Sibos 2010: Banking Blog

Publication: gtnews.com

Post 1: Introducing the Payments Maturity Model (25 October 2010)
The first day of Sibos saw the launch of a new tool designed to help financial institutions on the path to an agile payments environment. 

Sibos 2010 has opened its doors in Amsterdam, attracting around 8,300 exhibitors and attendees, according to the organisers. Bankers, corporates and technology vendors attending the event have hundreds of exhibition stands to browse and a wide variety of conference sessions to attend. 

One session of the opening morning revolved around the concept of a ‘Payments Maturity Model’ (PMM). Louis Blatt, chief product officer (CPO) at ACI Worldwide, was joined by Michael Anderson, senior vice president of Union Bank, Nancy Atkinson, senior analyst at Aite Group, and Leo Lipis, founder and chief executive officer (CEO) of Lipis & Lipis, to discuss this work-in-progress model that takes its lead from the Capability Maturity Model/Infrastructure (CMM/CMMI). 

A live poll asked delegates how their payment structures are currently organised. When asked “Which of the following most closely describes how payments are organised at your bank/clients?”, a majority (65%) said that their payments are managed and processed by individual payment type (such as ACH, ATM, cards, wire transfer, etc) and line of business. The next most popular answers, although far behind the lead response, was shared between “payments are managed and processed by consolidated payment systems (such as one ACH system, one card system, or one wire transfer system, etc)” and “payments are managed and processed through consolidation of all payments types, but segregated by retail banking or commercial banking”. Despite being the next most popular responses, both only polled 14% of the session attendees. The least popular response (7%) was “payments are managed and processed as a single line of business from the bank”. A following poll asked which best described the audience's banks'/clients' current situation with regards to their payments transformation. By far the most popular answers were “in the process of implementing changes now” and “planning for payments consolidation within the next two years, and confident about how to make that happen” - each statement chosen by 36% of the delegates in the room. In third place was “planning for payments consolidation within the next two years, and have an established plan for the evolution”, with 21% of the poll. Trailing far behind were the responses “happy with our existing payments structure and systems as they are” and “have given no consideration to payments transformation”. 

In this environment, there's clearly a role for the PMM to play. In its structure, the PMM identifies five stages: 

1. Reliable. 
2. Scalable. 
3. Efficient. 
4. Responsive.
5. Agile. 

The PMM assesses a bank's current position and determines next steps in that bank's evolution towards an agile payments environment. The model is designed to provide direction on the order and types of activities required to progress to the next stage of this payments evolution, as well as helping provide the business case to invest in this move. Both Aite Group and ACI stressed that this model is still in the development stage, so interested parties are encouraged to contact either company to provide feedback on this project.

Post 2: Practical Finance in an Open Account World (26 October 2010)
A session focusing on financial supply chain issues asked the big question: to what extent is collaboration between banks necessary in order to sustain international trade? 

The second day of Sibos saw some morning sessions starting later than advertised due to the sheer amount of people trying to get through security and into the RAI conference centre in Amsterdam. One of this morning’s sessions was a panel discussion looking at financial supply chain issues in the modern world, particularly the balance being struck between open account and letters of credit (LC). 

The global nature of this debate attracted a diverse panel of speakers. The moderator, Alexander Malaket, president of Opus Advisory Services International, encouraged debate and industry insight from Daisuke Kamai, manager from The Bank of Tokyo-Mitsubishi UFJ; Karin Mathebula, director, head of product, transactional products and services at Standard Bank South Africa; Michael McDonough, managing director and head of product management for trade services with BNY Mellon; and Lakshmanan Sankaran, head of trade sales and services at the Commercial Bank of Dubai. 

The four main themes for the debate were: 

1. Risk. 
2. Client orientation/demands. 
3. Collaboration. 
4. Innovation. 

Kicking off discussion on the risk strand, McDonough made the point that there is a very clear need for the development of common standards in open account - something that the more mature LC markets have had for some time. The risks that financial institutions face in this area vary between the obvious and the rather less obvious. McDonough pointed out that credit risk is the most obvious , and while this isn’t a difficult risk to manage, it is managed differently in open account. He added that financial institutions need to ensure that they fully comprehend and adhere to this different management style. Some of the less obvious risks that McDonough listed included cost risk, declining revenues, and the increasing role of non-banks taking clients from banks. This as a big issue in the payments world, so it was very interesting to hear McDonough argue that it is also happening in supply chain finance. 

McDonough also pointed to the systemic/operational/technology risk that banks are now facing in this area, specifically the nervous disposition of those banks who fear they may misjudge the technology that their clients require, and end up in the equivalent position of offering their clients ‘Betamax’ technology, when what they really want is ‘VHS’. Combine this uncertainty with the trouble that some banks are having in getting sufficient capital from their boards for the required investment in technology, and it is clear that technology is a pain point for some financial institutions in this regard. 

Turning to client orientation, Kamai noted that banks, particularly those operating in Asia, need to be preparing their open account solutions for the market, as there will be a surge in demand for these products as Asian corporates grow in size. While there was a growth in the use of LCs in Asia as a result of the financial crisis, the panel agreed that this was a temporary aberration, and that open account will grow as Kamai predicted. 

In terms of the offerings that banks provide in this area, Malaket drew attention to the fact that the threat of disintermediation is actually forcing banks to be very innovative with their products. Mathebula added that it was important to make the distinction between volume and value in terms of client orientation, and the small and medium-sized enterprises (SMEs) are increasingly investigating supply chain finance solutions and open account. 

Collaboration was the third major point under the microscope in this debate, with Sankaran noting that there is a great deal more willingness for global and regional banks to collaborate on their trade finance initiatives. In its best form, this sees the local knowledge and expertise of the regional financial institution being leveraged across the scale of the global banking partner. Looking at Africa specifically, Mathebula added that it is very important to demystify the business transaction world in Africa, country by country, as the continent is not just one homogenous banking market. 

Turning to innovation, Mathebula told the delegates about the work Standard Bank has been doing with SWIFT in order to get the trade services utility (TSU) up and running. She explained how there is a desire to offer off-balance sheet solutions and that the banks and industry innovators need to proliferate the level of understanding around the TSU and how to get the most out of it. The challenge ahead, according to Mathebula , is how to integrate the TSU with the supply chain. Despite this, the general mood among the panel was one of enthusiasm for this innovation. The same may be true for corporates, and it was pointed out that SMEs are currently demonstrating more interest in the TSU than their large counterparts. 

Overall the mood of the session was positive towards the open account world, in terms of the current state of the market and the huge potential for growth. There are challenges - for example the need for universal standards and a greater understanding of the risks faced and how to manage them - but the benefits of open account solutions and the innovation in the space provide plenty of reason for optimism.

Post 3: Recovery: Transaction Banking One Year On (27 October 2010)
The third 'Big Issue' debate at Sibos looked at how the global transaction banks have fared since last year in Hong Kong. 

The third ‘Big Issue’ debate at Sibos 2010 shone a spotlight on the world of global transaction banking, its place within the wider organisational structure of financial institutions, how it has evolved since the previous Sibos in Hong Kong last year, and what the future may hold for the sector. The moderator, Jeremy Wilson, chairman Global Councils at BAFT-IFSA (formed by the merger of the Bankers’ Association for Finance and Trade (BAFT) and the International Financial Services Association (IFSA)) and vice chairman at Barclays Bank, posed questions to a panel of transaction banking specialists: 

• Karen Fawcett, senior managing director and group head of transaction banking, Standard Chartered Bank. 
• Marco Bolgiani, head of global transaction banking division, UniCredit Group. 
• Karen Peetz, chief executive officer (CEO), financial markets and treasury services, BNY Mellon. 
• Peter Connolly, executive vice president (EVP) and group head of transaction banking group, Wells Fargo. 

The Role of Transaction Banks 

The discussion kicked off with a look at the importance of transaction banking, with Wilson probing where exactly transaction banking now sits within the industry and within a bank itself. Fawcett led the bullish tone of the panel on this talking point, claiming that transaction services are front and centre for financial institutions today. She cited the turnaround in attitude from two years ago, where transaction services were blamed for many of the problems in the financial services sector, and added that there is now a much greater recognition that transaction banking units facilitate trade flows, the lifeblood of the economy. Unsurprisingly, the rest of the panel were similarly optimistic about the current, and indeed future, position of transaction banking. For example, Bolgiani explained how UniCredit has recently reviewed its strategy for the next five years, and that transaction banking is one of the organisation's core strategic focus points. 

As Wilson drew in a more specific comparison between investment banks and transaction banks, the panel again demonstrated their confidence in the current state of transaction banking, while also pointing out the interrelated nature of the different types of bank structures. Connolly commented that focus has shifted from areas such as debt and equity markets, and that a key driver here has been the emerging economies, which have given a lift to transaction banking through their increase in demand for these services. Fawcett noted that a balance is necessary when making this comparison, noting that investment banks need the liquidity that transaction banking services provide. 

The western world is in a prolonged period of low interest rates, and the moderator was keen to understand what effect this has been having on the panel members' transaction banking organisations. Peetz kicked off this part of the discussion by describing how she sees the effect of low interest rates as being different depending on which product you are talking about and that in fact the effect is distributed by different product. Connolly expanded on this point by explaining how product bundling was enabling banks to manage this situation, by mixing those with low interest with others claiming higher fees to create a value added package. When it came to collecting higher fees, Fawcett suggested that some banks had been lazy with their approach to charging fees in Asia and the Middle East, and that this was certainly an area where banks could find more value. 

Pressures on Banks 

Keeping with the regional flavour, discussion turned to the top pressures on business that both transaction banks and their clients face. A key point picked out by Peetz here was the pressure on revenue growth, noting that, as yet, growth in developing markets are not enough to offset losses felt in the contracting markets of the west. Risk management also came up as a key pressure, specifically around operational and counterparty risk. Connolly argued that banks could have been more proactive with intraday liquidity problems, and also tougher on their client counterparties. Certainly intraday liquidity visibility and cost has been an important topic at Sibos 2010, and SWIFT is vocal about the work it is putting into providing solutions to give banks a much better visibility of their intraday liquidity position. 

Back to the pressures that banks are facing, and the issue of regulation loomed large. Wilson asked the panel whether, in their opinion, the capital requirements that are being discussed - particularly with regard to Basel III - are being set correctly. Peetz suggested that senior transaction bankers should be trying to co-operate and talk with the regulators to explain the unintended consequences of such requirements. She argued that during the formulation of the US Dodd-Frank Act, bankers had gone underground and their voices weren't heard. Fawcett agreed with this point, saying that as the regulations stand, 2% could be wiped off global gross domestic product (GDP), and that the problem actually goes back at least 30 years, not just three. 

Peetz argued that transaction bankers need to present fact-based arguments to regulators - for example around areas such as trade and liquidity - but in a way that doesn't sound purely interest led. Fawcett then highlighted how tricky this path can be to go down for the transaction banks, pointing out that heads of global transaction banks do meet with regulators as a group, but that they then also need to deal with a disparate group of national regulators with their own set of individual interests. 

The New Economic Axis 

Wilson then probed the panel on the issues they face with the shifting nature of the global economy. As far as Connolly is concerned, this is an opportunity for the transaction banks. He pointed out that 30% of Wells Fargo's payments go through China, so the current issue is to work out what to do with the renminbi (RMB). He reiterated the point that the volumes in this part of the world are still not overtaking the existing business, but that they will become advanced over time. For Peetz, the key issue is that her organisation is in dialogue in countries where they predict the volumes will be. 

At this point Wilson wondered if the big banks in Asia are going to start eating into this potential growth area for western banks, and Fawcett also drew attention to this point, stating how, with the birth of effectively a new global reserve currency happening as we speak, (with RMB) there are a number of extraordinarily powerful Asian banks that are looking to come west. Looking around the Sibos 2010 exhibition halls, this has felt very tangible this week. As well as the Asian banks, Connolly also identified non-bank payment providers, companies such as PayPal and Google, as future competition for the global transaction banks. Finally, Bolgiani made the point that growth in eastern Europe is also underestimated currently. 

Certainly the past couple of years have been tumultuous for the global transaction banks and, as we've seen, the challenges are only going to get stronger. However, there is a good news story in the way that transaction banks have turned their position around from that they faced two years ago, and this fortitude and dynamism should be a powerful tool for them going forward. Connolly made the point, on the topic of sanctions and anti-money laundering (AML), that all the banks represented on the panel have great individual systems internally but that they don't share. Taking this point wider, a greater collaboration between the major transaction banks would create an even more powerful lobby when speaking with regulators and politicians alike.

Post 4: Banking Blog Review of Sibos 2010 (29 October 2010)

As Sibos 2010 comes to a close, the Banking Blog reminisces about the conference highs from Amsterdam. 

As Sibos 2010 came to a close in Amsterdam, it would be fair to say that the general mood in the RAI conference centre was one of optimism, tempered by the knowledge that there is a lot of hard work ahead. The three 'big issues' of the conference - regulation, rebuilding trust and recovery - provide a useful stake in the ground to see how far the banking industry has come since the dark days of the credit crisis and the collapse of Lehman Brothers. But equally, in each of these cases, the journey is far from complete. 

Looking at the regulatory side of the debate, the tone was set in the opening plenary session on Monday, when Charles Goodhart from the London School of Economics (LSE) questioned why banks were being regulated at all. While this point may have been slightly tongue-in-cheek, he did draw attention to the fact that many in the banking industry believe that the Basel Committee on Banking Supervision should be more concerned about the systemic failures which led to the crisis, rather than on individual institutions. 

Obviously, the regulators have the final intention of rebuilding trust in the banking industry through the measures they are developing, but there was definitely a sense this week that the volume and complexity of what may be in the pipeline will not necessarily lead to this end result, and that perhaps an opportunity is already being missed. Several bankers that I spoke to seemed concerned that the current regulatory approach tars the whole industry with the same brush, whereas an approach that treated financial institutions as individuals, with different risk parameters and model sophistication, for example, would be received in a much better way. 

One feeling at Sibos 2010 was that the approach from the regulators changes almost as regularly as the season - for example last year the focus was all about liquidity, whereas today it is capital that is in the spotlight. In this situation, the best thing that banks can do is make sure that they are focussed on the essentials of the business - such as getting their data in order. Quality of data was mentioned as essential in many of the conversations I had around the exhibition halls. As one industry expert put it: "you've got to compare eggs with eggs." The statistical models that the banking sector have relied on are so intrinsic to the role of the institutions - be it for calculating risk or viewing exposures - that it seems counter intuitive to throw these out purely on the basis that the credit crisis happened 'on their watch'. What a lot of banks are now looking to do is to build on the models they have by revising and stress testing a wide variety of scenarios. By using some of the latest technological advances - for example grid computing - to assist here, banks will be able to regularly refresh their parameters and understand which measures are applicable at any given time. 

The development of technology also speaks to the 'rebuilding trust' theme. The coincidence of the rise of microblog website Twitter and similar social media platforms as the credit crisis was unfolding has created the tantalising possibility of banks being able to listen and respond to their customers in near real time. The challenge for banks is how they analyse, process and respond to what can be, at times, disparate opinions. As one delegate put it, marketing for banks is becoming inbound rather than the traditional outbound, and institutions need to change their approach to this and become a lot more flexible in order to take advantage of the opportunities of social media. 

Overall, I found that representatives from banks at Sibos 2010 are well aware of what is expected of them from regulators and politicians, but also of what they should be striving for as an industry. A number of panel discussions brought together some of the best leaders and thinkers in the banking industry today, and it has been encouraging to see them acknowledge the need for closer co-operation between financial institutions in order to push for change beneficial to the banking industry and its clients, rather than change for change's sake. Delegates from this year's Sibos head back home to their respective 155 countries with a positive message and direction, as well as a lot of work to do before Sibos 2011 kicks off in Toronto, Canada.

Risk, Regulation and the Rise of Asia: Corporate and Bank Perspectives

Publication: gtnews.com

This year's EuroFinance Cash and Treasury Management conference was held in Geneva, Switzerland. The three key topics under discussion were risk, new regulation and growth in Asia. This commentary looks at the challenges and opportunities in the year ahead. 

This year the EuroFinance International Cash and Treasury Management conference was held in Geneva between 6-8 October. The economic situation is Switzerland is comparatively healthy when viewed alongside some other European countries, but what of the global economic outlook for the next year? This was the theme of the opening session of the conference, with Daniel Franklin, executive editor at The Economist, interviewed by Anne Boden, head of Europe, Middle East and Africa (EMEA), Global Transaction Services, RBS, on ‘The World in 2011’. 

Boden described how she had found paranoia about emerging markets on recent visits to the US. Franklin pointed to the fact that this is a permanent shift, which was accelerated by the credit crisis. He encouraged delegates to look beyond the BRIC countries of Brazil, Russia, India and China, and also be more discerning with opinions towards emerging market countries. I think this comes from a certain desire in the west to rush to acronyms and paint largely diverse emerging economies as the same. 

Turning to risks for the year ahead, and Franklin’s main concern is protectionism. He used to the US as an example for his fear - unemployment is stubbornly high and some in congress are calling for harsh trade measures in order to protect jobs in the US. The main focus of this ire is China, with the perception that it is manipulating the price of the renminbi in order to have a trade advantage. Franklin stated that China doesn’t respond well to threats, but at the same time would not want a trade war with the US. 

Looking at Europe, and Franklin dismissed the chances of the euro breaking up as no more than a 10% likelihood - believing the political will to hold the euro together will overcome any current disgruntlement in various of the member states. However, the mechanisms within the eurozone for coping with economic crisis need to be much more robust, with the various sovereign debt woes and the value of the euro standing testament to the fact that safeguards were not strong enough in the past. 

Many of the economic themes that Franklin discussed have been subject to direct political influence during and in the wake of the credit crisis. Franklin named political risk as the biggest risk faced over the next 12 months, stating that he believes this gives a 30% chance of the much-touted ‘double-dip’ recession. For example, some tax cuts introduced by former-US president George W Bush are coming up to their expiry date. Looking at the political polarisation in the US, and the possibility of next month’s midterm elections delivering a split Congress, these cuts may be unable to be reinstated, which in turn could strike a blow against consumer spending levels. 

Turning to business, Franklin named three key trends: 

1. Competition from the emerging markets is increasing - even in the corporate world. 
2. The global nature of business is only intensifying, be it in the talent pool, or where business operations are based. 
3. There’s a focus on having both of the key factors that create enduring success for business - scale and agility combined. Many companies are good at achieving one or other of these, but the two together offer a much greater challenge. 

Asian perspectives 

Picking up on a theme common in this first session, a panel discussion on the second day added some extra detail to the Asian analysis. Damian Glendinning from Lenovo, based in Singapore, made the point that many of the delegates in the conference hall might find themselves working for a Chinese or Indian company in the near future. This is one example of the rapid corporate growth taking place in Asia. And it’s not only in the talent pool where this growth and competition is being found. 

Glendinning pointed out that a large number of western corporate are viewing Asia, and China in particular, as a ‘honeypot’ and there is a scramble to become involved and create a presence in these markets. Faced with this competition in their home market, an increasing number of Asian corporates, led by those from China, are rising to the challenge and taking the fight to the west by competing aggressively in these traditional western home markets. Glendinning used this example to illustrate the point that delegates need to understand the fact that perspectives in Beijing on the global economy and corporate world can differ from the perspectives held by those in London or Paris, for example, and that entities in the western world would benefit from trying to gain an insight into these alternative perspectives. 

David Blair from Huawei, based in China, described some of the challenges of being a western group treasurer of a Chinese corporation. “They call us the ‘grey hairs’," he joked, referring to the young and ambitious domestic workforce that are driving innovation in Chinese corporations and their thoughts on working for somewhat older western treasurers. Blair explained how Huawei has to have a very tight set of financial controls in place in the company, with most cash being centralised and not ‘in the field’, something he described as being very necessary when the workforce is young and eager. And, as Franklin mentioned in the opening session, this competitive nature is something that those in the west are just going to have to get used to. 

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Regulatory Thoughts 

Paul Simpson, Citi - The regulatory framework is unpredictable at the very least - Dodd-Frank, anti-money laundering (AML), emerging payments. A lack of liquidity is enhancing the focus on supply chain finance. Also, global cash flows are changing, which can be attributed to the growth of the BICs. 

Marilyn Spearing, Deutsche Bank - We’re wading through regulations, like it’s a new religion. And this is not just in the US with Dodd-Frank, but in Europe with things such as SEPA [single euro payments area] too. 

Tony Richter, HSBC - There’s a need for European governments vocally to support SEPA migration. The recent example of France switching the vast majority of its public finance payments to SEPA instruments is a lead that others around Europe should be looking to follow in order to boost the scheme. 

Anne Boden, RBS - The impact of regulations on the banks and the knock-on effect on their corporate clients is key. With Basel III, are we regulating the crisis we just had instead of focussing on current issues? Also, many regulations don’t look at the interlinked nature of banks. 

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Risk, Technology and the Role of Banks 

gtnews has published a number of articles about the growth of risks that treasurers are tasked with managing since the credit crisis, particularly areas such as counterparty risk and sovereign risk. It is here that treasury technology can be a key facilitator for treasurers, and this was a topic that I discussed with Vanessa Manning, corporate director, market manager, EMEA, international cash management at RBS. 

Corporates are seeking end-to-end visibility over their value chain, in a way that is synchronised and visible, rather than in the silos that bank offerings can tend to come in. Manning made the point that the technology available today allows this to be possible. And while budgets are tight, the opportunity to outsource these capabilities exist. "Software-as-a-service [SaaS] has never been cheaper, and it is globally available," said Manning. With the options available multiplying in number and versatility, corporates are looking to multibank channels, as opposed to proprietary banking technology. 

Turning to 2011, Manning described how there will be a continued focus on both standardisation and modularisation, with agility and mobility of systems being key to corporates during this time. Corporates want to track areas such as processing flows and connectivity, and are comparing and contrasting the performances of their different relationship banks thanks to the multi-bank portals that exist today. The user-friendliness of the new technologies will also play a large part in corporate adoption in the coming year, according to Manning. "This has to cover the complete online account," she explained, and pointed to the trial of the SWIFT 3SKey (PDI) in France as an example of the interest in developing user-friendly interfaces. 

User friendliness is a key reason that electronic bank account management (eBAM) is such a hot topic for both corporates and banks right now. Speaking to Paul Wheeler, managing director of Wall Street Systems, he explained how for corporates, eBAM will become a 'must have' utility over the next couple of years and it will be seen as part of the standard treasury kit. On the bank side, the advantage of eBAM is the efficiency it brings - compare having to change the signatory on 300 accounts of one of their corporate customers manually via paper authentification, to the ability to do this online. With pressure coming from both sides of the corporate banking relationship to get this technology evolving, progress will be swift. 

The next development for eBAM revolves around the developing SWIFT standards in this area. Wheeler explained how Wall Street Systems is playing a part in the next trial, which is aimed at getting multiple corporates sending information into a bank, and then the bank responding back to the corporates. In terms of the developing market in eBAM vendors, Wheeler described how this is adding momentum in the move to establishing eBAM. At the same time, he was bullish about his own company's chances of maintaining a strong presence in the market: "At the moment there's lots of noise, but when corporates and banks become more educated about the types of offerings that are describing themselves as 'eBAM', some vendors will fall away." 

A main challenge that Wheeler sees facing eBAM is the difficulty in making it multibank. This is something that Wall Street Systems are counselling the banks about, but the move towards multibank could slow the adoption process. Wheeler commented that SWIFT needs to be strong on this issue to ensure the process doesn't become bogged down.

Evolution in Corporate Transaction Banking

Publication: Global Treasury Briefing, Volume 3 Issue 2

The world of corporate transaction banking is changing. Why are corporates striving to gain greater visibility over their cash and how are pressures on banks post-credit crisis affecting corporate bank relationships? 

The globalisation of the economy has had an immense impact on the way large corporations are managing their cash and liquidity. Many corporations have reacted by taking steps to standardise and harmonise their finance processes across entities and regions by establishing regional shared service centres and implementing centralised back office systems. 

What were once payment factories simply offering a hub for processing payments, are now evolving into holistic corporate transaction banking systems that can offer corporates a holistic means of managing all transactions that flow to and from their banks. What has precipitated this change, and what are the wider trends in the corporate transaction banking area? 

The credit crisis has sparked a major rethink within corporates of how and where they put credit facilities in place. Corporates are looking to use internal cash more efficiently and get more visibility over their cash. One area that treasuries can find challenging is when it comes to gaining access to their cash once it has been identified. The situation is exacerbated in 'difficult countries' that have prohibitive tax regimes preventing the easy movement of liquidity outside of the country. An opportunity exists here for the large cash management banks with presence across countries such as this to advise their clients and leverage their network to provide value-added services in this regard. 

In addition, with the global economy in a fragile state post-crisis, corporate treasurers are placing a greater emphasis on having an overall visibility over their cash position. Achieving this visibility, together with the ability to access this cash, directly affects an organisation’s bottom line. Investing in this process can allow corporates to reduce their short-term borrowings by up to 30% - a figure that is bound to be attractive in the current climate. 

“Access to external capital still cannot be taken for granted,” explains Mario Tombazzi, senior vice president, regional liquidity product management, HSBC Asia-Pacific. “The importance of a company's working capital is especially important: liquidity risk can force large corporations into bankruptcy, and counterparty risk is also increasingly on the agenda. As a result, the opportunity cost of the internal sources of funds has increased. It's not only important to have enough funds, but also to manage them in a way that keeps them accessible and visible.” 

Corporates Hedging Bank Counterparty Risk 

While there is this good interest among corporates for setting up payment factories, shared service centres and the like, the attitude seems to be that if they’re going to go down this route, they will also split their business between a number of banks in an effort to reduce exposure and hedge counterparty risk. 

Corporate treasurers that embark on discovering how many banks and accounts their organisation uses can find themselves facing quite a painfully slow task, especially if this includes many overseas entities. Some business units may appear to be unwilling or unable to supply the information in the first place. This could be because these units either do not keep an up-to-date list of their various banking relationships or they see the exercise of listing them as one of group treasury interfering on their patch. Once the most accurate list has been compiled, treasury then needs to understand the reason for the amount of bank relationships and accounts and then see if there is a chance to reduce them. 

The first step in this process is to establish what an account costs to set up and manage. This can be a difficult exercise to complete due to the number of variables involved in the cost structure. These include: 

• Bank charges - set up, maintenance, etc. 
• Internal administration - reconciliation, etc. 
• Costs of linking to account structures - pooling, etc. 
• Reporting of account transactions. 

Once the cost has been established, it is then possible for the treasurer to set a realistic saving goal for bank charges. 

The question can arise as to whether group treasury should be responsible for managing cash management bank relationships within an organisation. This is usually the norm, but can find disagreement from other areas of the organisation. Treasury can make considerable savings through bank consolidation and the continuous review of accounts, but it also needs to be aware of the effect this can have on other business units within the organisation in terms of the change in relationships that these units have with their existing banks. Any change driven by treasury has to be handled sensitively. 

Figure 1: Changes in the Transaction Banking Landscape 

While corporates are reassessing their bank relationships, banks are also looking at how they leverage their corporate contacts. From a bank perspective, they want to ensure they are getting a slice of the profitable transactional business. One way to achieve this is by including part of the corporate cash management business in the terms of any credit agreement offered. Corporates understand this ‘linkage’ that banks are focussing on, but any forcefulness in the bank’s approach, particularly with the linking of the credit relationship to the cash management business, is another driving factor in making treasurers question how they share their business across their credit banks. Amol Gupte, head of treasury and trade, North America at Citi, says: 

“The market practice of rewarding credit with transaction business is not a new concept. However, in the wake of the recent financial crisis, banks are under immense pressure to optimise their credit extension with cross-sell business - to generate fee income and attract liquidity. As a result, non-bank providers are experiencing higher attrition rates, driven predominantly by clients moving transaction business to their primary credit bank(s).” 

Despite this, Gupte points out that the banks have to be innovative and offer competitive advantage in order to attract and retain corporate clients. “With that said, it is important to note that the key drivers for decisioning for our corporate clients continue to be product quality, pricing, etc. As such, there is no significant “free lunch” business that is simply gifted to banks due their extensions of credit. To be successful, banks must continue to invest in innovation and technology,” Gupte advises. 

Payment Regulations Squeezing Banks 

New regulations, particularly in Europe, are forcing banks to review their payment offerings and decide if they still want to, or can afford to, remain in the business. For banks, cash - their most liquid asset - is now more valuable. Regulatory requirements now require banks to not only prove that they have enough cash and liquidity to continue trading, but they must also be able to prove that they have enough to meet their ongoing obligations. While regulators around the world are still putting the finishing touches to the new areas of compliance, it seems clear that at least some financial institutions will need to provide the regulators with sufficient data to allow for various stress and scenario tests. On top of this, the credit crisis has led to a return to ‘back to basics’ transaction banking as a main source of profit for banks. This, in turn, is likely to continue to drive increases in transaction volumes. This means that banks need to ensure that they are putting their cash to good use, leading to a greater focus on counterparty and nostro account management. 

Large banks can have millions of transactions from myriad sources moving through their nostro accounts. The balances of these can change hundreds of times a second at peak times. Cash flow volumes have also risen, a trend set to continue with greater increases in electronic and algorithmic trading. These increases add pressure to the process of hitting target balances and regulatory demands, and squeezes nostro balance netting, reconciliation and forecasting processes. However, if financial institutions can successfully manage these processes, they can increase their opportunity to maximise the efficient use of cash in the money markets and foreign exchange (FX) markets, both regionally and globally. 

While this opportunity exists in nostro account management, this is also an area where banks can lose money. If an institution does not have sufficient funds in its nostro account at the time of closing, it will incur penalty interest and charges. As this is short-term and unexpected, the interest rates - which are based on the current Libor rate - are high. It is a common occurrence that nostro account balances fall so short that banks are severely penalised, possibly losing them hundreds of thousands of dollars on individual trades. This can also impact their liquidity buffers, which will soon be specified by the regulators. For example, if banks in the UK fall below their threshold, they will have to submit daily liquidity reports to the Financial Services Authority (FSA) and may also be issued heavy fines. 

The methods that financial institutions use to manage their nostro accounts look compromised when you compare them to the planned new regulatory requirements. For example, many banks hold complex hierarchies and nostro accounts structures, while using a multitude of manual processes and systems to maintain target balances, sweep funds, make cash flow projections, execute trades and manage risk. For global banks, these challenges are multiplied by trading a broad mix of asset classes across different time zones. Liquidity risk and operational risk increase exponentially, which leads to huge challenges in determining what the institution’s cash requirements are for its day-to-day counterparty obligations. However, with the impending liquidity regime and the return to transaction banking, banks are now recognising that this is a challenge they need to overcome. 

It’s estimated that the single euro payments area (SEPA) alone which will eliminate cross-border fees and float income will result in direct revenue loss of €20bn for banks. So does it only spell bad news for financial institutions? Not according to Citi’s Gupte, who told gtnews that, “While SEPA should reasonably precipitate the exit of thin-margin players who are not able to absorb the overall revenue decrease, it will also increase trade flows within the eurozone. Well-positioned banks will intermediate in these higher flows to offset the loss of float and cross-border fees.” 

One criticism of SEPA implementation is that it is happening far too slowly, as it is a regulatory-driven, not market-driven, change. Most payments within the SEPA framework are domestic with existing systems that are inexpensive and already proven - so why would an institution want to alter this process and spend money on a new infrastructure when the volumes of cross-border payments are so low? Currently most banks and corporates, and even agencies of the governments that ratified the PSD, are doing the bare minimum to meet SEPA requirements for cross-border transactions. In addition, domestic transactions are left largely unchanged. There are a number of reasons given for this – countries say that their systems are already SEPA compliant and therefore no action is required, banks say the SEPA Direct Debit (SDD) or SEPA Credit Transfer (SCT) volumes will be so small that they can process them without actually implementing any major changes, just the minimum to comply. Does a bank with six million mandates in one country want to modify each and every one of these for domestic SDDs? The answer, and common sense, would suggest not. As SEPA is a regulatory-driven change, the only way to make this happen is to increase the regulatory pressure to force financial institutions to comply. 

The prevalence of bank legacy systems is another issue that needs to be addressed before SEPA can be properly implemented. Most banks aren’t keen at building a new model as again this is not a cheap proposition. SEPA was dreamt up long before the credit crisis, and banks now have different priorities. Post-crisis, many have slashed their investment budgets in order to conserve funds for their operational budget. The received wisdom is that a bank can stop investment in infrastructure and systems for a period of six months to one year and won't lose anything in the meantime. In reality this is negative short-termism - at some point the bank will need to start investing again, and will find itself at a disadvantage to its competitors at this time. The ‘wait and see’ approach is another reason for the slow implementation of SEPA, as too many banks are waiting to see what the viable market model is before they invest in the process themselves. 

With few banks providing SEPA payment methods or cash management activities due to the large investments required to keep up with regulations - and some banks will not bother at all - there will be an increase in banks ‘white labelling’ their products to smaller banks. Deutsche Bank are a good example of a provider in this situation. 

As part of a major research project of SEPA and the Payments Services Directive (PSD) carried out by the Financial Services Club last year, Werner Steinmuller, head of global transaction services of Deutsche Bank, provided the following assessment of his bank’s position: 

“Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.” 

SEPA has required banks to build new infrastructure and systems, as well as new efficiencies in transaction processing. These systems and efficiencies can be leveraged across the bank’s network – just because SEPA, or even the euro currency, could possibly disappear, it doesn’t mean that these advances in transaction processing will. There is still an issue for corporates to consider here though – with white-labelling on the increase, corporates need to know who is providing their services. 

Turning to the US, and Citi’s Gupte shared some thoughts with gtnews about the regulatory impact there: “The major US regulations that will have an impact on the cash management business are the American Recovery and Reinvestment Act (ARRA) and the emerging financial services industry regulation focused on increased transparency, accountability, and government oversight.” The ARRA, in particular, provides an opportunity for the financial services industry in the US to move towards greater automation. 

And when it comes to white labelling, Gupte is quick to point out that it is not just regulatory pressure that is a key driver here. “Intense price competition for plug and play, plain vanilla services automatically grants advantages to the larger banks with sufficient scale to recover the substantial fixed costs. If this size-based advantage were not sufficient by itself to justify market entrance, white labeling also allows banks to expand their distribution network via indirect channels to areas where their local relationships may not be as strong,” explains Gupte. 

Use of Paper Increasingly Unfashionable 

European corporates are reducing their use of paper from within cash management and payments processes - cheques being a good example of this. SEPA is leading to a natural reduction of the use of paper, and feeds into the general movement to standardise, centralise and automate. All three of these are very difficult for corporates to achieve with paper, as processing paper is comparatively expensive. 

Cheques have traditionally been more popular in the US, but even here the use of cheques is going through an unprecedented period of change. Figures from a recent Aite Group report forecast that cheque payments in the US will comprise merely 68% of all non-cash payments in 2010, compared to 80% in 2006. With stagnating top lines in light of current economic conditions, cost reductions and quests for absolute efficiency are pervasive in corporate goals. As Citi’s Gupte explained to gtnews, organisations are re-evaluating their operational processes and implementing previously disregarded tools - including electronic integration with suppliers - to enable more judicious use of internal resources, reduce cycle times, monitor vendors, capture early payment discounts, enjoy increased transparency and control, and enhance bottom line performance. 

“One of the industries most aversely affected by the inefficiencies and drawbacks of paper based payments is healthcare,” explained Gupte. “The claim submission, processing (including reconciliation and verification), and ensuing payment processes dramatically extend the time between the service being rendered and the provider being able to completely reconcile its receivables. While paper cheques are still the preferred payment method of choice, more secure electronic channels will emerge on the back of new regulations.” 

Asia is also experiencing a growth in the use of electronic payment systems, according to Nolan Adarve, senior vice president, regional payments and receivables product management at HSBC, Asia Pacific. Adarve pointed out to gtnews that the alternatives, such as writing cheques, are not only more expensive to process, but also more time consuming. “However, this doesn't mean that cheques are on their way out. In Asia, thousands of cheques will still be issued and cleared every single day, Adarve explained. “For example, in Vietnam, cheques are still the preferred method of payments given the country's culture and infrastructure. HSBC will continue to invest in the most advanced payments solutions for our customers, be it paper or electronic as cheques will continue to be a significant form of payment for the foreseeable future.” 

Working Capital Key For Corporates 

A trend triggered by the liquidity crunch has been a greater interest from corporates across the world in working capital. The goal is to improve visibility and usage of internal funds. One example of this is that corporates are working on getting their payments as quickly as possible, while finding ways to delay making payments themselves. To improve the organisation’s working capital, treasurers must increase their cash visibility through processes such as cash forecasting, sweeping and netting. By using these standard cash management processes, corporates can gain an understanding of how much cash they have, where it is, what denomination it is held in, etc. With a full view of cash across the organisation, the treasury can effectively act as an in-house bank, providing funding to business units where necessary. 

Amol Gupte says that, over the last year, Citi has seen a fundamental paradigm shift in the priorities of our corporate clients. “Prior to the crisis, corporate strategies were focused on yield. Now, liquidity and risk are paramount, although yield is still an extremely high priority. Organisations are increasingly focused on opportunities to optimise working capital and extract liquidity otherwise trapped internally within the cash conversion cycle.” 

Pooling, either notional or actual, and interest optimisation across one or many currencies are seen as the ‘low hanging fruit’ in this area, given the speed with which improvements can be implemented. Pursuant to local regulations, some enterprise resource planning (ERP) systems are now available with pooling functionality. Previously, this service was predominantly provided by banks. 

“In looking at higher-complexity working capital management practices, corporates are now less draconian in their payment terms for suppliers,” explains Gupte. “At the height of the crisis, the general practice was to impose lengthy terms to generate liquidity. Today, corporates are keenly focused on injecting liquidity into their supply chains through supplier or receivables finance without diluting (or potentially even improving) their days payable outstanding (DPO) or days sales outstanding (DSO). In the present environment of early economic recovery, corporates are again viewing suppliers more as strategic partners with which win-win payment scenarios such as the previously mentioned can be developed.” 

This development within the financial supply chain of large corporates trying to protect their suppliers from the credit squeeze by paying early is particularly interesting, as the corporates are stepping into the role that bank’s usually have. To all intents and purposes, they are becoming the credit manager for SMEs, taking this power from banks. Is this a permanent change, or just a temporary one? Most likely it is not a permanent position for these large corporates to be in, although it is certainly sustainable until the banks get their act together and make credit available at more favourable terms. 

Another credit-related issue to watch over the next 18 months is a rather sensitive topic to some. After the various government bank bailouts around the world, many banks are now state-owned. Is subtle pressure being applied by governments for these banks to only supply credit to indigenous companies, or at least give them more favourable rates of credit? While this doesn’t appear to be an official policy of any government, it is something that some corporates suspect or are at least wary of. If governments were to lean on banks in this way, there’s a real danger of isolationism in credit management. 

Conclusion 

The fall-out from the credit crisis has caused a fundamental shift in how corporates interact with banks and manage their cash. As bank credit has become scarcer and more costly, treasurers have had to look to their own working capital management as a way of providing liquidity throughout the organisation. 

In order to successfully operate a payments factory, treasury needs to have full visibility of cash throughout the business units of the organisation. This starts with accurate and timely cash forecasting, which then informs the treasury of the optimal time to implement cash management strategies such as netting and pooling. To gain this visibility, treasury technology offers many options, but it is also relies on the treasury department educating the business units that they deal with as to the benefits of providing accurate information in good time. 

While corporates are hard at work trying to gain greater visibility over their cash, banks are facing equally complicated challenges. Regulatory changes from even before the credit crisis are removing access to banks from some areas that were previously profitable. Banks are now finding that they have to re-invest in their payment infrastructure in order to stand out in an increasingly competitive market for corporate business. Meanwhile, additional regulations that are being drawn up as a result of the credit crisis look set to have an even greater effect on the way that banks interact with their corporate clients. Transaction banking is evolving, and it hasn’t reached the end of this process yet.

2009: Treasury Management Under an Economic Shadow

Publication: gtnews.com

2009 has been a tough year for many in the financial industry, as repercussions of events from the preceding 18 months continued to resonate throughout the year. This commentary looks back over the most-read gtnews content over the past year, with comment from industry experts. 

Comparing the beginning with the end of 2009, you could use the cliché that the global economy has been involved in a game of two halves. The problem is that it can’t be said that the financial services industry ‘won’ either half. However, I think it’s safe to say that most would prefer the current economic conditions to those of January. The year began with terrible news and results almost everywhere - annual performance data from the major stock markets showed substantial falls, with Germany’s Xetra Dax, Japan’s Kikkei 225 and the UK’s FTSE 100 recording the worst performances in their history; bank stocks at major institutions continued to slump, leading to a shift in global power evidenced by both UBS and the Royal Bank of Scotland (RBS) selling their stakes in the Bank of China; while governments around the world implemented stimulus packages to bail-out their economies, failing banks and other major industries, at the taxpayers’ expense. According to Thomson Reuters, the amount of money pledged to economic stimulus around the world, as of 21 December 2009, stands at an eye-watering US$7,199,037,381,538. To follow how events have unfolded throughout the year, take a look at parts 1 and 2 of gtnews’ regularly updated Credit Crisis Timeline. 

All the time that the global economy was charging towards apparent meltdown, corporate treasurers across the world were fighting hard to ensure that their organisations were in the best position to survive, or even prosper in, the storm. Before the credit crisis hit, the role of the treasurer was rather low profile, and had already begun to expand into a number of different areas beyond core treasury competencies, such as cash management. But the credit crisis has brought the role of the treasurer front and centre. As Dub Newman, global treasury executive at Bank of America Merrill Lynch, pointed out to gtnews: “There’s now a treasurer-level focus in the C-Suite business.” Treasurers have never engaged with their chief financial officers (CFOs) and chief executive officers (CEOs) as much as now. And judging by the content that gtnews readers have been reading this year, the focus for treasury has now clearly shifted back to basics - managing cash, liquidity and payments.

Best Practice in Cash Management Crucial 

Renewed focus on pooling techniques 

With the credit crisis biting hard in 2009, the main focus for corporate treasurers has been on their cash and liquidity management strategies. Topics such as netting and pooling, for a long time thought of as dull, dusty topics, have suddenly found themselves back in vogue as treasurers are forced to examine every possible avenue in their quest to achieve best practice in cash management. This is one example of the ‘back-to-basics’ approach to treasury management that has grown out of the credit crisis. 

Two of the top three most-read features on gtnews look at the subject of notional pooling - although from fairly different perspectives. In Evolution of the Global Notional Cash Pool, Karen Kombrink, executive vice president, and Greet van der Steen, managing director, from Bank Mendes Gans looks at the evolving uses of the global notional cash pool. 

To understand the potential benefits of global notional cash pooling, it is important to understand what it is and how it works. In a traditional notional pool, credit and debit positions are offset, which reduces the expense of paying interest on overdrafts, and there is no physical movement of funds. A global notional cash pool uses a global overlay structure based on either a notional or inter-company loan cash pool (physical or zero balance cash pooling); in both cases the need to perform FX and/or swap transactions is eliminated. Again, no funds are physically moved. This offsetting process results in a total consolidated cash position, which is used to apply proper interest conditions to all of the cash pool accounts. The cash pool bank re-allocates the cash pool interest margins, which is effectively an intercompany margin, to its customers on compensated balances in the cash pool. The global notional cash pool is supported by a suite of applications on the internet. These should include bank account reporting, third-party payment abilities, and full integration of data into treasury workstations, enterprise resource planning (ERP) systems and proprietary bank systems. 

Figure 1: Global Overlay Cash Pooling at BMG 

The case that BMG makes for notional pooling is convincing - however, as with all corporate-bank relationships, there are areas that treasurers need to pay close attention to in order to ensure the process fits their needs. The Treasury Insider, featuring gtnews’s own treasury professional blogger, drew attention to these points in their post Are the Days of Notional Pooling Numbered?. The top three points from this blog are: 

1. For a bank to have even a chance at meeting a Basel II partial offset possibility, it will have to have credit facilities in place for the overdrafts and documentation to ensure full right of set-off in an insolvency. The documentation will probably encompass crossguarantees that may affect negative pledge clauses in other bank documentation. Ask any corporate that has recently put a notional pooling agreement in place what the major headache was and documentation often comes out on top. 
2. There is more attention being given now to thin capitalisation rules. Whereas in a company-wide group, consolidation may be adequately capitalised, notional pooling arrangements (just like intercompany lending) may mean individual companies are inadequately capitalised. 
3. There is the possible tax impact with notional pooling. Unless notional interest costs and revenues are charged based on the usual arm’s length principles, the tax authorities may not look favourably on the profit transfer effect of pooling. 

These are all valid points that treasurers should explore before entering such a banking relationship. However, when it works, companies do find benefits. For example, Stacy Cordier, assistant treasurer at Thermo Fisher Scientific, found that their global notional cash pool gave the company “much better visibility of our cash around the globe.” The company is now also self-reliant in terms of working capital requirements. Cordier adds: “Where we have excess cash, we can move that into money markets to increase the return a little bit - even though, in today's markets, excess cash does not generate much return.” Another of BMG’s clients, PSA Peugeot Citroën’s treasurer, Benoit Mulsant, explains how its two global notional cash pools proved their worth during the credit crisis, with reference to the company’s subsidiaries in eastern Europe. “The money markets were so disrupted that liquidity management would have been just unaffordable on these markets. With [our global notional cash pools], we were still able to manage our cash at money market rates without extra spreads. It has provided considerable protection for us,” explains Mulsant. 

Accounts receivable takes centre stage 

In 2009, the gtnews Fourth Annual Cash Management Survey, in association with SEB, produced interesting findings pertaining to how corporates were managing their cash in the credit crisis. In particular, when asked about which cash management process has the greatest potential to improve, our survey respondents did not disappoint. Over the past four years, survey respondents have provided different responses - reflecting the changing dynamics of the cash management environment. In 2006 and 2007, cash flow forecasting was highlighted as the cash management process with the greatest potential for improvement; last year, liquidity management topped the survey. In 2009, the priority has shifted once more, with 33% of the respondents agreeing that accounts receivable (A/R) is now the process with the greatest potential for improving cash management. 

“Working capital management has been elevated on the corporate agenda and for companies assessing their internal operations, A/R is a logical starting point to improve working capital management from a process-orientated angle,” explains Niclas Osmund, head of cash management advisory, at SEB. 

Osmund adds: “The current concern for corporates is not when they will get paid but whether they will get paid at all by some of their customers. As with any balancing act, there are two sides. It is very easy for corporates to get stuck between customers prolonging payment terms and suppliers requesting early payment in order to survive today. If this is the case, it is time for them to consider different options for discounting their cash flow.” One respondent, a senior manager at a western European company with revenues of US$500m- 1bn, commented: “Decreasing margins in the business and longer payment terms demanded by our clients means that we carry the working capital burden. This is coupled with shorter payment terms from suppliers as a result of high insecurity in the current economic climate.” Another, an executive/director at a North American company with revenues of US$500m-1bn, said: “Maintaining current payment terms with customers can be difficult, as they look for longer terms to aid their own working capital.” 

The important thing to remember during this potential squeeze between customers and suppliers is that, by and large, everyone is experiencing the same problems. The key is not to alienate either side of this problem, as in the long-term this could lose your organisation important ongoing business. It is certainly a time for the arts of negotiation and diplomacy to take centre stage - for example, if you can work with your suppliers on payment terms that help them avoid bankruptcy, they may well be willing to provide more beneficial terms for you later on. 

Trade Finance Best Practice to Manage Cash and Counterparty Risk 

Treasurers can use trade finance techniques to help optimise their working capital position, but another gtnews survey in 2009 found that there is still a knowledge gap on this subject in some treasury departments. The gtnews Trade Finance Survey 2009, in association with SEB, highlighted a ‘blind spot’ between how corporates manage their trade finance activity and the way they manage and monitor other cash flows. Only 20% of those surveyed manage their trade finance operations on a global basis, compared to approximately 75% that have global control over their cash management. By centralising the trade finance function, treasurers can claim control over a process that has a significant impact on their company’s working capital position. 

The credit crisis drove corporates to leverage their trade flows, but this in turn has, in some cases, exposed weaknesses in both the physical and financial supply chain processes. This comes back to a company’s governance models for trade finance processing, for example identifying who takes responsibility for trade flows. Corporate treasurers need to examine many internal issues before they can truly leverage their trade flows. For example: 

• How efficient and accurate are the invoicing/trade document procedures? 
• What proportion of the trade flows is included in the forecasting? 
• What are the payment conditions, for example, for a Chinese supplier? 
• Is the buyer fundamentally financing their operation as well? 
• How much political risk is the purchaser covering and has the new risk factor in the Organisation for Economic Co-operation and Development (OECD) countries horizon been strategically evaluated and a procedure developed for how to handle this risk (given the fact that many corporates lack a risk management strategy for the emerging market)? 

The focus on counterparty risk that currently exists among corporates has spilled out into trade finance, with the previous trend towards open account trade finance now actually falling away as many see it as increasing counterparty risk. To mitigate this perceived risk, instruments such as guarantees, documentary collections and letters of credit (LCs) are back in fashion again. LCs are being pushed by suppliers as they give them stronger contracts with the buyer, and also by the buyer themselves, who are seeing the free provision of funded credit facilities from banks, such as overdraft facilities, dry up. Instruments that were being faded out are now fashionable again - another example of the ‘back-to-basics’ approach to treasury management that has come out of the reaction to the credit crisis. 

Payments Automation and Standards 

Managing payments has been one of the other key treasury issues in 2009. The credit crisis has pressured treasurers into finding the most efficient ways to run their operations, and in the world of payments one of the best ways to achieve this is to automate the process and remove paper as much as possible. However, treasurers may also find that, due to the economic uncertainty, their company is less willing to provide the funds needed in the short term to aid the move from paper to electronic processes. To overcome this resistance, treasury departments need to build a convincing business case for the expenditure, something that Chris Bozek, integrated debt and treasury solutions manager at Bank of America Global Treasury Services, highlights in his well-read 2009 article, Payments Automation: Building the Business Case. Bozek argues that corporates need to have the ability to construct a compelling business case and financial model with all the relevant components, and that accounts payable (A/P) departments not aligned with finance, procurement, and technology groups need to agree on and drive forward a change process. His four-point plan to achieve this is: 

1. Conduct a high-level enterprise to enterprise audit by key payment types. 
2. Build a financial benefits model focusing on revenue and potential cost savings. 
3. Form a comprehensive plan to internally sell the business case. 
4. Construct a framework to evaluate solutions in the marketplace to support your organisation's specific goals. 

Automation can help corporates quickly improve their bottom line. However, the increasing number of choices combined with the process to drive change can be daunting. Treasurers should engage their banks and technology providers for help and advice about what is available to them and which solutions suit their specific needs. 

SEPA deadlines pass to mixed responses 

One of the largest ongoing payments projects in 2009 was the continued implementation of the single euro payments area (SEPA). November 2009 was the key implementation month for SEPA, with both the Payment Services Directive (PSD) and the SEPA Direct Debit (SDD) scheme coming into being. Well, sort of. Implementation of the PSD has not yet been universal across all participating countries, banks don’t have to accept SDDs until November 2010, and some countries are culturally opposed to any kind of direct debit at all. Speaking to gtnews, Jonathan Williams, director of strategic development at Experian Payments, sums up the problems SEPA implementation has faced in 2009: “While French banks earlier this year declared that they were planning to make SDD available only from November 2010, German retailers have now stated that they don’t see any direct benefits from SDDs in the first place. For retailers in Germany, the current ELV system works perfectly fine, so why would they want to make changes? Furthermore, a band of consumer and industry groups suggested that SDDs could be in danger of failure if issues on pricing, security and migration are not resolved.” 

Additionally, as Tony Richter, director, global transaction banking from HSBC Global Transaction Banking points out in Part 1 of our Guide to European Payments, on 24 April 2009, the European Parliament revised Regulation 2560/2001, stipulating that it will be mandatory for banks in the eurozone to be reachable for SDDs by 1 November 2010 onwards. For banks that operate outside the eurozone, the deadline is no later than 2014. While this has been a frustration for those that wish to see SEPA up and running as soon as possible, it does at least hold the tantalising possibility of 2010 being the year that SEPA gets one step closer to an end date. Speaking to gtnews, Richard Davies, director of global payments at Logica, agrees: “A mandated end-date for SEPA is needed for it to progress, of course. 2010 has to be better than 2009, so for example the end date of November 2010 for banks to be compliant for the SDD scheme will help.” Despite this, the way that implementation of SEPA seems to be so disjointed is a concern. “It is a shame that SEPA Credit Transfers (SCTs) went live before SDDs, as this led some banks to implement short-term fixes for SCTs, rather than taking an overall approach to SEPA,” notes Davies. 

But in the meantime, what are the potential issues for countries that are delayed in implementing the PSD or the SDD scheme? Ruth Wandhöfer, head of payment strategy and market policy, EMEA, Citi, asks the question as to how these delays will affect the rollout of services from payment services providers in the first part of our Guide to SEPA and the Changing Payments Landscape, which provides a first assessment of the live state of the PSD. 

The positive news on this matter is that the EC recently issued a statement that "Swedish PSPs will still be able to adhere to the SDD scheme if they wish to do so, as long as the scheme rules do not conflict with existing laws in Sweden. SDDs may therefore be offered in Sweden and cross-border on a temporary contractual basis, before the directive is implemented.” This sets a precedent that should apply to the other Member States that have also failed to transpose the PSD. 

One positive view of SEPA is to see the process as a catalyst to develop harmonised solutions across Europe. This is the view put forward by Vincenzo Calla, global head of CIB international cash management at BNP Paribas, in his article, Latest Techniques for Pan- European Cash and Liquidity Management, for the following reasons: 

1. The EU opted for three SEPA means of payments: 

• SEPA Credit Transfer (SCT) - From January 2008. 
• SEPA Direct Debit (SDD) - From November 2009. 
• SEPA Card Framework (SCF) - From January 2008. 

2. SEPA will promote homogenous means of payments across the eurozone and reduce cross-border charges. 

3. It will be based on one common standard (ISO UNIFI 20022 XML), which will facilitate end-to-end automation and facilitate payment reconciliation data. 

4. SEPA will lead to the introduction of additional optional services (AOS), such as electronic reconciliation, electronic invoicing (einvoicing), improved straight-through processing (STP), cost reductions, better cash flow forecasting and compliance. 

5. SEPA will also lead to the development of new solutions such as electronic bank account management (EBAM) standardisation, i.e. one public standard for interoperability and dematerialisation of the account management process as developed by SWIFT. 

Clearly for these benefits to come online for corporates, banks, PSPs and, indeed, governments need to provide consistency of implementation and service. But while this is lacking at the moment, treasurers can still prepare for how to efficiently use SEPA services as part of their overall treasury operations. Patrick Villers, managing director, global business services, corporate treasury at General Electric (GE) advocates that a company's SEPA strategy game plan is also an important project to consider right now in terms of pan- European liquidity management: "A SEPA review must be consistent with other internal strategic initiatives, such as centralisation, automation and standardisation through SWIFT and XML," Villers says. "There is no right and wrong blueprint but it helps to use a structured approach to evaluate what is best for your business." 

This year, ISO 20022 has emerged from the bank-to-bank space, and it is not just in Europe that this has been the case. As Experian’s Williams explains to gtnews: “For US banks, this development has provided a reason to join in with international bank account numbers (IBANs), as it reduces the number of standards that have to be maintained - one of the wider benefits Europe is already experiencing as part of the migration to SEPA. However, given the hesitations corporates have had in migrating to SEPA, especially around the conversion to IBAN and bank indicator code (BIC) formats, the US can learn a valuable lesson when it comes to standardising formats. 

“While a single, global payment initiation format is still some time away, the US should be looking at converting its data in time, setting clear guidelines and communicating the benefits to avoid wide-spread confusion among the corporates and the banks,” Williams adds. 

Banks Buffeted by Post-crisis Winds of Criticism 

The banking industry has clearly emerged from the credit crisis showing the most damage. The huge bank failures of 2008 were followed in 2009 by some vast restructuring programmes - swathes of staff laid off, take-overs and mergers, as some previously large players found they were unable to protect themselves, and of course, ultimately, the (part-) nationalisation of some of the largest financial institutions in the world in order to prevent their certain collapse. Such all-permeating failure of management among the world’s largest financial institutions led to a collapse of corporate confidence. Because of this, banks are now desperately trying to win back the confidence of disaffected customers, mainly by attempting to prove how great the value-added services that they offer are. But while attention is on innovative new technologies, such as contactless and mobile payments, the number of transactions generated by these emerging channels is still low. It is the traditional card-based payments that continue to generate significant transaction volumes and revenues. Speaking to gtnews, Paul Love, business solutions consultant at ACI Worldwide, comments: “While it is important that banks are ready to adopt new products when they reach critical mass, they must also ensure that their current card products remain competitive so that they bring in that important core payments revenue.” 

Love added: “The biggest innovation a bank should make is to equip itself with a stable, reliable and flexible platform to drive its current payments products and to facilitate smaller-scale innovation, where new products are configured, rather than coded, and then tested on selected customer segments. If a bank’s core platform can deliver this without the need for additional development or capital spending, it reinforces the business case and encourages innovation. When approached in this way, innovation can be very quick to market and can carry much lower operational and reputational risk than usually associated with the introduction of new products.” 

Looking globally, and while the large banks from Europe and North America continued to suffer in 2009, there were some strong signs of life in Asia and the Middle East. Chinese banks found themselves in a position to buy back stakes that overseas banks held in them, and the renminbi (RMB) is now being offered as a trade settlement currency outside of China. 

The Middle East has also seen a growth in its banking business, something that has meant financial institutions in the region have had to pay close attention to compliance issues in the new markets they are entering. Speaking to gtnews, Nolan Gesher, senior product manager at Fiserv, pointed out that banks in the region are putting more emphasis on controls, “especially with automating transaction matching and accounts reconciliation.” 

Regulatory Response to the Credit Crisis 

2008 cast the largest shadow over the regulatory world in 2009. How had such huge failures been allowed to happen? How can similar catastrophes be prevented in the future? Speaking to gtnews, Selwyn Blair-Ford, senior domain expert at FRSGlobal, points out that acceptance in the financial community that the regulatory environment has to change has occurred inf four phases: 

1. The aftermath of the Lehmans collapse - banks realised that, in this financial crisis, anyone can go. 
2. Passive acceptance of change. 
3. Denial from the financial services industry (some of which is still around). 
4. Arrival of the new liquidity regime, and other regulatory policy initiatives - change can now happen. 

The early part of 2009 saw a series of regulatory reports published, such as the Financial Services Authority (FSA) papers and the Turner review in the UK and the Geithner review in the US. Reports and reviews of this kind were all designed to tackle the both the problems caused by the credit crisis and address the underlying factors that created the crisis in the first place. 

When it comes to looking at how the implementation of the reports has gone, Blair-Ford says that we are currently in a dangerous place: “ The issue is now in the political arena, where they’re used to having a year or two to debate these issues. It is important that the political will around post-credit crisis regulation does not lose impetus.” 

While the recommended regulatory change will happen, it may take six to 12 months to really start achieving this implementation. With this time lag, it’s possible that these changes will no longer be at the top of the agenda for the financial services industry and it may be caught out by the changes when they are implemented. Political will may also fade and the regulators need to be wary of this happening. It is possible that, rather than all of the regulatory changes being made, some may not be implemented because of the lack of political will. There’s a real danger that if this happens - if not all of the issues are tackled and changes implemented - financial services could sleepwalk into another financial crisis of a comparable magnitude. 

Focussing on the UK, FRSGlobal’s Blair-Ford sees that the parliamentary election next year could potentially have a disastrous effect on the new regulatory regime. The policy being promoted by the opposition party, the Conservatives, of abolishing the FSA is clearly votedriven and short-termist. " In fact, their pledge to abolish the FSA if the Conservatives win the next UK election would set the UK's regulatory landscape back by seven years. The FSA is little more than ten years old and it has taken the best part of the last decade for the financial industry to adjust to them as regulator," he adds. 

Signing Off in a Stronger Position - but it is all Relative 

The economic conditions that treasurers operate in are, by and large, more positive than they were this time 12 months ago. Whereas at the turn of the year, treasurers could have been forgiven for feeling uncertain that all of their banking partners would still be standing the following week, today you can be fairly sure that they will be, thanks to the M&As and unprecedented government action. Credit can still be hard to come by, but there is a general acceptance that it is available (if not necessarily at the exact time you want it and for an inflated price). This level of certainty means that corporate treasurers can get on with the business at hand - managing their company’s cash and liquidity to the best of their ability. The re-evaluation of old methods of cash management and trade finance, for example, have seen treasurers find new and innovative ways of adapting to the poor economic climate. And as well as merely going ‘back to the future’, treasurers have also shown a great appetite for the latest technological breakthroughs that can add efficiency to their department - for example, EBAM and SWIFT connectivity are both issues that have appeared in the most read gtnews content this year. This flexibility of combining the best of traditional methods with the latest technological developments is something that treasurers can rightly be proud of as 2009 comes to a close.