S P R I N G 2012 Vol.5 No.1
Global Treasury Briefing P e r s p e c t i v e s g u i d i n g g lo b a l t r e a s u ry a n d f i n a n c e Subscribe to Global Treasury Briefing online at www.gtbriefing.com
THIS ISSUE Future Gazing: Top 10 Economic Trends for 2012 Challenges to Online Payment Uptake Evaluating Corporate-tobank Integration Models
Published every quarter by gtnews.com
Deutsche Bank Global Transaction Banking
Looking for the best in Cash Management and Trade Finance?
Our award-winning team has the solution. Best Cash Management House in Europe Euromoney Awards for Excellence 2011, 2010, 2009
Global Bank of the Year for Cash Management Best Bank for Risk Management – Europe TMI Awards for Innovation & Excellence in Treasury Management 2011, 2010, 2009
Best Trade Bank in Europe Trade Finance Awards for Excellence Poll 2011, 2010, 2009
This advertisement has been approved and/or communicated by Deutsche Bank AG. Without limitation this advertisement does not constitute an offer or a recommendation to enter into any transaction neither does it constitute the offer of securities. The offer of any services and/or securities in any jurisdiction by Deutsche Bank AG or by its subsidiaries and/or affiliates will be made in accordance with appropriate local legislation and regulation. Deutsche Bank AG is authorized under German Banking Law (competent authority: BaFin – Federal Financial Supervisory Authority) and authorized and subject to limited regulation by the Financial Services Authority. Details about the extent of Deutsche Bank AG’s authorization and regulation by the Financial Services Authority are available on request. Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities in the United States. Deutsche Bank Securities Inc. is a member of NYSE, FINRA and SIPC and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG and its banking affiliates. Investments are subject to investment risk, including market fluctuations, regulatory change, counterparty risk, possible delays in repayment and loss of income and principal invested. The value of investments can fall as well as rise and you might not get back the amount originally invested at any point in time. © Copyright Deutsche Bank 2012.
CONTENTS
Contents 4..............Future Gazing: Top 10 Economic Trends for 2012
Looking out into 2012, this article examines the top investment themes for the year. Will the euro stay intact? Will global corporate earnings and cash flow continue to grow at a solid rate?
10.......... Challenges to Online Payment Uptake Corporates’ usage of online payments is definitely growing. But what are the challenges to widespread uptake?
15.......... Evaluating Corporate-to-bank Integration Models Corporates should leverage the potential of both cloud computing service providers and the expertise of your financial service partners.
21.......... China’s Currency Revolution: What it Means for Corporate Treasurers This article examines the liberalisation of the Chinese renminbi (RMB) and how corporate treasurers can capitalise on developments.
Global Treasury Briefing +44 20 7436 4306 enquiries@gtbriefing.com Editor-in-chief: Neil Ainger neila@gtnews.com Editor: Joy Macknight joym@gtnews.com Deputy Editor: Lynne Peachey lynnep@gtnews.com Head of Production and Client Services: Mia Leaning mial@gtnews.com Sales Director: Anne-Marie Rice annemarie@gtnews.com Design and Artwork: Miss Jones Design donna@missjonesdesign.com
Editorial Board
Asia-Pacific . ............................................. Craig Busch, Group Treasurer , WorleyParsons............ Sue Lee, Assistant Treasurer, Danfoss A/S................... Jason Wang, Regional Treasurer Asia-Pacfic, Henkel.. Latin America .......................................... Carlos Negrao, Manager Corporate Treasury and Contract Management, BT Global Services.................. Middle East .............................................. Daniele Vecchi, Senior Vice President, Head of Group Treasury, Majid Al Futtaim Group................................ North America.......................................... Michael W Connolly, Vice President, Treasurer, Tiffany & Co Ruud Roggekamp, Assistant Treasurer Corporate Finance & Banking, The Boeing Company Rey Semonia, Financial Advisor Len Thompson, Cash Manager, Fike Corporation Brad Gilbert, Treasury Manager, Vista Print
Subscriptions Subscribe online at www.gtbriefing.com Or call our subscriptions line on +44 20 7436 4306
24............ SEPA 2.0: The New Regulatory Reality Governing the Integration of the Euro Payments Market
Print, delivered by air mail EU countries ..........................................£160 Outside EU..............................................£180 AFP members........................................$100
The European legislator has established mandatory deadlines for migration to the single euro payments area (SEPA).
PDF, delivered electronically Standard rate.........................................£130 AFP members.......................................... $75
29.......... Relieving the Pain of Cash Flow Forecasting
Global Treasury Briefing is published quarterly by C-Stream Limited, 3rd Floor, Northumberland House, 155–157 Great Portland Street, London W1W 6QP +44 (0)20 7436 4306
The European Treasurers Council (ETC), held in Brussels at the end of 2011, discussed some tips for success in cash flow forecasting.
GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 3
FEATURE | F U T U R E G A Z I N G : Top 10 E conomic T rends for 2012
Future Gazing: Top 10 Economic Trends for 2012 Looking out into 2012, this article examines the top investment themes for this year. Will the euro stay intact? Will global corporate earnings and cash flow continue to grow at a solid rate? Authors: Citi Research and co-authored by Robert Buckland, Global Equity Strategist; Willem Buiter, Global Chief Economist; Tina Fordham, Senior Global Political Analyst; Matt King, Global Head of Credit Products Strategy; David Lubin, Head of Emerging Market Economics; Minggao Shen, Head of Research for China; Ed Morse, Head of Global Commodities Research; Ebrahim Rahbari, Economist, Global Economics; and Markus Rosgen, Head of Regional Strategy.
M
ost investors look forward to 2012 with a sense of cautious optimism that things will be brighter. This year looks to be one where we seek to get ourselves out of the doldrums and get our confidence back. We will encounter challenges on the path to growth - in addition to a certain amount of ‘baggage’ that we carried forward from last year, despite us wishing it would disappear with the turn of the calendar page. Globally we expect the economy to grow 2.5% in 2012, down from about 3% in 2011 and from over 4% in 2010. Compared to a typical recession, today’s gross domestic product (GDP) growth is somewhat weaker than expected and unemployment is still much higher than one would expect to see at this point in the recovery. Governments, households and financial institutions are working to pay down debt levels that have been building up over the past 30 years. The question that needs to be answered is whether the
4 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
world can deleverage without this having a knock-on effect on asset prices and economic growth. We think confidence could be the determining factor. The crisis in Europe continues to be a drag on the global economy, with the sovereign and banking crisis likely to lead to a protracted recession in the eurozone. Although the euro area will be under intense strain, we believe it will likely remain intact and, given the high costs of exit for any member country, a break-up of the eurozone has less than a 5% probability. Despite the obvious macro headwinds, global corporate earnings and cash flow continue to grow at a solid rate. While these are typically a positive sign for investment and job growth, high levels of volatility and ongoing uncertainty of late have resulted in a noticable slowing of capital expenditure (capex) investment by corporates over the past two years. With the cost of equity high and the cost of debt unusually low, corporates have instead been using cash
FEATURE | F U T U R E G A Z I N G : Top 10 E conomic T rends for 2012 to buy cheap equity or pay big dividends. Although this should continue to support stock prices going forward, it remains to be seen if economic growth can recover without an increase in capex to fuel job growth. Discussion around tail risks will continue to make headlines in 2012 as investors and corporates worry about the potential of the ‘next shoe to drop’. The fate of the Chinese economy and whether its growth engine can continue to drive global demand is a concern, but we believe rebalancing to promote structural and marginal demand would lay a solid footing for continued growth.
2012 Investment Themes 1. Europe: crisis outlook
2. Global politics: vox populi
2011 was, from a political perspective, a ‘year of living dangerously’, dominated by the collision between sovereign debt dynamics and weak leadership in the developed world, political change and conflict in Middle East and northern Africa (MENA), and rising social unrest globally. 2012 is shaping up to feature the continuation of these themes plus two more: a concentration of elections and leadership transitions in some of the world’s largest economies, and rising geopolitical tensions.
Despite the obvious macro headwinds, global corporate earnings and cash flow continue to grow at a solid rate.
The risk from this more unstable political outlook against a worsening global economic backdrop, as well as growing scepticism that politicians possess the will or the capacity to act,
We expect the euro area sovereign debt and banking crisis to intensify further in 2012. We do not, however, expect the euro area to break up in 2012 or the following years, nor do we expect the disorderly default of a euro area sovereign. The risk that either or both of these disaster scenarios materialise is, however, non-negligible. In our central projection, two or more insolvent sovereigns (Greece, Portugal and possibly Ireland) undergo orderly debt restructuring in 2012-13. We also expect a ring-fencing of the illiquid but most likely solvent sovereigns (Italy, Spain, Belgium, France and Austria) through greater European Central Bank (ECB) involvement, enhanced euro area-wide fiscal facilities and extra-EU assistance, most likely organised through the International Monetary Fund (IMF). Incremental fiscal tightening, structural reforms, tight financial conditions and a continued ‘uncertainty overhang’ will strongly weigh on domestic demand and push the euro area into recession in 2012. We also expect a further GDP contraction in 2013. Then and thereafter, very loose monetary policy and external demand will prop up growth, while domestic demand is likely to remain weak. GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 5
FEATURE | F U T U R E G A Z I N G : Top 10 E conomic T rends for 2012
2011 was, from a political perspective, a ‘year of living dangerously'
will bear great significance for markets, in our view. The post-financial crisis recalibration between government, society, and markets is still evolving.
3. Payback time: de-lever decade
Over the past 30 years, the global economy has produced strong and steady GDP growth accompanied by a rally in asset prices. This growth, however, has been accompanied by an increase in borrowing. Given the current economic climate and the recent focus on sovereign debt and on debt in general, it is increasingly clear that the next 10 years are unlikely to see debt levels increase. The question that needs to be answered is whether we can run the process in reverse - deleverage - and not have a knock-on effect on asset prices and economic growth. The good news is it’s all about confidence. The bad news is that this makes for a very uncertain environment. This is positive for fixed income investments, which over an extended time horizon seem likely to offer better risk-adjusted returns than riskier vehicles such as real estate or equities.
4. Lost decade: how to survive
simple framework highlights why equities in the European Monetary Union (EMU) periphery could be exposed if economic growth remains sluggish. Unlike the US or UK, the European periphery does not have its own central bank or currency. Therefore, these countries cannot rely on easier monetary policy and weaker exchange rates to help deliver nominal growth supporting company profits and stock prices.
5. Financial repression: good in emerging markets
One idea gaining visibility these days is that the best solution to the developed world’s debt problems may be ‘financial repression’. This refers to a family of policies - interest rate ceilings, reserve requirements, capital controls, transaction taxes, liquidity requirements, regulatory bullying and outright state ownership - designed to create a financial system that is more inclined to assist a government in refinancing its debt. Assuming that advanced economic policymakers move steadily back to the future to create a financial system that acts more like a captive market to absorb government paper, we ask the question: how would policymakers in emerging market economies view all this?
Many investors are of the view that major developed economies are on the threshold of a ‘lost decade’ - a long period of low growth - as governments, households, and financial institutions work to pay down debt. Surprisingly, equity market performance in ‘lost decades’ has not always been poor. Companies that have done best during these ‘lost decades’ share common characteristics. They look for new sources of demand, they have pricing power, they are effective in managing costs, and they de-equitise. So if we are at the beginning of a lost decade, we estimate regional allocation should be overweight those markets where there are clear signs of inflation, attractive valuations and rising earnings per share (EPS).
Roughly speaking, we think the answer is: quite favourably. First, there is plenty of emerging market economies that are already financially repressed, and whose policymakers would likely be reasonably happy staying that way. A second reason has to do with global capital mobility. A move towards financial repression by developed market policymakers could set the stage for more limited global capital mobility, and since this could reduce the risk of ‘destabilising speculation’ in emerging market currencies, it is likely to win support among many emerging economy policymakers.
Within this context, we view the UK as well placed to survive a lost decade. Our
De-equitisation is now a truly global theme that is being reported by all of Citi's
6 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
6. De-equitisation: truly global
FEATURE | F U T U R E G A Z I N G : Top 10 E conomic T rends for 2012 regional strategists. It is about companies returning capital to shareholders through buybacks, dividend increases and cash/debt financed merger and acquisition (M&A). The rationale to de-equitise has hardly ever been stronger, especially in lowly rated developed markets. Even in some emerging markets, which have traditionally been areas of significant equitisation, Citi strategists report that companies are looking to accelerate capital returns. The capacity for companies to support their share price through capital returns has helped limit the downside in stock markets through the early autumn, in our view. As the benefits from de-equitisation remain compelling, we believe that they will continue to be ready buyers, even if investors are not. This corporate demand for equities should continue to support stock prices going forward.
7. Asia: dividends or buybacks?
In the developed markets, corporates engage in M&A, buybacks and pay dividends. In Asia, two out of these three options are a rarity, but dividends are available. The family ownership structure that is prevalent through Asia makes hostile takeovers nearly impossible, and in the same vein it makes share buybacks difficult. The easiest way to keep harmonious relationships among the family is through the payment of dividends. That explains why 93% of companies in Asia ex-Japan pay them. Over the past 10 years, dividend investing in Asia has led to outperformance. Dividend investing has outperformed growth. With dividend coverage and free cash flow high, dividends are not under threat in Asia.
market; growth in the US will likely remain subpar, increasing the chances of trade and currency related frictions; domestically, a hard landing can be avoided, but major structural hurdles need to be removed to ensure a smooth migration to a slower but more balanced growth environment; and leadership changes during the period pose both uncertainties and opportunities. Against this backdrop, the economy could hit a soft patch in early 2012, coinciding with a property market adjustment and external weakness. In preparation, the focus of macro policies has already shifted from anti-inflation to growth stability. We expect prudent monetary policy to normalise liquidity and proactive fiscal policy to forestall downside risks. We forecast growth to slow to 8.4% in 2012, and see a deeperthan expected euro area recession, QE2 in the US and, undershooting of property prices as the main risks to our growth forecast.
World geopolitical issues involve significant threats to major portions of the world’s oil supply
9. Oil in 2012: risky to growth
Oil demand is largely a function of GDP growth and the impact of oil prices is visible in the changing ratio between the two. One of the persistent themes
8. China: rebalancing required
China enters the second year of the 12th five-year plan facing tremendous external headwinds; the euro area is expected to fall back into recession, reducing demand from China’s biggest external GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 7
FEATURE | F U T U R E G A Z I N G : Top 10 E conomic T rends for 2012
Deequitisation is now a truly global theme that is being reported by all of Citi's regional strategists
in the oil market has been that we are living through 2008 all over again and that seemingly robust oil market fundamentals are going to give way in the face of a rapidly deteriorating macro environment. We look at the world rather differently and instead believe that oil could pose a significant threat to the macro environment. The redundancy in the system is slim and the threats to supply are many. In addition, the long list of world geopolitical issues involve significant threats to major portions of the world’s oil supply, such that the risk of an oil price spike is significant in 2012. Despite the risks, we expect prices to be range bound between US$100 and US$120 and averaging US$110 in 2012 and US$120 in 2013. Simply put, we think that oil supplies are constrained for the next two-three years, as we just do not see enough liquid
supplies coming to market to allow for unconstrained demand growth.
10. Gold: where to now?
Gold has performed outstandingly from 2009 to 2011, with a compound annual growth rate (CAGR) of over 25%. This has been a function of its special status as a universally accepted medium of exchange and financial store of value. In our view, during periods of macrofinancial uncertainty (which we expect to continue for the foreseeable future), there are three major macro-financial factors that should drive nominal and real gold returns: 1. Denomination effects from inflation and currency adjustments. 2. Real interest rates. 3. Financial demand for gold as a safehaven and source of liquidity.
This communication has been prepared by Citigroup Global Markets Inc. and is distributed by or through its locally authorised affiliates (collectively, the "Firm"). This communication is not intended to constitute "research" as that term is defined by applicable regulations. This communication is provided for information and discussion purposes only. It does not constitute an offer or solicitation to purchase or sell any financial instruments. The Firm shall have no liability to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data nor for any special, direct, indirect, incidental or consequential loss or damage which may be sustained because of the use of the information in this communication or otherwise arising in connection with this communication, provided that this exclusion of liability shall not exclude or limit any liability under any law or regulation applicable to the Firm that may not be excluded or restricted. The information herein does not constitute investment advice and the Firm makes no recommendation as to the suitability of any of the products or transactions mentioned. This communication is not intended to forecast or predict future events. Past performance is not a guarantee or indication of future results. Any prices provided herein (other than those that are identified as being historical) are indicative only and do not represent firm quotes as to either price or size.
8 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
23-25 May 2012
Intercontinental Amstel Amsterdam
Share experiences, ideas and strategies on critical treasury topics. Compelling speakers will discuss significant treasury topics to help you navigate the economic issues that have a direct affect on your company. Connect with colleagues and talk through the challenges and questions to gain clarity and validation. The Forum encourages a candid exchange of ideas and networking opportunities. To maintain this environment, space is limited in size to executive-level treasury professionals.
Register today. www.gtnews.com/theforum Gain recognition from your colleagues within treasury. Deadline for entries is March 16. www.gtnews.com/awards
FEATURE | C hallenges to O nline Pay ment U ptake
Challenges to Online Payment Uptake
Corporates’ usage of online payments are definitely growing. But what are the challenges to widespread uptake? Heather McKenzie
Companies with revenues of less than US$10m are most likely to use automated clearing house (ACH) credits and online payment services providers because these organisations tend to have lower negotiation power to collect payments
One issue that may be holding back increased adoption of online payment services is risk - the survey suggests that respondents expected a low acceptance rate of such services in the near future (22%). On the other hand, payment methods such as cheques, which are well-established, are perceived as safe and they continue to be a popular form of payment. This is despite the fact that other payment methods are more efficient in terms of transaction management. The risk associated with online payments services is high because of their novelty, according to the survey report.
Figure 1: Initiating Payment Methods in Regular Use (%)
Source: gtnews
Heather McKenzie is a UK-based freelance journalist and editor. In her 28 year career she has written for numerous newspapers and trade publications on topics ranging from technology, communications, investment management, infrastructure development and financial services.
W
compared with their larger counterparts. For companies with revenues greater than US$1bn, cheques and ACH credits are almost equal in proportion of usage (around 63%).
hile electronic payments have become the norm, corporate treasurers are yet to embrace forms such as online payment services. gtnews’ Payments Survey 2011 has found that of the more than 300 corporates who responded, 87% use wire transfers but only 15% use online service providers such as PayPal. Within this latter group, treasurers in Asia-Pacific are the most enthusiastic users - 24% regularly initiating online payments, whereas in North America only 15% use the services regularly.
10 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
FEATURE | C hallenges to O nline Pay ment U ptake The risk may not be a problem just for corporate treasurers, however. Ricky Thirion, vice-president, treasury at Etihad Airways, the flag carrier for the United Arab Emirates (UAE), says: “Customer attitudes to online payments play a big role. A Dubai-based market research group, Real Opinions, recently reported that a survey of internet users in the Middle East found that 43% were deterred from shopping online because they didn’t trust online payment systems. More than one in three said they avoided internet commerce because they regarded the payment options offered as unsuitable and 27% cited the limited number of local online retailers.” Despite the reluctance of consumers in the home market, Etihad does value online payments as “an important part of our direct sales channels such as the web and call centre”, he adds. Moreover, Etihad’s strategy to increase direct and especially web sales as a proportion of overall sales will lead to a greater percentage of payments being made via online payment services providers. Thirion identifies regional differences in the use of online payments: “These are mainly related to acquirer services and technology offered and card scheme rule differences. Customer attitudes towards online payment again play a big role.” He believes these local issues could be solved through better partnerships with local issuers and acquirers and card schemes. In doing this, greater use of online payment services by corporates and consumers would be encouraged.
experience and did not suffer any hitches at all. The other didn’t have a very good relationship and felt PayPal had not been clear on how funds were collected or would be transferred. There was a high element of mistrust and misunderstanding, although in reality PayPal was doing a good job.” Stheeman says online services such as PayPal are growing in popularity, particularly in countries such as Germany, where credit cards do not have a big hold. “Most online payments in Germany are done via direct debits or direct transfers. There are still many people who use paper forms to transfer money from one account to another. Credit cards in the country are more like payment cards; they do not offer a line of credit as in other countries. For this reason there is a strong possibility that online payment services like PayPal will increase in use because they will be attractive to people who want to make fast and simple payments.”
Only 15% of survey respondents use online service providers such as PayPal
Online B2B Services When it comes to online payments adoption, there are no hard and fast rules. Paul Stheeman, an independent treasury consultant based in Germany, relates his experience last year in setting up PayPal in the treasuries of two subsidiaries of the one company: “Interestingly, the two subsidiaries had completely opposite opinions of PayPal. One had an extremely good GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 11
FEATURE | C hallenges to O nline Pay ment U ptake
The potential of online payments will come down to a clash between the card world and the electronic world that is not cardbased
PayPal says it has more than 20,000 traders in Germany that offer its service, with most of these operating in the business-to-consumer (B2C) space. Adoption of online payment services will vary, depending on the size of the corporation and the industry in which it operates. Simon Bailey, director of payments at Logica, says for many of the company’s corporate clients, online services just don’t figure. “This could be because many of the corporates we have as clients are not in the B2C space.” Another reason for the slow pace of adoption is a state of some confusion regarding online services. “Treasurers are struggling to understand the difference between services, be they B2C or B2B [business-to-business],” says Bailey. “The boundaries are becoming blurred between merchant acquiring services, cash management and payment services. The services provided by the likes of PayPal may well overlap with some B2B services or other forms of transactions that come from tills and e-commerce applications that are card-based.” If it is a question of the role of electronic channels in creating business, corporate treasurers tend to be quite conservative, he says. Billing directors and marketing directors are more likely to push for mechanisms such as PayPal. “The potential of online payments will come down to a clash between the card world and the electronic world that is not card-based. But I am not sure that when it comes to B2C payments, that the particular payment service that is used figures very high in the minds of corporate treasurers.” Gareth Lodge, a senior analyst at Celent’s banking group in London, makes a similar point about the confusion regarding online payments. “What constitutes an online payment isn’t particularly clear. Organisations such as PayPal are a way of exchanging money, but at some point they need the funds and that is done by ACH and card models. WorldPay is a payment
12 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
services provider rather than a payment type - it provides a way of acquiring card transactions online, but those transactions then are processed via the traditional card rails at the back.” Despite this confusion, Lodge says there is tremendous potential for online payment services in the B2B space. In the US, for example, he says 75% of B2B payments are made via cheques. “There is a huge potential there to automate such payments and put them online, although they won’t necessarily all be done via online payments services.” Another important question is how a transaction is defined. Lodge says he can make a PayPal payment on a web page using his mobile phone - but will that payment be defined as online, PayPal, card-based or a mobile payment? Corporate treasurers require clarity on three elements of payments: • The reason for making the payment. • The channel. • How the payment is processed. Lodge says there are niche areas where online payment services could be a good fit, such as purchasing cards and foreign exchange (FX) transactions for making payments to small suppliers overseas. Some companies may also use online payments services to avoid the expensive FX charges applied by banks. For larger organisations to adopt services such as PayPal, he says, integration into existing treasury systems is needed to deliver the transparency required. “The trend towards electronic bank account management [eBAM] is driven by a desire for visibility of funds. I would say some of the online payment types are not unattractive to corporate treasurers, but there is no way for them to integrate these into their day-to-day workflow and that will hinder the uptake of such services.” Integration is an area that has been identified by enterprise resource planning (ERP) vendors such as SAP and PayPal itself. PayPal’s Payflow services, combined with Paymetric’s
FEATURE | C hallenges to O nline Pay ment U ptake
XiPay application, integrate online payment processing into SAP without the burden of developing, implementing and managing the integration in-house. Treasurers can integrate payment information directly into their SAP enterprise, connect to multiple financial processing networks, perform real-time authorisation and settlement, and accept, process and manage multiple payment types from a single, unified platform. This integration is aimed at encouraging greater adoption of PayPal for B2B use. Another inhibitor to adoption of online payment services could be a balance sheet consideration, says Chris Skinner, chief executive officer (CEO) of consultancy Balatro. “Automation makes everything too fast in terms of recognising debt on the books. That is why many corporate treasurers are reverting to letters of credit (L/Cs), and why there was such resistance to the phasing out of cheques in the UK. SMEs [small and medium-sized enterprises] are going out of their way to resist or slow down the automation of payment and finance.”
This is a negative view, he says, because automation will also increase the speed of credit on the books as well, but in practice, most organisations will delay payment until the final day of settlement.
Best Practice and Harmonisation Needed Celent's Lodge says online payments are definitely growing, and there may be more traction for such payments if they are tied into electronic invoicing (e-invoicing) applications. “If you can link the two, factoring could be offered for small businesses. These online payment services could offer a one-stopshop that provides similar services that the large corporations currently enjoy,” he says.
Setting up services such as PayPal in a corporate treasury is straightforward
Lodge identifies two market forces that could provide a boost to the use of online payment services providers. First, SWIFT is aiming to have 5000 corporates on its network within the next few years. “We are seeing many GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 13
FEATURE | C hallenges to O nline Pay ment U ptake
Online payment types are not unattractive to corporate treasurers, but there is no way for them to integrate these into their dayto-day
more corporates using SWIFT service bureaus as payment factories. This is not necessarily online, but many of the bureaus are connecting to other payment networks. The result could be some alternative rails to the payments process; if you believe a payment is a payment, as long as the payment gets to the desired location, they can be routed in alternative ways, some of which are online providers.” The other nascent force, Lodge says, is the moves being made by MasterCard and Visa. MasterCard is making inroads into the payment services provider space, having bought UK online payment services provider Data Cash last year. “Data Cash has an e-invoicing and ERP platform and could help MasterCard break into the B2B market. At the same time, Visa has developed its IP network, which potentially can provide an alternative payment network for e- and m-commerce,” he says. Given the connection the card companies have to banks and to merchants, as well as settlement mechanisms, they could be well equipped to break out of the merchant oriented space and move into B2B as well. In its submission to the 2011 Review of the UK Payments Council’s National Payments Plan, the Association of Corporate Treasurers (ACT) said the growth in online, mobile and telephone transactions relative to other forms of retail payment were likely to continue. It pointed out that there was significant cross-over between the parties involved in card and non-card payments, and therefore a more ‘joined up’ approach should be taken. The ACT urged a global best practice review for current and emerging payment methodologies. Asked about services that allow online merchants to include a payment option on their checkout page that redirects users to a specially adapted version of their bank’s internet banking site, the ACT said it
14 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
had mixed reactions to it. While corporations that received copious amounts of low-value card payments online each month were positive about such services, they did stress that the cost of these transactions would be critical to its success. Others were not as positive and stressed that clarification was needed on who has the liability to the customer and noted that it lacked the consumer protection that is currently provided by credit card payments. The ACT ended its submission with a suggestion that new account providers such as PayPal were included in the remit of the National Payment Plan. Setting up services such as PayPal in a corporate treasury is straightforward, says Stheeman. “PayPal has a lot of experience and provides everything that is required to set up operations. From initiation of the paperwork through to live operation took about three months.” While there is a strong possibility that the adoption of online payment services such as PayPal will be consumer driven, Stheeman says there are many advantages for suppliers and buyers in such services. “I think online payments will continue to grow and sit alongside more traditional payments types. At some stage there may be too many suppliers of these services and there will be consolidation, which is fairly typical in such areas.”
FEATURE | E valuating Corporate - to - bank I ntegration M odel S
Evaluating Corporate-to-bank Integration Models The rapidly changing treasury technology market has created a range of integration options for corporate treasurers to leverage. Corporates should leverage the potential of both cloud computing service providers and the expertise of your financial service partners.
T
he essence of ‘Treasury 3.0’ is to move the treasury department to the next level, creating a state-of-the-art organisation to support strategic business objectives. But chief financial officers (CFOs) are challenging their treasurers to transform treasury operations while reducing costs. This obvious conflict of objectives is hard to manage, let alone achieve. However, recent trends have emerged that are providing direction on how best to achieve this task. Increasingly, organisations are moving towards centralising finance activities. This is underscored by the fact that 63% of respondents to the Citi Treasury Diagnostics benchmarking analysis have centralised working capital processes into shared service centres (SSCs). This changing role for treasury necessitates increased integration with companywide working capital and supply chain management activities. More often than not, the treasury team uses a comprehensive treasury management system (TMS) solution to oversee working capital, intercompany funding/ lending, and risk management, while the accounts payables (A/P) and receivables (A/R) teams use an enterprise resource planning (ERP) platform for processes involving procure-to-pay (P2P), inventory management, collecting receivables, and meeting payment obligations. Typically the TMS and ERP are provided by different vendors and thus require integration with each other, as well as to external banking partners.
With different technologies being used for treasury and non-treasury functions, the challenge is to find the best methods to integrate disparate corporate systems with banking partners. This article examines four traditional models that corporate treasury can use to integrate with their banks, reviewing the pros and cons of each, including important considerations for current model evaluation and determining next steps.
Levelling the Playing Field: Corporateto-bank Integration Before we examine the various models, it’s important to set them within the appropriate strategic context. Corporateto-bank integration is about more than just connecting with banks. It’s about the ability of treasury to function as a new decision-making unit within the larger organisation and to better anticipate changes in the market and in the business, thereby supporting the objectives of the company as a whole. For example: • How soon should we issue funding instructions considering our daily cash position in a key geography? • What is the impact on our daily cash/ liquidity if the cost of a key product component increases by 25%?
Mark Mixter, Global Product Manager, Financial Services, GXS Mark Mixter has product responsibility for GXS software-as-aservice (SaaS) integration solutions for financial services - particularly the GXS SWIFT Service Bureau. He has worked in corporateto-bank integration for 16 years - as a corporate practitioner, banker and solution provider. He represents GXS on the ISO 20022 Common Global Implementation (CGI) workgroup. He is based in Chicago and joined GXS in 2007.
• What is our plan if the credit quality of our counterparties deteriorates significantly (and how would we know that)? GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 15
FEATURE | E valuating Corporate - to - bank I ntegration M odels
Figure 1: Multiple Bank Integration Models
Rene Schuurman, Director, Global Product Manager Connectivity Services, Global Transaction Services, Citi Rene Schuurman has global product responsibility for all file and message based connectivity solutions for Global Transaction Services within Citi. These include the use of EDI and messaging standards, enterprise resource planning (ERP) and treasury workstation (TWS) integration and the use of SWIFT product and services. In this capacity he is also a representative for Citi in EDI standard governing bodies, such as the PAY SEG and the Common Global Implementation (CGI) workgroup. He is also an active participant in the ISO 20022 CGI Mapping Group. Schuurman is based in Chicago for Citibank, and has previously been employed by ABN Amro Bank in Chicago/ Amsterdam, as well as by Capgemini Consulting in Utrecht, the Netherlands.
Ideally, treasury makes decisions based on the analysis of relevant data, aggregated and presented through appropriate systems and tools. Much, if not most, of this data is sourced from treasury’s banking partners, which treasury can then apply against existing in-house data. Corporate-to-bank integration is first and foremost about the exchange of data between treasury and its banking partners. It is also about ensuring the exchanged data can be consumed by the receiving system - which is most commonly done by some form of data translation (e.g. converting BAI2 into an MT940). As we review these models, we should bear in mind that corporateto-bank integration is a subset of the organisation’s overall businessto-business (B2B) ecosystem. B2B integration is inherently complex, costly, and on-going. From the perspective of treasury, it is also a crowded playing field, as B2B integration invariably competes
16 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
with other internal functional areas and business units for technology resource allocation and prioritisation. So, rather than taking a ‘do-it-yourself’ approach, treasury organisations may ask: Is there another (better) way? Can newer technologies and capabilities be brought to bear on these tasks? Can treasury integration requirements be met with cloud-based service offerings? What standards can be applied across multiple banking partners? How can I reduce my total cost of ownership (TCO) and improve productivity and efficiency? With this context in place, we can now examine the four models for integrating with multiple banking partners.
Direct Integration Description
The direct integration model means treasury can take advantage of a distinct means of exchanging data directly with each of its partner banks. For some
FEATURE | E valuating Corporate - to - bank I ntegration M odels banks, this will mean a host-tohost or machine-to-machine information exchange using an agreed upon data communications protocol, such as AS2 or https. For others, an online or mobile bank cash management application may be used. Online banking channels typically provide treasury with some capacity for file upload and download. In some cases, faxes and/or telephone calls may still be used. Along with differing means of exchanging data, the direct integration model often includes a variety of differing data formats. For statement reporting, BAI2 may be received from one bank while MT940s are received from another. One bank may accept an iDOC and another EDIFACT. This traditional model is usually established as a company grows and expands operations in new markets and geographies.
Pros/cons
This is an effective model. Data is exchanged with banking partners and treasury decisions and instructions are carried out. However, this models works at a cost. Resources are needed to operate and maintain each individual channel. As regulatory requirements change, new transaction options become available and new services are used. Treasury must oversee accompanying changes to the information security and encryption of their data, as well as changes in formats - even change to a different format. These efforts, combined with the need to apply changes to bank channels on an individual basis, mean some portion of available technology resources are dedicated to the tactical work of daily operations, maintenance, and upgrades. The technology is not available, or as available as it otherwise would be for more strategic projects. The direct integration model typically
results in a higher TCO than other models as the company leverages more and more banking partners. This is due to the resource allocations noted previously, along with the resources needed to integrate these banking information flows into the company’s financial applications. As a result, the direct integration model is most effective where there are relatively few banking partners. The integration cloud, consisting of data transmission and transformation services, is effectively insourced.
Concentration Bank Integration Description
A second option is the concentration bank model. This model uses a single, lead bank to concentrate data flows from secondary banks into treasury. The concentration bank forwards payment instructions and collects status information and balance reporting data from the company’s ‘other’ banks and delivers this data to the company. The integration cloud is shifted to the concentration bank.
Corporateto-bank integration is about more than just connecting with banks. It’s about the ability of treasury to function as a new decisionmaking unit
There is typically a significant implementation lead time to implement this model. The concentration bank must negotiate secure interfaces (often proprietary in nature) and support arrangements with each of the GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 17
FEATURE | E valuating Corporate - to - bank I ntegration M odels
The rapidly changing treasury technology market has created a range of integration options for corporate treasury to leverage
company’s other banks on behalf of the client. In addition, the concentration bank may need to prioritise and build new bank interfaces.
Pros/cons
The concentration bank model has the advantage of using a single channel for corporate connectivity, resulting in reduced development costs. However, treasury is then fully dependent on a single bank for routing and distribution. The relationship with your concentration bank must be a solid, long-term one. There can be minor or even severe integration challenges (both technologically and operationally) between the concentration and nonconcentration banks. Lower development costs do not necessarily result in any overall cost savings as the connectivity fees of the non-concentration banks are being replaced with increased fees from the concentration bank.
SWIFT Integration Description
With this model, treasury employs the SWIFT network to exchange standard messages and data with its banking partners, as well as using standard formats for those messages. Integration becomes less about individual bank interactions and more about data integration to internal financial systems. The SWIFT integration model shifts the cloud to the SWIFT service bureau. With more than 9,700 members, SWIFT can be viewed as a dedicated financial services cloud. Offering both standardised messaging (how data is exchanged) and message formatting (structure of the messages exchanged), SWIFT has registered more than 900 corporate organisations since 2003. These organisations represent 30% of the Fortune Global 500 (source: SWIFT Corporate Forum 2011). SWIFT organisations no longer represent only 18 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
the largest global companies. Although 29% have an annual turnover of more than €10bn and 24% have turnover between €1bn and €1bn, more than 47% of the organisations using SWIFT have a turnover of less than €1bn.
Pros/cons
The essential argument for SWIFT is that standardisation offers cost and efficiency gains that outweigh the required initial investment to convert to SWIFT, as well as ongoing TCO advantages when compared with the direct model. SWIFT, however, does not (yet) have a message format or standard for every financial transaction. Domestic payment formats such as US automated clearing house (ACH) or UK BACS do not have a corresponding SWIFT MT or MX message format. There is still great diversity between banking partners on their ability, and in some cases willingness, to leverage SWIFT as a channel for corporate treasury. Finally, the technology requirements to leverage the SWIFT network can be daunting if attempted in-house, and therefore the largest percentage of corporations connect to SWIFT using an indirect means such as a SWIFT service bureau.
Hybrid - SWIFT and Direct Integration Description
This model attempts to take the best of both the direct integration and SWIFT models by using each where most appropriate. As others have noted, treasury organisations will require oneto-one bank connectivity for some time. Like the other models, the hybrid model retains the use of human interaction by treasury with a bank’s web portal and/or online banking application. It also includes point-to-point data connectivity between systems such as a treasury workstation (TWS) or TMS and
FEATURE | E valuating Corporate - to - bank I ntegration M odels
the information reporting or payment initiation solutions of bank partners.
Pros/cons
As noted above, SWIFT offers standards for both messaging and formats, and where appropriate and available, can enhance and improve corporate-tobank integration. Yet because of the multiplicity of standards, banks still have some product/channel limitations and therefore a single integration method will not enable treasury to achieve comprehensive integration with its banks. A typical example is priorday and intraday reporting only being available to treasury in BAI2 format, but not as an MT940 or in XML. Existing direct connectivity protocols, such as FTPS, SFTP, HTTPS, AS2, AS3, EBICS, etc, are likely less technically daunting for treasury’s IT resources. Finally, given that the overwhelming majority of corporate organisations
have multiple banking partners, managing and maintaining the connectivity of this ecosystem needs to be considered. IT resources (in-house or via a service provider) are needed to implement, monitor/support, perform necessary maintenance/upgrades, and resolve issues.
Conclusion
The relationship with your concentration bank must be a solid, longterm one
The rapidly changing treasury technology market has created a range of integration options for corporate treasury to leverage. Because every company is at a different stage of its growth progression or centralisation of its treasury function, no specific model may emerge as an absolute best. One way to resolve your integration challenges is by leveraging the potential of both cloud computing service providers and the expertise of your financial service partners. GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 19
PENSIONS AND BENEFIT TRACK.
BOLD VISIONS FOR THE FUTURE. Join more than 6,000 finance professionals at this world-class event to discover the latest “Attending the AFP innovations in treasury and finance in unbiased Annual Conference discussions by leading practitioners.
allows one to keep abreast of developments, see new possibilities, and set A new PAth oF innovAtion.”
The AFP Annual Conference offers first-class networking, powerful keynote speakers and education that you can bring back to your office that include: > Discussions of FX and Interest Rate Risk Issues impacting Cross Border Acquisitions
> Case studies in FP&A that illustrate how to integrate corporate finance functions to David McAlister enable collaboration with the organization’s Senior Economist strategic objective Finance Canada > A close look at pension risk management concepts such as dynamic glide path asset allocation, portfolio strategy, and customized pension liability hedging.
RegisteR by May 18 to Save $500. www.AFPconference.org
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the Association for Financial Professionals. © 2/12.
FEATURE | C hina’ s C urrenc y R evolution : W hat it M eans for Corporate T reasurers
China’s Currency Revolution: What it Means for Corporate Treasurers This article examines the liberalisation of the Chinese renminbi (RMB) and how corporate treasurers can capitalise on developments.
O
ver the past few years, there has been a revolution going on within the world of foreign exchange (FX). China’s currency, the renminbi (RMB), is making huge strides within the global payments market. The UK Treasury’s recent announcement that it wants to make London a leading international hub for trading China’s currency was a big moment for Britain and an indication of where we could be headed as the RMB internationalises. Treasury officials are confident that the new partnership puts London in a strong position to be a major centre for trading the Chinese currency outside China and Hong Kong, forecasting that trade transactions settled in the Chinese currency will reach around a trillion dollars (£650bn) by 20201. The government’s aim is for London to complement Hong Kong in becoming a major offshore centre for the RMB2. Fundamentally, the liberalisation of the RMB is a progressive move that could cause a shift in power away from the US dollar’s status as the world’s reserve currency. The potential ramifications of this ‘currency power shift’ should not be understated for UK businesses. For decades, a UK-based corporate treasurer would have had to go through a lengthy process when making an overseas payment into China. First, the treasurer would have needed to convert their sterling into US dollars. Having made this conversion, the US dollars would then have needed to be exchanged for RMB - an inefficient process for
corporate treasurers to have to undertake that left them exposed to three different exchange rates, and therefore vulnerable to fluctuating conversion rates over a lengthy period of time. This meant that treasurers were previously unable to fix costs when making international payments and transactions to and from the world’s second largest economy. Which begs the question: how can a corporate treasurer do his or her job and manage a company’s cash flows in the most efficient and profitable fashion possible if it’s impossible to forecast the cost of a large overseas transaction? To put it into context, in 2011, the pound-versus-dollar exchange rate varied from a low of US$1.5343 to a high of US$1.6707, an 8.16% fluctuation3. Added to this fluctuation, the US dollar oscillated with the Chinese RMB by 5.12% (CNY6.2950 - CNY6.6350) in the same period4. Exchange rate instability has always been a major issue for corporate treasurers when making international payments. Indeed, having to deal with unknown and uncontrollable costs can be a frustration for anyone. The good news, however, is that treasurers no longer have to be subject to multiple currency exchanges that can be affected by FX volatility and lead to spiralling costs when trading with China. Over the past few years, the Chinese government has quietly begun deregulating its currency to allow Chinese exporters to send and receive payments in the RMB to and from foreign companies. The policy makers in
David Sear, Chief Operating Officer of Western Union Business Solutions David Sear was appointed as chief operating officer (COO) of Western Union Business Solutions upon the acquisition of Travelex’s Global Business Payments division (TGBP) in November 2011. He joined TGBP as global managing director in 2009. His vision was to create an innovative payments technology that would transform the way businesses made domestic and international payments. Sear is also chairman of Bango, an AIM listed company and a pioneer in mobile payments and analytics.
GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 21
FEATURE | C hina’ s C urrenc y R evolution : W hat it M eans for Corporate T reasurers
Exchange rate instability has always been a major issue for corporate treasurers when making international payments
Beijing, as well as Chinese companies, are increasingly seeing the economic benefit of RMB internationalisation. As China opens up, foreign companies will gradually look to pay Chinese suppliers in RMB rather than US dollars. The Chinese economy grew at 9.2%5, last year and, although down from the tremendous leap of 10.3% in 2010, the country is continuing to grow at a very healthy rate. China’s story is a stark contrast with the UK’s stuttering 0.9% growth during 20116, and it is therefore no wonder that many UK businesses are keen to capitalise on the ‘eastern promise’ that is China’s economy. It is helpful to consider the recent history in China to understand the reasons why the payments industry is excited by the liberalisation of the Chinese currency. In July 2009, the RMB Cross-border Settlement Scheme was launched. This scheme expanded the RMB currency to cover cross-border settlements between companies in the 20 provinces of China and the rest of the world. As part of the scheme, the People’s Bank of China (PBOC) and relevant Chinese authorities created a list of eligible enterprises, commonly known as mainland designated enterprises (MDEs), who were able to settle their merchandise exports in RMB. The principal moment of the ‘RMB revolution’ occurred in December 2010, when the list of MDEs was expanded from 365 to 67,3597. This expansion meant that the number of Chinese companies that could now settle merchandise exports in RMB substantially increased. The significance of this legislation is huge - it was a real game-changer for global FX and international payments. As the RMB becomes more accessible through its increased liberalisation, global businesses will increasingly want to trade with China in its native currency. FX experts are anticipating a trend in global treasurers generally favouring the RMB over the US dollar when making payments in and out of the country. Given China’s robust growth rate, this trend is likely
22 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
to continue as the western economies recover from the global recession. A growing number of commentators are seeing the possibility of the RMB becoming a global reserve currency within as little as five to 10 years. In this light, the new partnership with Hong Kong has the potential to make London the western outpost for trading the RMB outside of China. The implication of such an event should not be underestimated; the ability to trade in the RMB will not only help UK-based businesses to capitalise on the large and growing economy, but it is also a step in the right direction in terms of an export-led recovery for Britain. So what we are potentially looking at here is a global currency revolution that will have a profound impact on how the UK conducts international business. With this in mind, it is therefore important for a corporate treasurer to fully understand exactly how they can make the most of trading with China. In June last year, Travelex Global Business Payments added the Chinese RMB to its Global Clearing Network. As a result, over 15,000 of our 35,000 business customers are now able to send RMB payments into China. The ability to do so offers businesses who take the opportunity a number of benefits. First, treasurers that opt for direct RMB payments instead of multiple FX transactions will instantly reduce their exposure to multiple currency fluctuations. As a result, these treasurers will notice the
FEATURE | C hina’ s C urrenc y R evolution : W hat it M eans for Corporate T reasurers immediate benefit in cost management and efficiency in bypassing the US dollar middleman. Corporate treasurers will no longer have to wait for transactions to be processed in three different currencies, resulting in faster, cheaper and more transparent supply chains. Second, making direct RMB payments will help UK-based treasurers manage cash payments better by eliminating exposure to volatility in the US dollar. Although the dollar’s global dominance is showing signs of weakening, it is still used as a safe haven by investors, which sends it fluctuating during times of economic uncertainty. As mentioned earlier, 2011 saw an 8% swing in the pounddollar exchange rate. Such a fluctuation would potentially lead to massive cost implications for treasurers who generally transfer large sums of money. Last, and perhaps most importantly, corporate treasurers that trade directly in the Chinese RMB are more likely to have improved supplier relationships. The resultant reduction in FX documents and delays in payment will go a long way to improve the professional partnership between the UK-based treasurer and the Chinese supplier. Suppliers may also receive faster tax rebates from the authorities, helping reduce costs in the supply chain while simultaneously protecting profit margins. This currency amelioration, coupled with stronger trade relationships, could potentially lead to further business deals, and even recommendations to further Chinese suppliers. A simple decision by its
corporate treasurer to switch to direct RMB payments could give a company a competitive edge in one of the world’s key markets.
Conclusion It is clear that the RMB revolution of the past few years will change the way we transact international business payments. Certainly, London’s recently-crowned status as an ‘international hub’ of the RMB suggests the Chinese government are becoming more committed to the internationalisation of their currency. Corporate treasurers must be aware of the Chinese RMB’s ability to challenge the US dollar as the world’s dominant reserve currency - a likelihood that is highlighted by the London deal. It has been a long time coming, but China is opening up the RMB to the benefit of those who are willing to act fast in using it. 1
Corporate treasurers that trade directly in the Chinese RMB are more likely to have improved supplier relationships
Source: www.bbc.co.uk/news/business-16571765
Source: HM Treasury: www.hm-treasury.gov.uk/ press_04_12.htm
2
Source: Bloomberg: 29 April 2011, £1 = $1.6707; 22 September 2011, £1 = $1.5343.
3
Source: Bloomberg: 10 January 2011, $1 = CNY 6.6350; 30 December 2011, $1 = 6.2950
4
Source: China Briefing: http://www.china-briefing. com/news/2012/01/27/chinas-provincial-gdp-figuresin-2011.html
5
Source: http://www.bbc.co.uk/news/ business-16715080
6
Source: CitiGroup: http://www.citigroup.com/ transactionservices/home/region/asia/docs/list_ chinaenterprise.pdf
7
Top tips for corporate treasurers doing business with China: • Paying in the local currency can be a good way to improve supplier relations when doing business with China. Try and use a supplier who is able to place payments into local accounts, as this will eliminate unnecessary cross-border fees and delays. • For payments to mainland China, check with the beneficiary to see if they are an authorised MDE which allows them to receive payments in RMB. This will allow for a faster clearing time and more efficient processing of the payment. GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 23
FEATURE | S E PA 2.0: T he N ew R egulator y R ealit y G overning the I ntegration of the E uro Pay ments M arket
SEPA 2.0: The New Regulatory Reality Governing the Integration of the Euro Payments Market The European legislator has established mandatory deadlines for migration to the single euro payments area (SEPA).
I
Gerard Hartsink is the chair of the European Payments Council (EPC) and is a senior advisor to the managing board of ABN Amro Bank, where he is responsible for market infrastructures. Hartsink takes care of relationships in the payments, cards and security industries in addition to those with European institutions. He also participates in the governance of the following organisations: chair of CLS Bank, board member of LCH. Clearnet, convenor of ISO 20022 Registration Management Group and board member of SWIFT. Hartsink is a career banker within ABN Amro Bank with a wide experience in retail and commercial banking roles.
n February 2012, the European Parliament (EP) adopts the ‘Regulation Establishing Technical Requirements for Credit Transfers and Direct Debits in Euros’ (the single euro payments area (SEPA) Regulation). This will define 1 February 2014 as the deadline in the euro area for compliance with the core provisions of this regulation. Effectively, this means that as of February 2014, existing national euro credit transfer and direct debit schemes will have to be replaced by the SEPA Credit Transfer (SCT) and SEPA Direct Debit (SDD) schemes. The SCT and SDD schemes were developed by the European Payments Council (EPC), in close dialogue with the customer community, as requested by European Union (EU) governments, the European Commission (EC), the EP, and the European Central Bank (ECB). The majority of market participants recognise the value of setting a deadline for migration to harmonised SEPA payment schemes through EU regulation. The EPC shares the view that an end date for phasing out legacy euro payment schemes for credit transfers and direct debits ensures planning security for all market participants and eliminates the high costs of running multiple payment schemes in parallel. The EPC also welcomes that the SEPA Regulation establishes one end date for compliance of euro credit transfer and direct debit
24 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
schemes with this regulation, as opposed to two separate end dates as originally envisaged by the EC. This will spare bank customers such as businesses the duplication of implementation efforts and required resources. The EPC has frequently pointed out that full migration to SEPA is subject to the EU legislator establishing the appropriate legal and regulatory environment. The SEPA Regulation sets the conditions to fully realise the benefits inherent to the harmonisation of the euro payments market. A study carried out by Capgemini, on behalf of the EC in 2007, found that the replacement of existing national euro credit transfer and direct debit schemes by harmonised SEPA payment schemes holds a market potential of up to €123bn in benefits, cumulative over six years to the advantage of payment service users (PSUs). As confirmed by the findings of this study, these benefits for bank customers are, however, contingent upon swift migration to a single set of SEPA payment instruments by both the demand and supply sides.
Impact of the SEPA Regulation on the Corporate Community It is important to note that the SEPA Regulation does not only affect payment service providers (PSPs) but also PSUs such as businesses. Specifically, the SEPA
FEATURE | S E PA 2.0: T he N ew R egulator y R ealit y G overning the I ntegration of the E uro Pay ments M arket Regulation includes provisions with regard to the initiation of payments, the use of the International Bank Account Number (IBAN - ISO standard 13616) and the Business Identifier Code (BIC - ISO standard 9362), as well as direct debits relevant to the corporate community1:
Provisions regarding the use of the ISO 20022 message standards for the initiation of payments The SEPA Regulation defines the meaning of the ISO 20022 XML message standard as follows: “ISO 20022 XML standard means a standard for the development of electronic financial messages as defined by the International Organization for Standardization (ISO), encompassing the physical representation of the payment transactions in XML syntax, in accordance with business rules and implementation guidelines of Union-wide schemes for payment transactions in scope of this Regulation.” The “implementation guidelines of Union-wide schemes” referred to in this definition are, for example, the implementation guidelines published by the EPC with regard to the SCT and SDD schemes. These guidelines are available for download on the EPC website at www.epc-cep.eu. For more information on the ISO 20022 message standards see www.iso20022.org.
that corporates verify at national level whether the requirement to use the ISO 20022 message standards as described above applies as of February 2014 (in the euro area) or only at a later stage.
Provisions regarding use of IBAN and BIC The SEPA Regulation details the use of the account and bank identifiers IBAN and BIC. It also specifies the timelines leading to the application of the socalled ‘IBAN only’ rule, which the EU legislator introduced in the last stages of the legislative process. For crossborder payments the ‘IBAN only rule’ will apply as of February 2016 - i.e. PSUs will not be required to provide the BIC with a payment instruction. For national payments, the ‘IBAN only rule’ will apply as of February 2014; however individual EU Member States have the option to delay this to February 2016 if required.
Market participants recognise the value of setting a deadline for migration to harmonised SEPA payment schemes through EU regulation
The SEPA Regulation allows for the optional continued use of national
The SEPA Regulation also states that a PSP “shall ensure that where a PSU that is not a consumer or a micro-enterprise, initiates or receives individual credit transfers or individual direct debits which are not transmitted individually, but are bundled together for transmission, the message formats specified in point (1)(b) of the Annex are used.” Point (1) (b) of the Annex to the SEPA Regulation specifies that the message formats referred to in Article 4a. 1d are the ISO 20022 XML message standards. The Regulation allows individual EU Member States to extend the deadline for compliance with this provision - i.e. to allow PSPs to offer conversion services. It is recommended GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 25
FEATURE | S E PA 2.0: T he N ew R egulator y R ealit y G overning the I ntegration of the E uro Pay ments M arket
The SEPA Regulation stipulates that the prohibition of multilateral interchange fees for regular cross-border direct debit payments
account identifiers by consumers during a transitional period. The regulation defines Basic Bank Account Number (BBAN) as follows: “BBAN means a payment account number identifier, which unambiguously identifies an individual payment account with a PSP in a EU Member State and which can only be used for national transactions while the same account is identified by IBAN for cross-border transactions.” The regulation includes a provision, which states that EU Member States are “permitted to allow, until 1 February 2016, PSPs to provide PSUs with conversion services for national payment transactions, enabling PSUs that are consumers to continue using BBAN”, instead of the IBAN.
Provisions with regard to direct debit transactions The SEPA Regulation makes it mandatory for PSPs to offer specific mandate checking features to bank customers. A mandate is signed by the payer to authorise the biller to collect a payment and to instruct the payer's bank to pay those collections. The Regulation, however, implies that these mandate checking obligations do not apply to the SDD Business-to-business (B2B) scheme developed by the EPC. Responding to the specific needs of the business community, the SDD B2B scheme offers a significantly shorter timeline for presenting direct debits and a reduced return period than the SDD Core scheme. The reason for the shorter timelines of the SDD B2B scheme, compared to the SDD Core scheme, is that business payments by direct debit require a timely certainty about the finality of the payments, so that goods or services can be delivered, while minimising financial risks and costs for the payee. The SEPA Regulation states that any “valid payee authorisation to collect recurring direct debits in a legacy scheme prior to 1 February 2014 shall continue to remain valid after that date and shall be considered as representing the consent to the payer's PSP to execute the recurring 26 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
direct debits collected by that payee in compliance with this Regulation in the absence of national law or customer agreements continuing the validity of direct debit mandates”. In other words, this Article ensures the continued legal validity of existing mandates under the SDD schemes and therefore facilitates the transition to the SDD schemes by bank customers (both creditors and debtors). The SEPA Regulation stipulates that the prohibition of multilateral interchange fees for regular cross-border direct debit payments applies as of November 2012. For national direct debit payments, a clause allows the existing practices to be continued until February 2017.
Getting SEPA-ready: The Time for Corporates to Act is Now The gtnews Payments Survey 2011, which asked its corporate treasury readers to rank SEPA instruments among regularly used methods to make and receive payments found that just over a third of respondents regularly made payments via SCT, while 14% used SDD. Almost 20% of corporate respondents already invested in SEPA compliance and more than 40% said that investment plans were already in the making, whether that is within a threemonth timeline or just ‘at some point’. The gtnews 2011 Payments Survey results also show that some corporates are still hesitant to invest in SEPA services. When asked if their organisation planned to make that investment in the future, 20% of those corporates operating in western Europe stated they had no plans. Taking into consideration that corporates handling euro payments in the EU will have to comply with several provisions of the SEPA Regulation, it is strongly recommended to identify the resources required to adapt operations and systems in accordance with applicable deadlines - i.e. to set up a SEPA implementation project at the level of individual businesses now.
FEATURE | S E PA 2.0: T he N ew R egulator y R ealit y G overning the I ntegration of the E uro Pay ments M arket
The New Regulatory Reality Governing the Evolution of the SCT and SDD Schemes The SEPA Regulation also redefines the process governing the evolution of the SCT and SDD schemes. To date, the EPC develops the SEPA payment schemes and frameworks, based on global technical standards developed by international standardisation bodies, in close dialogue with the customer community. It remains the EPC's objective to ensure that the SCT and SDD Rulebooks evolve in response to proven market needs, based on a predictable release schedule. It must be clarified, however, that the EPC can no longer be held accountable in this regard. Moving forward, the EPC will be under the legal obligation to align the SCT and SDD Rulebooks with the technical requirements detailed in Article 4a and in the annex to the SEPA Regulation. The SEPA Regulation gives power to the EC to amend the technical requirements set out in the annex to the regulation through ‘delegated acts’. Delegated acts are a new addition to the EU decision-making landscape. They were introduced by the Lisbon Treaty, which entered into force in December 2009 and more specifically, by Article 290 of the Treaty on the Functioning of the EU (TFEU). Whereas European legislation is adopted by the EU legislators: the Council of Ministers (made up of representatives of the 27 EU Member States) and the EP (made up of 754 directly elected members), Article 290 TFEU allows the Council and EP to delegate the power to adopt non-legislative acts to the EC (the executive body). When adopting these acts, the EC has committed to consulting experts appointed by EU governments in its preparatory work. It is uncertain to what extent the EC will consult SEPA stakeholders not appointed by EU governments. The EC has reiterated that it has a lot of autonomy in relation
to adopting delegated acts and “experts will have a consultative rather than an institutional role in the decision-making procedure”. All market participants obliged to adapt systems and operations with the technical requirements applicable to the SCT and SDD schemes decreed by the EC, would greatly appreciate it if the regulators were able to make specific information on the principles and timelines governing the further evolution of the schemes available. To date, the EC has however not yet publicly commented on the matter. All references in this article relate to the version of the SEPA Regulation as published by the Council representing EU Member States on 16 December 2011.
1.
The gtnews 2011 Payments Survey results also show that some corporates are still hesitant to invest in SEPA services
GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 27
The global leader in treasury and finance. Together, AFP, AFP of Canada, gtnews and bobsguide offer an unrivalled mix of information, education, training and member services to the world’s largest corporations.
www.AFPonline.org
The essential global financial resource. Industry experts from leading corporations, banks and technology companies publish their knowledge on key issues facing treasury and financial professionals. Articles, special reports, white papers and more.
www.gtnews.com
The premier financial IT solutions network, connecting financial IT buyers with suppliers. Access 45,000+ members, 2,300+ vendors and the latest financial technology news, RSS feeds, jobs and event announcements.
www.bobsguide.com
FEATURE | R elieving the Pain of C ash F low F orecasting Sponsored by Deutsche Bank
Relieving the Pain of Cash Flow Forecasting Cash flow forecasting often crops up as the area corporate treasurers feel can be most improved upon. The European Treasurers Council (ETC), held in Brussels at the end of 2011, discussed some tips for success in forecasting. Cash flow forecasting is a major issue for many corporates - and today chief executive officers (CEOs) and chief financial officers (CFOs) are relying on treasury to provide accurate and timely information. Before 2008, cash forecasting was not as big a concern; but in terms of uncertainty and difficulty to get credit or cash from the banks since then, corporates began to look at their internal funding and realised the need for visibility. Prior to the European Treasurers Council (ETC) in Brussels on 5 December, gtnews surveyed the attendees regarding how they manage the cash flow forecasting process. The answers varied from “we don’t have a system for that” to “we have some spreadsheets, some post-it notes and bits of paper”, right up to some companies that have gone through a transformation and developed cash flow forecasting best practice and technology. In Brussels, the ETC discussion began by asking why cash flow forecasting was such a problem for corporate treasurers today. Some said that the problem lay in the fact that it is a process that is difficult to automate and relies on information gathered from other departments, such as sales and marketing, which may not understand the importance of forecasting. Comparing annual accounts from one company to another, there
are many different models for cash flow statements, which are evidence that cash flow statements are very specific to specific business models. It is important to understand where the data comes from, who owns the data and who should be responsible for providing the quality data. Another problem identified is that everyone has their own definition as to what is meant by the term cash flow forecasting - and what the information will be used for, whether they are a treasurer, banker or CFO. Aligning SAP enterprise resource planning (ERP) versions was another key issue, particularly when working within a highly acquisitive company. An interesting point of divergence among ETC participants was around the timescale of the forecast: one reported that they had a one-year rolling forecast, done on a quarterly basis, while another treasurer said that they had very good cash flow forecasts for two days in the future. Although many find short-term cash forecasting relatively easier, forecasting a half year out or producing 12-month rolling forecasts seems much more difficult. More than one participant pointed out how important communication between business units and subsidiaries was for accurate forecasting.
Joy Macknight is editor at gtnews, with a particular interest in technology and regions. She joined gtnews in May 2008. Previously, she was staff writer at Banking Technology. Prior to that, Macknight worked as a freelancer, including a period at Computer Weekly, and also worked as staff writer on IBM Computer Today. She has a BSc from the University of Victoria, Canada.
GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 29
FEATURE | R elieving the Pain of C ash F low F orecasting
Cash flow forecasting is difficult to automate and relies on information gathered from other departments
Visibility of Cash Cash visibility comes down to two things. First there is a need for visibility today: how much cash does the corporate have on its accounts? Most corporates have invested money in projects to get dayto-day visibility over their cash in a more automated way. After corporates attain visibility on the day-to-day cash position, the second aspect is: what will be the company’s cash position in one week, two weeks, three months and at year-end? This is a much more difficult question. It also depends who is doing the forecast. In treasury, there is more emphasis on short-term cash-based forecasts, whereas a controlling department will be looking more at strategic and long-term forecasting. Therefore, treasury will look at the shortterm benefits, i.e. what is the cash position, what can be done with the company’s liquidity, how to best manage the cash position and liquidity in the group, etc. On the other hand, controlling or planning/ analysis will tackle the three-year strategic plans within a company. Both recognise the benefits of having cash forecasting, but there are different agendas.
Is the Technology Available? Cash flow forecasting is heavily reliant on Excel spreadsheets which can be combined with specialised forecasting systems. However, is there one single specialised forecasting system that answers all a corporate’s forecasting needs? One ETC participant said ‘yes’ and explained that they were rolling out the SAP forecasting system. This covers sales forecasts and includes what is needed to obtain true financials, including a total liquidity forecast for a 24-month horizon. Although it was a difficult exercise, it now works well and gives not only the liquidity position but also a full currency risk picture. However, the forecast is not for the day-to-day but for the medium term. 30 | GLOBAL TREASURY BRIEFING | Vol 5 No.1
Another participant added that the one drawback of SAP is that does not allow treasury to see historical data. Historical data is important, as past trends are needed to build cash forecasting. However, she had spoken with some SAP developers at a recent conference who said that they were working on a solution for this problem and hoped to have something in the next year or so. The short-term workaround was to download the information into Excel.
Tips for Success The fundamentals for improving cash flow forecasting are manifold. It is important not to look for a system to solve cash forecasting problems in the first instance. Although a system is needed to automate and industrialise the production of cash flow forecasting, the starting place is really with the organisation and process. Organisation is about governance, for example who owns the data and who is responsible for the data quality, and a culture that will build a bonus scheme to incentivise people to work with treasury. Improve the process by looking at cash flow statements specific to your business model, and understand where the information comes from. One treasurer from a net borrowing corporate related her experience of using a “very low-tech” approach to develop a cash flow forecasting programme. She said that the company did not go for a technology solution but focused more on improving the process. Every year, the company has an annual finance conference where the finance directors get together. One year the CFO announced that the conference would focus on cash flow forecasting and there would be a few days of workshops with the aim of developing a more unified and consistent process. The treasurer worked with the entity that was the best at producing the cash flow forecast. Together they did an enquiry before the conference began into how cash flow forecasting is currently
FEATURE | R elieving the Pain of C ash F low F orecasting done, how difficult is it, whether there are enough resources allocated, etc. During the workshops the participants covered cash flow forecasting theory. The treasurer did not want to have to consolidate 60 cash flow forecasts on an Excel spreadsheet and then compare it to actuals. The entities already did cash flow forecasting for their own needs and the treasurer didn’t want to get involved in that level of detail because their interest lies in the cash inflows and outflows. The answer was to take some of the tools used in-country and build a back end, which produces a file for the treasury management system (TMS). So, the entities carry on doing all their cash flow forecasting in detail that they need to do in-country but they send the treasurer the FTP file that is uploaded into the TMS. The importance of the workshops was to have buy-in from the all the departments and entities - and having the CFO standing behind treasury meant that resistance to change was much lower.
Treasurers’ Pain Points The ETC closed with a discussion on pain points facing corporate treasurers today and potential topics for future ETC meetings. The top pain point across the board was counterparty risk, reflecting the volatile situation in Europe, Middle East and Africa (EMEA) with regards to the euro and sovereign issues. The big questions raised were how to manage the risk posed by the current uncertainty and also, if you are working for a cash-rich corporate, where to invest to ensure that it is as riskfree as possible. The euro crisis throws up many questions, specifically around the single euro payments area (SEPA) project, legal agreements and also FX exposures. Another going concern was about the raft of new banking regulations coming down the pipeline, such as Basel III, and their knock-on effects on borrowing. Will it impact on corporates because the banks
are more restricted in how much they can lend? However, cash-rich corporates are facing the opposite problem. One treasurer related their recent experience with a global money market fund (MMF), which closed the possibility for the company to invest extra cash. The MMF could not invest in the market because government bonds were considered too risky. Coined by the meeting as an “investment crunch”, it is clear that as the situation gets more restrictive, MMFs have little opportunity to invest where it satisfies their investment criteria. They are all more risk-averse, which is a good development until they are so risk-averse that corporates can’t invest anymore. One participant suggested that a future ETC should look at working capital, following on from a discussion they had had at lunch. Bank payment obligation (BPO), still in pilot phase, was also raised as an area of interest. The BPO attempts to automate the letters of credit (L/Cs)/bank guarantees mechanism, which is heavily paper-based and has discouraged many corporates in the past.
The top pain point across the board was counterparty risk, reflecting the volatile situation in Europe, Middle East and Africa (EMEA) with regards to the euro and sovereign issues
GLOBAL TREASURY BRIEFING | Vol 5 No.1 | 31
Willem Dokkum Global Head PCM Sales Corporate & Institutional Clients + 31 (0)20 563 9921
Bottom line: [Finding ways to unlock your cash] It takes time and money to unravel what is the most efficient way to manage cash and reduce costs. Optimising your liquidity and processes allows you to unlock your cash and gain access to your working capital. Our consultants are fully committed to helping you find the solution perfectly suited to your business and processes. www.unlockyourcash.eu
Scan and find out more
ING Commercial Banking is a marketing name of ING Bank N.V., registered by the Netherlands Authority for the Financial Markets (AFM). Copyright ING Commercial Banking (2012).