s number of connections, memberships in professional organizations and related data points may provide improved predictions about creditworthiness as well as potential for fraud.

Unstructured data can be analyzed by modern text mining software, with the results incorporated into credit scoring models. An often-cited McKinsey study identified external data sources from telecom providers, retailers and wholesale suppliers as valuable proxies for judging a customer’s ability and willingness to repay and for confirming identity and income. McKinsey also highlighted the value of the financial services providers’ own, often unused, internal data. Their report stated that “many large banks still do not take into account information as simple as the balances and transaction patterns of their own customers’ checking and savings accounts when assessing creditworthiness.”2

Credit scoring modeling: what’s new?

Interest in machine learning, a computeintensive method of data analysis that automates model building, has risen recently for credit scoring and other areas of financial services. Part of the interest comes from the availability of increased and cost-effective computing power along with large amounts of available memory. Industry research is focused on the use of neural networks, decision trees and random forest techniques for credit scoring.

Today, most production users of credit scoring software use logistic regression

techniques because they deliver excellent results and are well-understood. Since credit scoring models are typically “regulated” models, banks and other lenders must be able to explain, validate efficacy and defend usage to regulatory authorities. Machine learning models can become so complex that modeling staff cannot explain “why the model does what it does” to regulators. Modern credit scoring software provides a wide choice of predictive modeling techniques, including machine learning, so that firms can identify the techniques with the highest “lift” (predictive power) and then determine what technique should be used in production scoring.

Real-time decisioning The use of credit scoring models began decades ago when computing was almost exclusively batch processing. Today, banks want to accelerate the opportunity for profitable lending revenue through realtime credit authorization decisioning for many types of loans, including credit cards, personal and automobile loans. Modern credit scoring software can integrate with real-time decision management tools to provide this capability.

An eastern European bank interested in growing its small-amount credit business by focusing on lower-income segments combined modern credit scoring, real-time decisioning and marketing automation software to increase loans by 25 percent and achieve ROI of over 175 percent.

Collections It may seem strange to view collections as a competitive activity. However, all borrowers have a personal payments hierarchy for determining which bills to pay first in times of financial stress. Collections can be thought of as competing for “share of wallet,” similar to the sale of new financial products and services. A best practice for collections is to start as early as possible in the delinquency cycle, given the likelihood of recovery will decrease over time.

Collections scoring models can help identify the likelihood for delinquent customers to “cure” across various communications methods. These methods could include contact center phone calls, automated IVR, emails, SMS messages or “watchful waiting” (self-cure) by the next

billing cycle. Banks have to balance the use of these communications methods with capacity constraints and costs. Mathematical optimization, which seeks to maximize or minimize an objective while considering real-world constraints, is an excellent method to obtain the “best” answer to the collections problem. All collections customers, and their propensity to cure using various communications channels, can be analyzed together with capacity and cost constraints to arrive at the “best” or optimal communication channel for each customer.

A large Asia Pacific bank used modern optimization software to significantly increase the cure rate (reducing outstanding delinquent debt), delivering a 300 percent ROI and a payback on their software investment in less than six months.

Wrapping up Modern credit scoring software lets banks speed up the model development and deployment cycle, leading to faster credit quality assessment; the end result of which is increased revenue from lending and reduced credit risk. New types and sources of data can be incorporated into the scoring process, and new modeling techniques are also available. Credit decisioning can now be real-time, and collections can increase while minimizing costs. Implemented together, these new capabilities can modernize a financial institution’s more traditional credit and collection processes to compete with the flashy new tactics from FinTechs. As 2016 begins, consider how a modernized credit and collections program can garner more customers, more revenue and more profits.

David M. Wallace is global financial services marketing manager for SAS with responsibility for defining industry strategy for banking and capital markets. He has over 30 years’ experience in the application of information technology to solve client needs, including a focus on financial services for over 20 years. Wallace holds a Bachelor of Science in economics from the University of North Carolina Wilmington and a MBA from East Carolina University. He is a member of GARP, PRMIA, and SIFMA Compliance & Legal Society, and is also the chair of BAI’s Solution Provider Executive Council.

1 University of Edinburgh Business School, Biennial Credit Risk and Credit Scoring Conference, survey of 200 delegates from 40 countries, August 2015.

2 McKinsey and Company, New Credit-Risk Models for the Unbanked, April 2013

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Technology Report

International Payments Made Simple

Optimizing technology drives efficiency

By Anil Sawrup

T

he international payments landscape is changing rapidly, driven by the increasing use of mobile devices and ongoing technology sophistication. Both at work and at home, consumers are increasingly encountering user experiences on their electronic devices that are more intuitive and agile. This heightens expectations for enterprises to conduct

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business in a digital format. Banking services are no exception.

Global payment trends According to a recent report by the Pew Research Institute, approximately 50 per cent of U.S. adults bank online and approximately one third use their smartphone to do so.1 Similarly, global payment trends for SME

Financial Operations | WINTER 2015 | www.financialoperations.ca

and large enterprises reflect a dramatic shift in the payments mix from cheque to electronic payment alternatives. Studies indicate an average annual decline of -6.5 per cent in the volume of cheque payments, offset by an average annual increase of 15 per cent in the volume of Automated Clearing House (ACH) and debit/credit card payments.2 For context, in the U.S. alone, there is an estimated 217

Technology Report billion payment transactions with a total value of U.S. $54 billion. Of this, cheque payments comprise approximately 50 per cent of transactions by volume and 38 per cent by value whereas ACH payments comprise approximately 9 per cent by volume and 44 per cent by value. Further, more than two thirds of cross-border payments are made via wire.

Traditional banks are costly and inefficient What do the above statistics tell us? The volume of ACH and wires payments are growing. However, the vast majority of these transactions are conducted through major banks. Unfortunately, this can make booking foreign exchange (FX) deals and initiating international payments expensive, timeconsuming, and inefficient. This is because banks typically set higher transaction charges for international payment services than nonbank financial institutions.

In part, higher bank charges could be considered to reflect more stringent regulations (i.e., banks might argue that they need to charge a premium to offset low interest rates and higher capital reserve requirements in the wake of the global financial crisis). Higher charges can also arise in circumstances where a bank elects to use a fixed daily conversion rate for currency exchange rather than live rates that reflect intra-day rate changes.

Notwithstanding, the practical reality is that banks typically charge substantially higher fees than non-bank institutions for the same international payment. Accordingly, cost savings for reduced transaction fees can be significant, especially for organizations with higher annual transaction volumes.

Significant cost savings and human resource efficiencies can be achieved when international payments are optimized by technology.

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Technology optimization drives efficiencies Significant cost savings and human resource efficiencies can be achieved when international payments are optimized by technology. For instance, there are innovative web-based solutions that help to simplify the complex rules for making secure international trades and payments. These technology solutions are designed to overlay with the organization’s existing accounting system and leverage its existing banking relationships for settlement.

International transactions are typically governed by complex laws, policies and regulatory requirements unique to each country. Advanced web-based platforms include robust beneficiary and country validation capabilities, such as the automated insertion of required fields with countryspecific banking information. This eliminates the need to source or track unique banking and regulatory rules specific to each country and ensures that payments are accurately delivered to the intended recipient with reduced returns and investigations.

Key elements of an effective electronic payments solution: • Robust country-specific bank routing and regulatory data validation • Intuitive, agile web-based user interface with mobile device access • Ease of integration with existing accounting systems (e.g., SAP; Oracle; Microsoft Dynamics) • SWIFT and in-country payments with straight-through processing support • Secure, scalable solution from partial to full payments automation

Electronic payments solution integration If your business is contemplating an electronic payments solution, a critical consideration is how the technology will integrate with your existing back office IT infrastructure. In larger organizations, it is not uncommon for such prior IT investments to be in the order of $100+ million. As such, care should be taken to minimize any potential integration issues.

Sophisticated payments platforms are designed to provide a seamless online interface with your existing IT system.

Accounts Payable (AP) staff would typically generate a single payment file (i.e., in TXT, CSV or XML format) from your

Financial Operations | WINTER 2015 | www.financialoperations.ca

existing accounting system for upload to the electronic payments platform via Secure File Transfer Protocol (SFTP). Payment files, with beneficiary and payment information, can then be dropped into a secure folder and automatically uploaded for supplier validation and custom remittance.

Consolidated funding transactions are initiated via an Automated Clearing House (ACH) debit and can be reconciled against your AP sub-ledger. Where payments are transacted in foreign currencies to global suppliers, a reconciliation file will show the exchange rate and funding amounts for each payment.

Summary Adopting an electronic platform for international payments is a significant opportunity for organizations to reduce costs and increase efficiencies. Key benefits include optimized transaction and currency exchange rates, robust bank and payment validation, and custom remittance options.

The technology objective is to provide a simple, intuitive experience that guides the user through making international payments from the convenience of a desktop or mobile device. Scalability of the technology solution, whereby it is sufficiently agile to consider the unique requirements of your business, is the key to successful implementation.

Anil Sawrup is Chief Commercial Officer at Cambridge Global Payments. He is primarily responsible for ensuring the integrated commercial success of the company.

In tandem, he manages the U.S. market, along with engineering and expanding Cambridge’s elite group of FX specialists who offer customized risk management and payment solutions including check elimination and derivative instruments.

In addition, Anil is responsible for integrated payments on a global basis and works closely with Cambridge’s product team to launch and expand the organization’s new technologies. Anil brings a wealth of experience to Cambridge’s enterprise team, with over 20 years’ experience implementing FX and payments strategies with large companies, including Fortune 100.

About Cambridge Global Payments Cambridge Global Payments is a leading provider of integrated cross-border payment services and risk management solutions. As a trusted partner for over 20 years, Cambridge delivers innovative solutions designed to mitigate foreign exchange exposure and address unique business needs. Our award-winning capabilities and industry-leading technologies simplify the way businesses connect with the global marketplace. As one of the largest bank-independent providers globally, we are flexible and responsive, with offices across North America, Europe, and Australia. Learn more at cambridgefx.com and follow us on Twitter and LinkedIn. 1 Pew Research Center; 51 per cent of U.S. Adults Bank Online, August 2015 2 Institute of Financial Operations, 2012 Global Payments Study

KEEP UP TO DATE AND INFORMED BY VISITING OUR WEBSITE DAILY. Financial Operations magazine posts news, insights, updates and breaking stories as they happen.

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Visit us online at www.financialoperations.ca Financial Operations is a Lloydmedia, Inc publication.

Lloydmedia also publishes Payments Business magazine, Canadian Treasurer magazine, Canadian Equipment Finance magazine, Direct Marketing magazine and Contact Management magazine.

BUSINESS MATTERS

Payment Transformation Options are Migrating North While most companies still rely on cheques for the majority of supplier payments, new payment digitization services offer the potential for substantial savings.

By John Davis

W

ith both the Bank of Canada and the International Monetary Fund (IMF) downgrading their Canadian economic outlook in October, finance professionals are more challenged than ever to find efficiencies to strengthen their companies’ competitiveness.

Challenging times create a need for leaders to broaden their influence in their organizations, and finance professionals need to drive change to strengthen the competitiveness of their firms. The most impactful opportunities involve full transformations of existing processes as opposed to incremental improvements.

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Looking at a process end-to-end and reengineering it can often create step change improvements, but finding the time to look for these opportunities and make changes, amid unrelenting day-to-day demands on time and budget, is difficult. To help address this need, outsourced options have arrived in the Canadian market that enable leaders to implement transformations of the economics and risks of current payments without distracting internal staff from their core mandates.

The status quo Paper-based processes and cost structures represent an opportunity to reduce cost

Financial Operations | WINTER 2015 | www.financialoperations.ca

and risk, where finance professionals can implement change to create value for their businesses. Finance professionals have made real progress on invoicing workflow, cash position information, and forecasting.

Arguably, progress has been made in the payments space as well, but the pace of the adoption of electronic B2B payments lags retail payments substantially. You don’t need to look far to see examples of paper and manual processes that distract finance staff from more strategic activities and create little value for their firms.

A number of factors reinforce the status quo, and keep the old world of paper and manual processes in place. Nearly a billion

BUSINESS MATTERS cheques are used in Canada annually according to the Canadian Payments Association (CPA).Payment process transformation efforts need to address the reasons things are the way they are in order to result in lasting change. Ubiquitous acceptance is certainly a primary driver of the prevalence of paper, as is the fact that many business’ payment processes are still built around cheque issuance. Supplier banking information is not needed to write a cheque, and mail float still creates some additional working capital. To transform paper payment flows to digital, acceptance, routing information, working capital impact, security, and inertia need to be considered.

Cheques introduce significant fraud risk in terms of alteration, and a cheque itself contains many pieces of useful information for a fraudster …”

Cost and risk implications Cost, control and risk are the major drawbacks of cheque payments. A 2015 payments cost benchmarking survey by the Association for Financial Professionals (AFP) shows that cheque payment costs are typically more than five times the cost of electronic payments, with the typical issued cheque costing $3 as opposed to the typical next-day electronic funds transfer (ACH in the U.S., EFT/AFT in Canada) costing 56 cents (including internal and external costs).

Cheques introduce significant fraud risk in terms of alteration, and a cheque itself contains many pieces of useful information for a fraudster, including the company’s logo, address, and bank account number along with the name and sample signature of an authorized officer. Indirect costs related to handling and problem resolution of cheque issues can be difficult to assess, and are unpredictable in terms of amount and frequency.

While float is often perceived to be a benefit of cheque usage, float is less valuable today than it has been in previous higher interest rate environments. Additionally, the cost of supplier calls to Accounts Payable departments (AP) to make payment inquiries, leading to hours of non-value added activity

by AP staff, are not usually factored in, resulting in an overestimation of the net benefit of mail float.

For large companies with higher volume payments, Citi data suggests that the gap between the costs of cheque and electronic payments is closer to 9X, driven by the greater scalability and efficiency of electronic payments at high volume, the costs of fraud targeted at large companies, and the costs of mitigating this risk. In these cases, migrating from cheques to electronic payments is likely to result in between 65-85 per cent cost savings – a dramatic improvement that finance professionals can achieve, with ancillary risk reduction benefits.

The picture improves further for companies with meaningful volume of low-dollar payments, as these can often be moved from cheques to credit card payments as opposed to moving them to EFT/AFT/ ACH. In addition to the cost savings noted above, moving small payments (<$10,000) from cheques to virtual card payments earns the company a rebate of 0.75 per cent to 1 per cent of the total value of those small payments made, turning what used to be a cost stream into a revenue stream.

Depending on the number of payments being made, Citi has observed that companies can achieve cost savings of $50-150,000 from efforts to migrate their payments from paper to digital.

Cheque volume is falling organically at 6.3 per cent annually according to CPA statistics.

CPA modernization efforts may accelerate this, but they are several years away from delivering meaningful savings to corporates.

Simply waiting for this change to happen won’t result in meaningful near-term cost efficiencies.

Since most large companies in Canada are presented with this same opportunity, it is best resolved through an outsourced approach where best practices can be shared and cost efficiencies gained, as opposed to in-house efforts that tax scarce resources and achieve neither the scale nor experience advantages that a wider effort can bring.

Addressing the challenge Reducing reliance on paper-based payments has been a challenge for finance professionals because converting a large supplier base (accustomed to receiving paper payments) to electronic payments is as much a marketing and IT challenge as it is a finance challenge.

Payment digitization initiatives may require: 1. An outreach program via email and telephone to drive supplier conversion to electronic payment acceptance.

2. Validation of supplier bank details, and security to protect supplier information.

3. A customized supplier portal to enable suppliers to maintain accurate information on an ongoing basis.

4. Ongoing optimization of the payment mix from a single payment file to maximize cost savings.

5. Automated notification to suppliers when payments are made.

6. Access to historical transaction information and payment reconciliation support.

Challenges in marshalling cross-functional resources can make an insourced payment digitization program difficult for finance professionals to get off the ground. In the United States this has led to the creation of a number of payment digitization services, offered by banks and technology companies.

Canada lags in commercialization of payments digitization services, but services like Citi Payment Exchange have recently arrived in the Canadian market to close this gap. Payment Exchange and services like it have been in place in the U.S. for several years.

Outsourced payment digitization services can enable corporations to transform the economics and risks of their payment process, without distracting limited internal resources from other key priorities. By leveraging an outsourced payment digitization model, proven to create cost efficiencies and reduce risks, finance professionals can deliver a win that will strengthen their organizations’ competitiveness and their profile as leaders.

John Davis is the Head of Citi’s Payments and Receivables business in Canada

Financial Operations | WINTER 2015 | www.financialoperations.ca

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2016

ISSUES & EDITORIAL THEMES Issue  Q1 2016 The Role of Analytics in Risk Management

A look at risk, the risk factors impacting companies, and best practices for mitigation and management. EDITORIAL DEADLINE: February 12th

Issue  Q2 2016 Data and Documents – Fraud and Security Issues

A look at the capture, collection, use, and allocation of data and documents and how evolving technologies are impacting them. EDITORIAL DEADLINE: May 20th

Issue  Q3 2016 The Impact of Changing Technology

The rapidly evolving world of technology creates challenges for the back office. This issue looks at the trends in technology and best practices to mitigate the challenges.

EDITORIAL DEADLINE: August 12th

Issue  Q4 2016 Credit and Collections

From approval to billing to account management, implementing a successful cycle of credit and collections involves effective strategies. This issue looks at best practices, resources, and tools to enhance this function of your finance department.

EDITORIAL DEADLINE: October 14th

Plus…

Each issue includes regular editorial columns such as our technology report, compliance, risk, and business intelligence, as well as industry updates, news, events, and more ...

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EVENTS 2015-2016 NOVEMBER November 17-19 Comexposium CARTES & Identification Exhibition 2014 Paris, FR www.cartes.com

JANUARY 2016 January 20-21 NAPCP Canada 2015 NAPCP Canadian Commercial Card and Payment Conference Toronto, ON www.napcp.org/

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APRIL February 16-18 ProcureCon Canada Toronto, ON http://wbresear.ch/oi February 23-25 ATMIA ATMIA Annual Conference New Orleans, LA www.atmia.com

MARCH March 7-9 BAI BAI Payments Connect

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April 4-7 ICMA Annual Card Manufacturing & Personalization Expo Orlando, FL www.icma.com

April 11-14 NAPCP 16th Annual Commercial Purchasing Card and Payments Conference Tampa, FL www.napcp.org

April 5-7 Smart Card Alliance 9th Annual Payments Summit Orlando, FL www.scapayments.com/

April 12-14 PaymentsSource 28th Annual Card Forum & Expo Los Angeles, CA www.paymentssource.com

April 6-7 Payments eXchange

Visit us online www.financialoperations.ca/events.html Financial Operations | WINTER 2015 | www.financialoperations.ca

21

Trend Report

The Future of Payments is Digital – Just Ask Your Suppliers

By Chris Rauen

A

s consumers, we’ve embraced digital networks to the point that we can’t imagine life without them. We use them to search, buy, and pay for goods and services, to hail a cab, line up housing, keep tabs on friends and family, share news, and more. And with increasing frequency, businesses are moving their activities online too. Why? Because they recognize that their employees – a growing percentage of whom are millennials – expect things to be as easy when they start work on Monday as they were at home over the weekend. And business processes are, frankly, too complex.

B2B payments are a great example. From shopping to socializing, nearly every aspect of our lives has been digitized, mobilized, and automated. Yet, when it comes to the world of business, antiquated methods of payment are still the norm. More than 60 percent of payments between businesses in the US are still made using checks.

For buyers, that means lots of paper and inefficiencies that cost their companies billions each year. For sellers, it means little visibility into when they will actually be paid and what they are being paid for, making it difficult to effectively manage cash and reconcile payments.

But thanks to advances in technology, it doesn’t have to be this way. Just as Apple Pay has digitized payments for consumers, services are emerging to do the same for businesses.

Leveraging the connectivity and insights of business networks and the convenience and agility of cloud-based technologies, for instance, services like AribaPay enable companies to connect and collaborate around

22

B2B payments in completely new ways and more effectively manage the entire payment cycle – from exchanging purchase orders and invoices to delivering rich remittance data along with payments that shows what they represent at the invoice and line-item level – all in a fast, secure, electronic environment.

Companies that are closely watching the development of such services are the technology companies that help complex organizations drive revenue through increased engagement with sales content on any device.

For example, Mediafly, long a proponent of leveraging e-commerce channels such as networks to do business, has automated its invoice and payment processes with a number of customers through the Ariba network.

From shopping to socializing, nearly every aspect of our lives has been digitized, mobilized, and automated.

But payment processing still occurs offline as a largely manual process. And this poses problems. Payments are often delayed. Lack of visibility into scheduled payments makes it difficult to forecast cash flow. And even when payments are received promptly, they can’t

Financial Operations | WINTER 2015 | www.financialoperations.ca

easily be reconciled because the payment file may come with incomplete remittance detail, or may not contain any remittance information at all.

“With most of our clients it’s a black box as to when we are going to see payments and what we will actually be paid for,” says John Evarts, Mediafly’s chief financial officer and chief operating officer.

But Evarts sees a solution in networkbased electronic payment offerings that link payments with relevant transaction documents such as purchase orders and invoices and deliver the detailed remittance information needed to accurately apply payments and improve cash flow forecasting.

“In taking a network-based approach we can create data-rich transactions that drive much greater transparency and enhance the entire procure-to-pay process,” Evarts says.

“I’d like all my customers to pay me this way.”

And he isn’t alone. Seeing the speed and efficiency that electronic payments deliver, suppliers around the world are moving to digitize their invoice and payment processes.

Certainly buyers would be wise to do the same.

As solutions marketing manager at Ariba, an SAP Company, Chris Rauen is responsible for marketing programs that educate finance, procurement, supply chain, and other business professionals on the transformational potential of the Ariba Network and Ariba’s cloud-based financial solutions. Before joining Ariba, Chris spent more than 15 years in business-tobusiness marketing for technology innovators OpenVision, Documentum, and Xign Corporation. His published work has appeared in a variety of technology, trade, and business press, including Business Week, Fortune, Nation’s Business, Dow Jones Capital Markets Report, Enterprise Systems Journal, PC World, and Portable Office.

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