Three-quarters of the participants surveyed at the International Payments Summit (IPS) in London last week felt optimistic regarding the fate of global transaction banking (GTB), and payments in particular, in 2009, with the results rising to 92.6% when looking at 2010 and beyond. Over 600 representatives from across the payments industry heard how GTB is now ‘sexy’ because it is a strong income generator for banks and a provider of liquidity for corporates.
In a straw poll of the participants, the value of transaction banking today was seen by 32.7% as a stable source of revenue and profit, 23% see it as a source of liquidity and an equal amount saying that it provides infrastructure, while 25% said that it anchors products for clients.
Peter Hazou, head of strategy, GTB for cash management, trade finance & supply chain at Unicredit, says that although the business cycle had hit a snag, the industry wasn’t falling off the cliff. “GTB is sexy. There has been a fundamental shift in the relevance of transaction banking to its customers. These are glory days for GTB because there is money to be invested in system infrastructures and operating models. Banks need to invest in GTB because it is deeply relevant for today’s environment.”
“The danger is that ‘back to basics’ is seen just as the flavour of month, but it’s not,” he adds. Participants were polled to see what ‘back to basics’ meant to them: over half (57.1%) saw it as core products, while 27.3% thought it meant a client focus and 9.1% thought credit and risk management. Only 5.2% thought it meant cost cutting, with 1.3% identifying ‘back to basics’ with a lack of innovation.
The New Financial Landscape
Paul Camp, global head of cash management, financial institutions, Deutsche Bank GTB, opened the IPS conference on a sombre note, pointing out that world payments and trade flows are down 30%, while China exports are down 25.7%. However, he predicts that the worst of the financial crisis is over. “There is a silver lining,” he says, “as the unprecedented government policy response will lead us out of the crisis in the near future. I am optimistic because even though we are suffering now, we can use the pain to reassess our business. The challenge is not to focus on the pain of the past eight months, but make hard decisions about our business that isn’t made in the good times.”
The majority (57.6%) of the audience surveyed believes that the global economy will improve by mid or late 2010; only 12.1% thought it would happen this year.
The sentiment that the global economy could now see the light at the end of the tunnel was reiterated by a number of speakers, including Stéphane Garelli, professor at the International Institute for Management Development (IMD) and University of Lausanne, who likens the world economic situation today to a blue screen on a computer: it is “time to re-boot” the system, he says.
The audience agreed – a survey found that over a third (38.2%) were focussing on new revenue in 2009, while meeting regulatory requirements (22.4%) and risk management (19.7%) were less of a priority. The results for 2010 changed significantly: 82.9% predicted that growing new revenue streams was going to be their top priority, with only 5.3% choosing regulatory requirements and 4% risk management. The optimism of the audience shone through with only close to 4% focusing on survival either now or in the future.
In his speech, Bertrand Lavayssière, managing director at Capgemini Global Financial Services, drilled down into what the current conjuncture meant to GTB, highlighting the strengths and weaknesses of the banking division: “The good news is that the fundamental growth volumes are still there. The bad news is the market conditions, the volumes are down, and the regulatory pressures, such as the PSD [Payment Services Directive], SEPA [single euro payments area] and the G20 regulations that are yet to come, are putting pressure on the banks,” he says.
PSD and SEPA: What Happens Next?
The IPS conference was very much focussed on the drive towards harmonisation and standardisation in the European payments industry and the imminent impact of the new regulations, particularly the PSD and SEPA. Interestingly, the almost half of the audience (42.4%) saw SEPA as an opportunity for GTB; yet only 11.9% thought the PSD offers the same potential.
Daniela Umstätter, national expert, retail issues, consumer policy & payment systems, internal market, European Commission (EC), reminded the summit participants that the PSD was asked for by the payments industry because it needed a legal framework for harmonisation and standardisation of payments. “The good news is that the PSD in on track, with the exception of Sweden that has said it will be late in implementation,” she says. Both the PSD and SEPA Direct Debit (SDD) schemes are to be implemented on 1 November this year.
But there are a number of outstanding issues that will affect whether or not the PSD succeeds in its aim of harmonisation, not least because that each country can transpose the directive with different interpretations. It is well accepted that the PSD will protect some legacy payment products. Approximately two-thirds of the participants did not believe that the PSD would be homogenous across Europe. How to manage this complexity was the subject of much debate during the summit.
Gerard Hartsink, chairman of the European Payments Council (EPC), was pragmatic regarding this issue: “We can’t embed everything into the rulebooks. The majority’s best interest has to be looked at and we should avoid importing all specifics from the local situation.”
Gianfranco Tabasso, co-ordinator of the European Association of Corporate Treasurers (EACT), said he was curious to see how different options – such as the classification of microentities – is taken up by different countries. He warned that these issues must be cleared up in the next few months or the 1 November deadline won’t be met. The other issues, such as value dating, execution times, direct debit refund timescales, and transaction reporting demands, also need quick resolution in order for banks, corporates and SMEs, and public administrators to complete their change programmes.
The PSD deadline is not the only one under threat – there are concerns that the deadline for the SDD schemes will also slip. Already France’s National SEPA Committee has announced that it won’t be ready with SDDs until November 2010. Although Wiebe Ruttenberg, head of the market, integration division at the European Central Bank (ECB), tried to paint this decision in a good light by saying it was a positive sign that the French have committed strongly, EC’s Umstätter said that although they respect the decision, it was an “unfortunate” signal to the market. “Legally speaking, they must be reachable by 1 November 2010,” she says.
She is referring to the European Parliament’s approved proposal extending the provisions of Regulation 2560/2001 on cross-border payments in euro, whereby banks are not permitted to impose different charges for domestic and cross-border payments. Main changes include: the extension of price parity requirements to direct debits, rules on multilateral interchange fees for direct debits and mandatory reachability for SDD collections in the euro area from 1 November 2010.
Debate still rages within the payments industry about the SEPA migration end date, i.e. when legacy instruments must be switched off. This is despite the fact that the European Parliament has called on the EC to set a clear, appropriate and binding end date, which should be no later than 31 December 2012. Ruttenberg, as well as many other speakers, points out: “There is no start date without an end date.”
EACT’s Tabasso says: “The industry as a whole is not ready and won’t be until the end date is decided and all the legacy systems are switched off. We won’t even know until August how the legacy systems are changed by SEPA. Banks are not providing information to their customers because they are waiting to see what happens. My hope is that an end date won’t be mandated without consultation with end users.”
Umstätter states that running two parallel systems is costly and therefore a SEPA end date has to be set “as soon as possible to avoid a long dual period but as long as possible to coincide with technology investment cycles.” The EC is developing a SEPA Action Plan that should be published in the summer and the roadmap will tackle the question of the end date. This will include a paper for consultation.
Massimo Battistella, manager of accounts receivable, administration services, Telecom Italia, is one who argues for two end dates – one for SEPA Credit Transfers (SCT) and one for SDD. Mario de Lorenzo, director of payment systems at SIA-SSB, agrees that two end dates are needed in order for the industry to keep the forward momentum.
De Lorenzo makes the point that SEPA is a reality, so doing nothing is not an option. “The train has left the station and we are on the right train. SEPA gives the end users ground for asking their banks for new services. We need to be developing processes beneficial to all users,” he says.
What Should a Bank do if it Hasn’t Started its SDD Project?
With six months left until the deadline, time is very tight if a bank hasn’t started its SDD implementation project. Two solutions were launched at IPS to directly address this need, one by Deutsche Bank and Logica and the other by SIA-SSB.
Deutsche Bank’s GTB division and Logica launched an outsourced SDD solution that combines a new SEPA Connector offering with Deutsche Bank’s SEPA processing solutions to provide its financial institution clients with low-cost ‘plug and play’ SEPA functionality. The SEPA Connector will initially be targeted at debtor banks requiring a solution for complying with mandatory SDD reachability requirements in readiness for the November 2010 deadline, but also supports SCT.
Michael Mueller, managing director of wholesale solutions, GTB at Deutsche Bank, says: “This solution is aimed at all banks that need to be reachable by the 2010 deadline but don’t want to invest in SEPA infrastructure in the short-term. This will give them the ability to buy some time and still be compliant.”
SIA-SSB has launched two SEPA solutions. Smart SDD is a hosted solution aimed at banks looking for cost reduction as well as SDD adherence. With this solution, SIA-SSB manages the payment data, and stores, converts and validates it before sending to the STEP2 clearing system. It does the same processing in the opposite direction, from STEP2 to the bank.
The centralised solution has two distinct characteristics:
- Proximity to STEP2 – makes it competitive in terms of the cost of interconnectivity and processing efficiency. In the medium to long term it is important because the PSD is focussed on processing time.
- Independent processor – independence is an important feature for small financial institutions.
The second SEPA service is an interface for manual processing, not straight-through processing (STP) as such. The main target for this tactical solution are banks that are not ready in their back office and don’t want to invest in revamping it. So SIA-SSB takes charge of the SDD processing for the bank through a web interface, which allows the bank to connect to SIA-SSB’s system and download payment information. There is no cost for integration because it is solely a web connection.
Mario de Lorenzo, director of payment systems at SIA-SSB, says: “The banks that want this service are playing a passive role with regards to SEPA. If banks are under customer pressure for SDD but won’t make the deadline then this service allows them to upload payment info and we send to the pan-European automated clearing house (PE-ACH).” He claims that there are 10 banks presently trialling the solution that are expected to go live for the November deadline.
Supply Chain Finance and Financial Supply Chain Management
When the audience was asked if the credit crisis created an increased focus on supply chain finance (SCF), it was split down the middle between yes, the focus is on the lack of finance to supply chain partners, and no, corporates were still concerned more with their own working capital. Interestingly, 71.4% thought that optimal SCF could only be achieved once the financial supply chain management (FCSM) has been optimised, while only 20% of the participants were sure of the difference between the two.
John Gleason, EMEA regional treasurer at Dell, participating in a strategy roundtable, listed what were the pressing issues for him:
- Compression of the cash conversion cycle.
- Days sales of inventory (DSI) to increase.
- Renewed focus on working capital: senior executives – CFO, CEO – involved in the Working Capital Council.
- Trade finance: letters of credit in the emerging markets.
- Credit crisis: concerned receivables reserves; structured financial supply chain; reverse factoring.
- Alternative payment methods, giropay, Paypal.
- Technology infrastructure: looking at SWIFT and diversifying banking partner, as well as automation in countries underserved.
Gleason says that within the supply chain there are big crises brewing. “Our customers are stretching us longer, while our suppliers are also squeezing us. Where do we push back? We need to make structures work, including information flows, risk management, and liquidity flows.”
Roque Damacela, head of trade finance, EMEA at Citi, adds: “The industry is in an adjustment phase to deal with the crisis. But when will things normalise? There is a drive for liquidity by corporates and banks need to look beyond balance sheet towards the positives of a company.”
In an earlier session discussing how payments fit into the cash and liquidity landscape, Tanveer Yaqoob, senior treasury accountant at Vodafone, made the point that today corporates need basic levels of services done very well – more efficiently than before. “We need transparency in payments. We don’t want funds tied up in clearing systems. It is hard for banks to deliver what corporates want because of constraints in the marketplace. This reveals the weaknesses in banks’ payment systems. Banks need to get back to basics – and corporates can have valuable input into the discussion. Cash management and payments are both growth areas for banks.”
Case Study – HP
Hedi Ezzouaoui, worldwide director, financial markets at HP, illustrated how HP had worked both with its banks, bank clients and suppliers in order re-define its strategy in the economic crisis:
- With our banking relationships, we re-visited our assessment of counterparty risk and took steps to mitigate this risk.
- HP has 400 bank customers that the company supplies with technology and services. As the credit crunch hit, the financial supply chain experienced a moment of panic as banks lost market capitalisation and some went out of business. The banks needed to assess their strategy and the main issue became cost elimination, not just cost reduction. Bank clients looked at fixed costs and variable costs in terms of IT and business operations. We saw that high fixed IT costs were a real problem for our customers, so we started to discuss different possibilities with our bank clients, for example shared services utility, and re-examined leasing conditions. We amended our sales strategy to help banking customers navigate out of the crisis.
- There was a severe liquidity challenge in the overall supply chain, plus high credit and counterparty risk in terms of our suppliers. We needed to mitigate all the different types of risk on the supplier side to protect out business. We started to run stress test scenarios in order to identify points of possible failure in our supply chain. We assessed failure impacts and proactively prepared for supplier help. We needed to put in place a mechanism so that we knew if they were in trouble, there was something we could do. It was important to engage with the supplier through a consultation process so that we could understand our priorities and develop back-up plans.
- In terms of supplier financing, we pushed supplier payment conditions to 45 days. Then we offered to pay our bills faster in exchange for a discount to provide liquidity to our suppliers; we could do this because we are a cash rich company and have good oversight of our cash.
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