“We were a model company in terms of SEPA compliance. We invested in it, migrated on time and did everything expected of us but we haven’t had any benefits!” That was the damning indictment of the single euro payments area (SEPA) project undertaken by the pharmaceutical company Merck by its own director of international treasury services, Hans-Maarten van den Nouland.
He was speaking on the opening day, 2 April, of the main conference at the International Payments Summit (IPS) 2014 in London. “We just want a published standard that everyone sticks to,” added the exasperated treasurer who went on to explain he’d “ended up with 19 different flavours of XML ISO 20022, not the one harmonised standard that I’d been hoping for!”
“We centralised everything, moved to a single bank, and ran a SEPA compliance project touching more than 1000 separate action points over the past year, including getting operations people to visit payments departments across Europe – remembering we’ve got 250 company units in Europe – and still we haven’t got the promised harmonisation,” continued van den Nouland.
“We’ve had payroll problems and tax problems, bank identifier codes (BICs) go missing after previously being told they were essential – although it appears not – and various other problems, alongside the six month delay to the migration from the original 1 February 2014 end date. You could say overall it’s been a big success,” he quipped, adding, “so much for the promised cheaper SEPA payments.”
“My corporate has got efficiencies from SEPA but only because internally we moved to one methodology thanks to our own internal work. It was nothing to do with SEPA per se,” he concluded.
His treasury colleague at the IPS show’s corporate panel debate on SEPA Massimo Battistella, who is the manager of accounts receivables at Telecom Italia, was less scathing about the concluding phase of the decade-old SEPA project, but still critical.
“My company was ready to migrate on 31 January this year, but then news broke about the six month SEPA delay on 9 January,” he explained. “We now expect to close the SEPA migration in May and Telecom Italia completed the first phased migration in mid-March a couple of weeks ago.
“The delay was actually helpful to us because we at Telecom Italia were facing eight million mandates in regard to the SEPA Direct Debits (SDD) programme and didn’t really want to move without testing it. We’d only have done so if forced to do so by the regulators, so actually the reprieve helped us. I know of others who moved without testing and suffered problems. Even we had issues with 10,000 mandates being mistakenly cancelled after a small Italian bank refused our payments, triggering an automated ‘repair mandates procedure’ – all because the bank said there was no mandate when actually there was one!”
SEPA delay concerns aside the IPS panel, including Jeroen Oort, an ICT project manager at Randstad and member of the Dutch SEPA taskforce, and James Lockyer, development director at the UK Association of Corporate Treasurers (ACT) also addressed the concept of a SEPA 2.0, which has the potential to repair some of the teething problems at a later date.
Although as Lockyer noted: “Who needs SEPA anyway? You can pay on your mobile now anyway and track it [technology has moved on]. SEPA has been so long in the making it has been overtaken. Indeed it may end up being the last hurrah for old-style payments banking.”
Treasurers Forum: Roche Case Study
As part of the same Corporate Treasurers Forum at IPS 2014, Martin Schlageter, head of treasury operations at the world’s third largest pharmaceutical firm Roche, which has a turnover of €47bn, gave a best practice presentation on a supplier finance project.
“We’re three years down the road with the project now and after getting procurement buy-in, which was tough, we now measure the department on its days payable outstanding (DPO), we’ve trained them, and have got our auditors on board,” he explained.
Schlager added that other ‘pain points’ Roche has overcome in its efforts to enhance its financial supply chain management and ‘sweat’ its cash and working capital include a drive to have centralised global documentation templates, with only limited essential local amendments where necessary. A process harmonisation drive has also been a key part of the highlighted project.
The latter was “hard to do but necessary”, he said. It involved introducing:
- Pay-to-purchase workflows.
- Embedding an in-house bank (IHB) and payment factory (PF), which enabled scalability, automation and enhanced efficiency.
- Safeguards for the fast discounting process.
The end result is that Roche now has 24 entities signed up to its supplier financing project in 2014, having started out with just four in 2011. It has a smooth process in place and has gone to a 45-day payment cycle to sweat its cash, with an ultimate aim of 90 days. It provides discounts and extra rich data and useful information to participating firms.
Electronic E-Billing Transparency
To the question ‘Who is getting electronic bills from their banks explaining their services?’ only one hand went up in the room dedicated to corporate treasurers – even then it wasn’t clear if the participant wasn’t merely scratching his head. The lack of transparency over bank fees and of a universal way for banks to detail transactions and explain their charges for specific services was a clear lament and ‘wishlist’ item. It is easy to understand why, because e-billing would give treasurers better data to improve processes, assist the establishment of shared service centres (SSCs) and ultimately save money.
“In Asia, for example, 70% of bank fees could be incorrect,” claimed Hubert Rappold, a partner at the Austria-based treasury consulting firm Schwabe Ley & Grainer. He added that interbank fees mean a payment a treasurer has sent in good faith sometimes isn’t enough to pay a bill once all the correspondent banks have taken a cut – highlighting yet another reason why more detailed standardised electronic billing is required from banks.
Around 20 banks and 20 German firms that the panel – which included Mondi’s European treasury director, Andreas Resei – were aware of are now signed up to the European aspect of this e-billing project. It originated in the US with the support of the Association for Financial Professionals (AFP) and General Electric (GE) in particular, which fought hard for it. The drive for bank electronic e-billing attained Transaction Workflow Innovation Standards Team (TWIST) status and is now an International Standards Organisation (ISO) standardised format supported by SWIFT, so slowly it should be coming to Europe and the rest of the world over time. “I’d certainly like to see it over here in Europe more,” said Resei.
The ‘Renewed Appetite for the Centralisation of Treasury Functions’ was the title of another presentation at the IPS 2014 Corporate Treasurers Forum. Frank Seiler, head of corporate treasury at Germany’s Stada Arzneimittel AG, a pharmaceuticals-focused company, provided an overview of the key drivers for this renewed appetite; SEPA being one of them.
Other treasury centralisation drivers were:
- Transparency and strategic treasury requirements for more data and control, particularly in regard to risk and liquidity management.
- Regulatory drivers such as the European Market Infrastructure Regulation (EMIR), Basel III, which plays into the previous point.
- Business case drivers, such as the need for better customer service (internally and externally) from treasuries.
- Corporate organisational demands emanating from the increased use of technology and XML, SWIFT, SEPA instruments, virtual international bank account numbers (IBANs), etc. Additionally, there are staff and cultural demands for more and more data.
- The need to connect cross-departmentally.
In conclusion Stada’s Seiler explained that the renewed appetite for treasury centralisation was simply down to the continual need to optimise procedures and improve efficiency – a demand that any treasurer would recognise.
Treasurers Outline What They Want From Their Banks
During the morning sessions at IPS 2014 a panel of treasurers joined the main stream of the payments conference. They included Andrew Bishop, head of cash management, Gazprom Marketing and Trading; José-Carlos Cuevas de Miguel, regional treasurer for Europe at Alstom; and Kostas Evangelidis, senior manager for global treasury at PwC. The corporate panel addressed the question of ‘What Do We Want From Our Banking Partners?’
PwC’s Evangelidis answered the session title’s question by stating: “I want the plain truth from my banks: to know what they’re good at, and what they aren’t, plus what their future plans are. Equally, I recognise that it’s a partnership and that we can help them too [i.e. by not doing unnecessary request for proposals (RFPs) for instance].”
Alstom’s Cuevas de Miguel responded amusingly when he said that it was a good title question and that: “Quite simply I want banks to make our lives easier as treasurers: of course I do. What else did you expect me to say?
“By this I mean I expect my bank to help me by providing me with good data and support, so that I can manage liquidity better with enhanced cash management procedures and so forth,” he continued, adding that Alstom is currently running a zero balance account (ZBA) cash pooling project, so he’s naturally looked to banks to help out here.
For Andrew Bishop: “Gazprom aren’t experts at payments. We’re experts at oil and gas, which is why we’re keen on collaboration with banks, but not on them selling us ‘sexy’ products.
“Banks sometimes don’t get what we want. For instance, sometimes money goes ‘invisible’ on us and we have to ask a bank for proof of payment to release a ship: we’re often told, however, that this is for the beneficiary bank to do! Ironically we then get charged for asking for an investigation.” Bishop understandably wants this to change.
Is More Capital Markets Corporate Funding Coming to Europe?
Helmet Schnabel, an ex-treasurer who was on the same corporate IPS panel as his former colleagues – although he now runs Asecurius Asset Management – talked about how banks might ultimately be cut out of the treasury relationship if they’re not careful. His section addressed how Europe has typically lagged behind the US in terms of treasurers raising money from capital markets, as opposed to bank funding. Schnabel believes this is now changing. As he said:
“Only 20-30% of corporate funding in Europe is done via the capital markets at the moment. It is the opposite in the US, where capital markets provide 80% of funding but change is underway.
“The trend is for Europe to move towards the US funding model,” added Schnabel, who has obviously set up his company in anticipation of this trend accelerating, but did admit that it will take time to come about. He added that most small-to-medium-sized enterprises (SMEs) and mid-sized MEs in Europe are not yet ready to provide the necessary transparency to be able to access capital markets. Nor are they at a stage to deal effectively with a large credit reference agency (CFA), so there are still hurdles to overcome before capital markets funding becomes more prevalent in Europe.
An Economic Overview
Hamish McRae, principal economic commentator at UK daily The Independent and a trained economist, gave an economic overview to the IPS 2014 audience in a session entitled ‘What Will the World Look Like in 2020?’. As he candidly admitted: “With that title there is always the risk of making an ass of yourself”.
The two big issues that McRae addressed were the structural changes around globalisation, “which has utterly transformed our world over the last 20 years and will continue to do so”, and secondly the West’s burden of debt.
McRae outlined how this debt mountain among governments, consumers and some companies, will hinder the economic recovery among developed nations in the ‘West’ and impact its investment capacity and competitiveness against emerging market economies.
As he said: “We’re coming out of an economic downturn versus a headwind of debt”. He also highlighted the rise of the East in terms of the population in China, India and elsewhere and its consequent growth in economic power, as well as environmental factors concerning the adoption of green technologies and fracking to fuel future economic growth, pointing out the US’ advanced adoption of this extraction technology.
Live Polling Results
A number of live polls were run at IPS 2014 throughout the day. Some of the selected highlights of these polls are included below , which asked the audience of payment professionals:
Q. What is keeping you awake at night? The top three answers were:
- Growing revenue: 33%
- Dealing with new technology and innovation (i.e. threat of disintermediation): 27%
- Being resilient: 11%
Other lower scoring options included: cutting costs; changing the bank safely; being compliant; and reducing risk.
A panel of transaction bankers then responded to the live polling results. It comprised of Wilco Dado, managing director and Europe, the Middle East and Africa (EMEA) head of cash management and treasury services at JP Morgan; Mark Davies, director of cash management, Barclays Bank; Sonia Rossetti, a managing director in the transaction banking unit at Standard Chartered; and Harold Young, a managing director at Deutsche Bank’s global transaction banking unit, covering the Americas.
“I’m shocked by these results,” said Rossetti, “as I ticked reducing risk [as the thing that is keeping me awake at night]”. So did her banking colleague Dado, pointing out that while the other points were important: “reducing risk and adhering to regulations is my license to play.”
Davies talked about the Payment Services Directive (PSD II), SEPA and liquidity risk, particularly in regard to Basel III as the issues keeping him awake at night. He said the latter will change the business model at banks. As any treasurers in the audience would have known implicitly, if not overtly, signals that treasurers should be aware that trade finance prices may go up under the incoming Basel III capital adequacy regime and that only multinational corporations (MNC) clients are likely to be wanted by large banks in the future, as the new collateral requirements come into force.
“The challenges around revenue are linked to regulation and risk, so to be fair to the audience, the poll result is understandable because it’s all linked,” concluded Deutsche Bank’s Young.
Other polling results from the transaction banking panel included:
Q. What should banks focus on most to increase payments revenue?
- Innovation: 34%
- Better customer segmentation: 14%
- New markets: 12%
- Existing markets: 12%
- Better data mining:12%
- Focusing on basics (e.g. STP): 12%
- Stemming revenue leakage (e.g. improving sales effectiveness, etc): 6%
Q. What are the main effects of regulation on bank performance?
- 52% believe it will increase complexity and cost.
- 22% think regulation will reduce risk.
- 12% fear it will stifle innovation.
No surprise there. The IPS audience think that regulation will increase the cost of doing business for banks, and the panel generally agreed. Watch out for consequent increased fees treasurers, therefore, especially if you’re not an MNC.
Real-time Infrastructures and McKinsey Tech Research
As part of a focus on technology, following discussions about mobile payments; the coming of M-Pesa mobile money to Europe; and the traceability of payments; the IPS 2014 show also addressed the development of real-time payment infrastructures around the world. The UK’s near real-time Faster Payment Service (FPS), Singapore’s new fast payment infrastructure, and the numerous exciting developments in dynamic payment platforms in Scandinavia, Asia and Africa were all cited as examples of this growing trend for newer, faster technology platforms.
The implications for treasurers are profound in that real-time infrastructures enable faster processing and recognition of cash, better forecasting and real-time insights into cash positions, and more pooling and ‘sweating’ of cash – not to mention richer payments data that can improve billing and enhance treasury procedures. The consumer benefits in terms of easier, speedier peer-to-peer (P2P) payments for ordinary bank customers, sole traders and other end users were also discussed at IPS 2014’s Day One.
Some polling results from the McKinsey research report, delivered by Olivier Denecker, director of knowledge at the consultancy’s Global Payment Services unit, which preceded the real-time infrastructure panel, and assessed bank payment trends, are included below:
Q. What is the greatest threat to banking?
- 37% thought new entrants such as Google and Amazon focusing on core payments presented the greatest threat.
- 15% thought it would be another major bank failure. Certainly, no treasurer wants a re-run of the 2008 crashes!
McKinsey’s Denecker said transaction banking has three features: old business, but new money coming into it; a rapidly changing landscape; and a requirement for new solutions in the mobile arena and elsewhere. Quoting McKinsey’s research into this area, he added that: 53% of small businesses in the US are very likely to use mobile services for business in order to communicate with customers; 49% would use it as cost reduction tool.
McKinsey’s research also showed that over 70% of corporate customers are already strong users of digital channels. Key selection criteria among corporates when choosing a bank are digital channels and technology capabilities, plus banks’ online service offering are determining factor.
The research showed that technology matters, but this is not news to the IPS audience of payment professionals. In a changing world of ever-evolving landscapes where regulatory drivers, new entrants and ways of doing business are proliferating, technology is just one aspect of the changing payments picture.
Businesses should look to identify the strategic opportunities presented by GDPR rather than simply seeing regulatory hurdles as an additional constraint, costs or obligation for the compliance officer.
There has been an uptick of treasurers inquiring about interest rate risk management in recent months as interest rates in the US and UK have started to show a rise in momentum, said Chatham Financial at the annual Bellin treasury conference.
A series of governments are now very worried about the idea of bitcoin and these currencies because customers would be able to make sustainable ongoing transactions and payments without having to ever introduce the use of a typical financial model or banking system. To combat this potential threat, several countries including major central banks like the Bank of England and the Bank of Israel will be launching their own version of a cryptocurrency. This could bring big advantages to customers.
PSD2 is set to remake the EU payments marketplace. This deliberate public policy exercise is going to regulate and demonstrate what next generation financial crime competencies must be and cement the standard going forward.