Regulations, Corporate Cash and Funding

 20 Apr 2012

The final day of the Association of Corporate Treasurer's (ACT) 2012 conference, which attracted more than 700 participants, ended with hard-nosed newsman Jeremy Paxman hosting a session of 'Question Time'. The panel of industry experts received a grilling, as questions flooded in from the audience. Earlier in the day, Paul Tucker, deputy governor, financial stability, Bank of England (BoE), addressed some concerns regarding the UK credit market.

The ACT Annual Conference in Liverpool came to a close on Wednesday 18 April 2012 with a corporate treasury version of ‘Question Time’, hosted by Jeremy Paxman, a presenter on BBC Two's Newsnight programme. The panellists, which included Peter Hahn from the Cass Business School, Matthew Hurn from the Mubadala Development Company, Heather Rabbatts (media advisor), and Trevor Williams from Lloyds, faced tough questions from the audience regarding the eurozone and the UK’s relationship with its biggest trade partner, as well as whether the government could truly ‘rebalance’ the economy.

In a similar vein to Hamish McRae’s comments in the opening plenary on the first day, Hurn provocatively predicted that the eurozone would not be around in 10 years’ time. Williams disagreed but added that the composition may change and it may not be the same 17 countries that it is today.

The last day opened with a keynote speech by Paul Tucker, deputy governor, financial stability, Bank of England (BoE), which focused more on the UK’s economic predicament. He talked about the effects low interest rates and quantitative easing (QE) have had on the real economy, as well as the new Financial Policy Committee’s (FPC) mandate. He said that the FPC wants the power to be able to increase the capital banks need to put aside, but this would not be a popular suggestion. “We will not micro-manage the banking industry, but we need to ensure stability and the resilience of the financial system, while not threatening the growth of the economy,” he argued. He emphasised the need to keep inflation low, and is committed to reducing it to 2%, from the 3.5% it is at today after falling from 5.2% in September.

Tucker said that the UK growth figures for February saw a gradual pick up as the global economy recovers, and the big picture will show this trend but that it won’t look like this all the time. He identified two factors that will muddy the water over the next quarter:

1. Weak figures in the construction sector.
2. The Queen’s Diamond Jubilee holiday, which reduces the total number of days worked.

The Office for National Statistics (ONS) predicts that the UK headline growth figures are likely to be weak or flat.

When asked by an audience member whether the BoE will implement another round of QE or use other measures to help the UK recovery, Tucker said that whichever monetary instruments are used, the main aim is to address inflation in the medium term. “The path back to a 2% inflation target is slightly harder than we thought three months ago,” he admitted.

The Treasurer’s Hunt for Funding

A main focus of the conference was not only what to do with the piles of cash that corporates are hoarding, but also how to secure credit lines and funding for those corporates that are not cash rich. The session entitled ‘The Treasurer’s Hunt for Funding’ looked at two case studies from very different corporate sectors.

Andrew Kluth, group head of funding, National Grid, led off by talking about how an indebted utility, with too much sterling debt, opened up to the retail investor sector for a euro medium-term note programme (EMTN). The utility achieved:

• Diversification from institutions.
• New investor base.
• Less sensitivity to market conditions.
• Different focus: absolute rate versus spread (and the tyranny of benchmarks).
• Addressed demand for inflation-linked assets.

The result was the utiliy raised US$260m, which subsequently rose to US$275.5m and again to US$282.5m. Now it has approximately 10,000 retail investors.

The second case study was presented by David Peters, treasurer, Grosvenor Group, which is an international property development company associated with the Duke of Westminster, with £12bn of assets under management. The group’s financing needs were long-term and needed to support development projects outside the UK.

Grosvenor manages direct debt, as it is a non-rated entity and wants to stay non-rated because its name is stronger than its rating would be. Grosvenor’s indirect debt was focused on the bank market and also securities. It has 132 facilities, 38 lenders and £2bn in derivatives. Therefore, its sources of finance were bank lending for long-term needs, capital markets for short-term needs and insurance companies.

Peters advice to other corporate treasurers working with bank lenders is to work out a return on capital (ROC) for each provider and co-ordinate all group activities. He believes that Grosvenor achieved:

• Closer relationships with its banks.
• Greater understanding of its own business.
• A successful private placement transaction in terms of pricing and good covenant package.

Conclusion

The ACT conference’s main themes tackled the issues corporates are facing worldwide: new regulations such as Basel III, making corporate cash work in times of historically low interest rates and returns, risk management, and doing business in emerging markets such as China and India.

One regulatory issue that got next to no attention at the conference was the upcoming deadline for the migration to single euro payments area (SEPA) Credit Transfers (SCTs) and Direct Debits (SDDs). The deadline is 1 February 2014, although for those countries that do not have the single currency the deadline is 30 October 2016. This could be the reason why UK corporate treasurers do not have this at the top of their agenda and are waiting to see how it plays out in the eurozone.

The Association of Corporate Treasurers (ACT) Annual Conference 2012, held in Liverpool 16-18 April 2012, attracted more than 700 delegates, with corporate treasurers making up approximately 45% of attendees. 

First published on www.gtnews.com 

Old Time Rock and Roll or Risky Business?

18 Apr 2012

The second day of the Association of Corporate Treasurers (ACT) Annual Conference in Liverpool took a long, hard look at risk. First up was a plenary on whether 2012 was a make or break year for the UK economy, whereas two session tracks looked at how corporates can manage liquidity and counterparty risk in uncertain times.

RBS’s chief economist, Andrew McLaughlin, opened the second day of the UK’s Association of Corporate Treasurers (ACT) conference in Liverpool by tackling the question of whether or not 2012 is a make or break year for the UK economic recovery. Even though the global economy has been recovering, for the past four years, albeit at an annual growth rate of about 4%, the situation in the UK has not "felt that good”.

McLaughlin outlined three reasons why:

1. Most of the growth in the global economy is happening elsewhere.
2. The UK is trying to trade its way out of trouble, but it is running up against the fact that the majority of its exports go to developed markets that are facing similar issues as the UK.
3. The source of the momentum is based mostly on growth from the expansion of central banks’ balance sheets, which incur side effects within the economy. The ‘Daghi Put’ effect means that the central banks’ debts have expanded, while consumers, banks and governments have shrunk theirs.

McLaughlin argued that although this action by the central banks has successfully prevented a deeper recession, it couldn’t stimulate a vigorous economic recovery. He outlined three things that would make or break the UK:

1. Corporate balances sheets are in good shape: to make a recovery, corporate need to spend more and save less.
2. Falling inflation will boost the take-home pay of indebted consumers: if inflation falls away, as the Bank of England predicts, then this will have a positive impact on the economy.
3. The need for impressive trading growth: the Chancellor George Osborne predicts a doubling of exports in the next decade.

McLaughlin said that although 2012 was not a ‘break’ year, it was also not a ‘make’ one, but more of a ‘grin and bear it’ period.

Risky Business, Risky Year

In the first set of break out sessions, one track explored how corporates can ensure they raise liquidity for their global businesses and manage the associated risks. This session explored the impact of Basel III and the CRD IV regulations, as well as credit rating agencies’ (CRAs) downgrades.

Neil Garrod, director of treasury, Vodafone Group, challenged the commonly-held view that Basel III will have a big impact on the market, controversially likening it to the “damp squib” that was Y2K. He believes that corporates will not see a huge increase in the cost of capital as a result.

However, Garrod spoke from the position of a cash-rich corporate, which may not be true for those corporates that are more reliant on bank lending. His idea is to reduce investment in European money market funds (MMFs), despite the attractiveness of daily liquidity, and look at buying back Vodafone’s own debt. “Our own debt is riskless; we can’t default on our own business,” he said. Charles Van Der Welle, director of treasury, ITV, agreed that the best cash management is to buy back your own debt.

Garrod also highlighted that return on investment was not as important to him as simply getting the principal back. There were many nods in the auditorium, including Van Der Welle.

This sentiment was repeated in the next session ‘Managing Risk in Uncertain Times’, when Gavin Jones, vice president treasury, Ahold, stated that departing from the objective of capital preservation was a “career choice”.

In his session, Jones laid out Ahold’s operational priorities for the next 12 month to manage risk, including:

• A pan-European cash management request for proposal (RFP), balancing bank capabilities with robust creditworthiness.
• Funding and integration of treasury activities in new countries (e.g. Belgium) or companies.
• Continue to implement innovative but cost effective ways for Ahold’s customers to pay, which meet their evolving payments habits.
• Renewal of Ahold’s euro medium-term note (EMTN) programme and potential extension of its current credit facility.
• Keep board and wider business updated.
• Team development and training.
• Upgrading its IT2 treasury management system (TMS).
• Implementing new policy frameworks.

Philip Learoyd, head of funding and treasury operations, SABMiller, who joined Jones and Matthew Davies, head of Europe, Middle East and Africa (EMEA) corporate sales, global treasury solutions, Bank of America Merrill Lynch (BofA Merrill) on the panel, spoke about how SABMiller had restructured its treasury operations, particularly in light of the Foster’s acquisition in 2011. The company decided in 2008/2009 that it needed a more efficient treasury. The plan involved moving from a regional, decentralised treasury to a more centralised, regional hub structure.

The project was completed in Europe in 2011 and is currently in a pilot phase across Africa. It will also be rolled out to Asia and the Americas and should be fully completed within two years. IT2 is again playing a central role in delivering the technology solution across the whole company.

First published on www.gtnews.com 

China and India: Globalisation and Competing in a Fast-changing World

17 Apr 2012

The ACT Annual Conference 2012 opened with a plenary discussion entitled 'Smart Globalisation in the Age of China and India'. It asked a question that many corporates in Europe and the UK have been grappling with: how is the West going to stay competitive in a fast-changing world?

The opening plenary at the Association of Corporate Treasurers (ACT) Annual Conference in Liverpool, running 16-18 April, attracted around 200 participants yesterday, discussing the effects of globalisation with a specific focus on the growing influence of China and India. Haiyan Wang, managing partner, China India Institute (CII) and adjunct professor of strategy at the INSEAD business school, gave the keynote presentation and led off with the Chinese Communist adage that “the East is red and where the sun rises”, which holds a metaphorical element of truth today.

Wang explained in numbers what the global economic restructuring presently going on looks like:

• Emerging markets (EMs) are growing at three times the rate of developed markets (DMs).
• EMs will make up 78% of global gross domestic product (GDP) growth by 2025.
• By 2020, China’s GDP will equal US’s, and this is by conservative estimates. By 2050 it will be 2.5 times that of the US.
• By 2025, India will be the third largest economy in the world.

She says that China and India are five stories in one:

1. Mega-market and mega-growth: even if they slow down, these economies will remain growth engines for the world economy.
2. Platforms for cost reduction: Wang explored the differential in wages between India, China and the West.
3. Global innovation hubs: patents granted by the US Patent and Trademark Office to Chinese and Indian companies grew by 45.9% and 23.4%, respectively, between 2005-2010.
4. Rise of new global competitors: Chinese and Indian companies now hold a number of top positions in the Fortune list.
5. Investment for resources: not only in terms of outward investment but also companies looking at Shanghai to launch an initial public offering (IPO).

Wang raised numerous challenges that face corporates, including rapid changes, early stage markets, weak or poor infrastructure, and importantly the economic, cultural and behavioural differences that must be understood to be successful. She also highlighted that there is a war for talent happening in both China and India. “Scarcity in the land of plenty” meant that recruiting, training and retention were challenging areas.

In his presentation, Hamish McRae, chief economics commentator at the Independent, argued that the shift of power to the east is inevitable and that Europe must embrace this seismic change and learn from it. His predictions for Europe were much more gloomy than Wang's outlook for China and India, saying that although the eurozone will hold together this year, the possible break up - in July 2017 he predicted - will be mismanaged and therefore the outcome will be sub-optimal.

In a roundtable discussion, which included John Grout, policy and technical director at the ACT, Wang took on the question by a corporate treasurer in the audience as to where younger treasury colleagues should look for funding in this new environment. This led Wang to expand on impact of the renminbi (RMB) internationalisation, which she believes will be fully convertible within 10 years. She predicts that within 10-15 years it will be one of the three world reserve currencies.

“There is a rapid increase in the use of the RMB in trade. Today, 10% of China’s trade is settled in RMB,” Wang says. “The People’s Bank of China [PBOC] is implementing the financial market reforms needed to push forward the internationalisation of the RMB. Allowing the RMB to float is a gradual move in this direction.”

First published on www.gtnews.com 

The Long March to SEPA

20 Mar 2012

The single euro payments area (SEPA) end date was one of the hot topics discussed at the International Payments Summit (IPS), held 12-15 March in London. With much uncertainty still remaining despite the end date regulation and a tight timeframe for compliance, it is essential to highlight a number of success stories.

After promoting cross-border payments harmonisation for the past 10 years, in February the European Parliament finally bit the bullet and legislated dates for the migration of national credit transfer and direct debit schemes to the single euro payments area (SEPA): 1 February 2014 for euro-denominated Member States and 30 October 2016 for those Member States that do not have the single currency.

This has sent a shockwave through corporates and banks alike. Although both have been lobbying hard for a legislated end date for legacy payment instruments, less than two years may not be enough time to do the job. Plus there are many outstanding issues still to be resolved, such as additional optional services (AOS), national niche schemes that will remain in place after migration, and details that were last minute additions. For example, the last round of debate in parliament removed the bank identifier code (BIC) as a mandatory identity alongside the international bank account number (IBAN). This means that, as of 1 Feb 2016, BICs will not be used in cross-border payments.

At the International Payments Summit (IPS) in London, which attracted more than 300 bank, vendor and corporate representatives, the Payments Regulations Boot Camp on Monday 12 March and SEPA Migration stream on Wednesday 14 March grappled with SEPA challenges, but also showcased a number of success stories to spur the industry forward.

How Can Corporates Define the Value of SEPA?

What could be done to help corporate adoption of SEPA? During the Payments Regulations Boot Camp, Gianfranco Tabasso, chairman of the Payments Commission, European Association of Corporate Treasurers (EACT) and chief executive officer (CEO) of FMS Group, argued that the SEPA governance had to change to allow corporates, and other end users, more input in the design of SEPA - until now it was solely the banks that decided where the dividing line was for competition and collaboration.

The SEPA Council, which met for the first time in June 2010, was set up explicitly for this reason. But, as Etienne Goosse, secretary general, European Payments Council (EPC), pointed out in the SEPA Migration stream: “The SEPA Council will need to be strengthened with renewed stakeholder involvement in order to steer a firm course through the changing environment.”

Tabasso also questioned why a harmonised version of bank transaction codes was not included in the SEPA remit, as that is something that corporates are much more interested in because of its usefulness in reporting.

Massimo Battistella, manager of accounts receivables (A/R), administration services, Telecom Italia, said that he dreamed of standardised processes across all of Europe. Yet the reality is still quite different. “We are facing a nightmare of compliance within the next two years. We will need to change all our payments systems, which will have a huge impact on our business model. We will need to change the way we deal with customers, as they will now need to go to their bank to sign a mandate,” he explained. With some 10 million direct debit mandates, some of which were signed 20 years ago, it is no wonder Telecom Italia is feeling the pressure from SEPA migration deadlines.

Ruth Milligan, legal expert on payment systems, Eurocommerce, an association for retail, wholesale and international trade interests, echoed Battistella’s sentiment during the SEPA Migration stream. She said that the association wanted a Europe where payments are “efficient, cheap and simple, with same experience in different Member States”. What they didn’t want was just “transferring old processes and Sellotaping them onto new technologies”.

Interestingly, in the debate over whether or not BICs should be mandatory, both corporate representatives at the boot camp argued in favour of IBAN-only. This point was also supported by corporates in the SEPA Migration stream.

SEPA: Step-by-step to Success

Despite all the difficulties, there are a number of successful initiatives being rolled out across Europe. The high SEPA adoption level in Finland, Belgium, the Netherlands and Estonian, particularly with regards to public authorities (PAs), shows just how important it is to have a clear roadmap driven forward by the national government.

Finland, Belgium and the Netherlands are well on their way, with Belgium reporting 52% of payments are now SCTs, while SCTs make up 80% of PAs’ payments. SDD is already at 20% adoption due to a big biller migrating in November, compared to just 0.4% across Europe. The Netherlands, where all stakeholders participated in the development the national migration plan, is launching a mass media campaign in May to make everyone aware of the impending changes. Estonia, on the other hand, is just beginning the journey, but it has a good excuse - it only joined the euro at the end of 2010.

Despite these countries having a significant head start, none are convinced that they will hit the deadline of 1 February 2014.

In his presentation, Jeroen Oort, project manager SEPA at Randstad, an HR service provider, showed how it was possible to use SEPA to streamline payments processes. Randstad provides temporary workers in 40 countries, and has 3500 branches, including 1100 in-house locations; in total it employs 28,700 people. The company’s treasury is centralised, it deals with three banks, ING, Rabobank and ABN Amro, and operates a shared services centre (SSC).

Oort outlined six strategic decisions Randstad took before beginning the SEPA project:

1. Have one programme and minimise impact.
2. Phased implementation, therefore a dual period.
3. Implement as part of late majority, not first in the market.
4. Minimise number of internal standards.
5. Align SEPA amendments with existing projects.
6. Same service level agreements (SLAs) with all banks.

The SEPA project touched five main areas of the business:

1. Invoices.
2. Payment hub.
3. Front office application.
4. Back office application.
5. Bank statements.

In all these areas, applications had to be upgraded, or bespoke software used. Randstad put IBANs on invoices as soon as it could and upgraded its payment hub to be SEPA compliant. “For domestic payments, we used an online conversion tool to convert to IBAN from BBAN [basic bank account number]. We have a whole database of beneficiaries that has to be converted. Bank statements are delivered using MT940 format. As far as the new ISO standard goes - if the market moves, then we will too,” said Oort.

From his experience, Oort recommends:

• Start the SEPA project now.
• Do an inventory (work/risk).
• Discuss with you bank/supplier.
• Define strategy/end date.
• Have a clear project plan.

First published on www.gtnews.com 

Bankers' Dilemmas: The Global Economy, Basel III and Banking for the Good of Society

31 Jan 2012

More than 200 commercial bankers gathered in London on 23-24 January 2012 for BAFT-IFSA's annual global conference - the first conference in its just short of 100-year history to be held outside the US. The main theme of the conference was co-operation: how could this trade organisation guide regulators for the greater good of the transaction banking industry?

Bringing together more than 200 transaction bankers to discuss how they can better work together may sound a bit like herding cats, but the two-day BAFT-IFSA global annual conference, held in London on 23-24 January, was fruitful - mainly due to the frankness and participation of attendees. The backdrop of the current economic situation, specifically Standard and Poor’s (S&P) downgrading of France and eight other eurozone countries, brought home the fact that the pressure is on - even in the safe, stable and almost hidden world of transaction banking.

Jeremy Wilson, chairman, BAFT-IFSA board of directors and co-chair Europe Council, whose day job is vice chairman, Barclays Corporate, summed up the two days: “The transaction banking industry, similar to other industries, is under pressure in this economic climate - but it is still an attractive business. The issues that we are grappling with are how can we continue to work well in the new regulatory environment and how the industry can convey our knowledge to help regulators understand the critical complexities - many tested over centuries - of our business and help them to regulate it effectively?”

It was apparent that those in the room considered themselves to be the ‘good guys’ of banking, due to the facilitating role transaction banking plays in the global economy. More than one speaker reminded the audience that global trade has lifted billions out of poverty, effectively making the modern world ‘go round’. Many called this banking sector a “force of cohesion”.

In a world sceptical of bankers, transaction banking is truly the acceptable face of the industry. But this sector is still painfully aware of the need to promote trust and engage with the customer. One speaker said that the new question being asked is whether or not the bank will be around. The idea of ‘too big to fail’ needs be changed to ‘too good to fail’, according to one panellist.

Looking to the future, the idea of one global bank that could be everything to everyone was under scrutiny. A few speakers put forward the hypothesis that the next generation of banks won’t be in every country in the future. To survive these stressful times, banks need to concentrate on competitive advantage, and partnership banking; in this sense correspondent banking and diverse collaboration is the wave of the future - not bigger banks.

The main aim of the conference, operating under the Chatham House Rule, revolved around education, networking and specific take-aways to be better able to run the business. The two days tackled such pressing issues as the continuing global economic turbulence and incoming regulatory changes, including the dampening effect that Basel III may have on global trade flows. Risk was also top of mind for attendees.

Global Economy - Continuing Turbulence

The situation in the eurozone was one of the main threads of the conference. It is crystal clear that the world cannot afford another banking crisis. However, one cannot wish away the situation that we are in - and it is obvious that the East is doing much better than the West in this current crisis. Asia has not decoupled from the West, but is better insulated. It has diversified growth, through resilient domestic demand and south-to-south trade flows. In addition, it has room for manoeuvre in terms of economic and fiscal policymaking.

Refreshingly, the panel discussion examining the global economy tried to take a positive view of the turbulent situation. One panellist looked to the European periphery with hope, as these countries are not in a slump but only a recession. The core, such as Germany, is in a “pause” and is expected to grow again by the end of year. According to an expert, the US may surprise the rest of the world with results on the high side in 2013. This is because US consumer spend held up despite weakness in consumer confidence, business and the markets. In addition, industrial production is still growing, although modest, which means a double dip recession is not predicted.

Growth in Latin America and Africa remains strong. The former will benefit from high commodity prices and increasing domestic demand, which is expected to grow over the next two years. However, the expert expects that 2012 will see an economic slowdown. Africa will also see domestic opportunities, particularly in the consumer market.

The attendees queried panellists about the biggest risks. “A hard landing in China” was one answer put forward. Some postulated that serious inflation could be a problem down the road in Europe. Other panellists identified challenges around food and commodity prices, while Middle Eastern schisms in Iraq and Syria may reverberate around the whole region. The biggest concern raised was the possibility of another synchronous downturn, which would be “devastating”.

Basel III and Trade Finance

What keeps transaction bankers awake at night? New, incoming regulations seem to continually top the worry list, maybe because not all the details have been worked out by the regulators and the flavour of the regulation depends on the region. In addition, there is a lack of consideration/appreciation/forgiveness on the side of regulators in terms of cost to be borne by the industry.

Although this situation can be challenging, it also opens up an opportunity for a trade body such as BAFT-IFSA to give feedback to the regulatory bodies as to how the proposed regulations will affect their business. This opportunity has been seized with both hands, particularly with regards to the impact Basel III regulations will have on trade finance, which sits alongside payments as the heart of transaction banking. In 2011 BAFT-IFSA gathered data from across the industry to illustrate the low-risk nature of trade finance products and the unintended impact of the increase in capital requirements. Ongoing proactive industry engagement by the likes of BAFT-IFSA, International Chamber of Commerce (ICC), British Bankers’ Association (BBA), World Trade Organisation (WTO) and the World Bank has resulted in the Basel Committee on Banking Supervision adopting two technical changes to the Basel regulatory capital adequacy framework related to the treatment of trade finance that will help promote trade with low income countries in October 2011.

Another area of interest for industry co-operation that was raised at the conference is around intraday liquidity. Large swings are reasonable but one panellist suggested that there is a need to drill down into data to analyse what is going on - or some costs will be associated with overdrawing.

Banking in the Service of Society

With participants at the World Economic Forum, meeting in Davos the same week, questioning the viability of capitalism, the BAFT-IFSA attendees highlighted the positive aspects of financing world trade including wealth creation, job creation and lifting millions around the world out of poverty. In addition, many banks are committed to social investment and charity work.

But there was also a significant amount of ‘soul searching’ at this conference. Many panellists and participants talked about the need to reconnect financial business with the moral fibre of society. As Bob Diamond, Barclays’ chief executive officer (CEO), has argued in an opinion piece in the Guardian, banks need to become better citizens. They need to engage with shareholders and really assess risk and reward.

An interesting point raised on the first day of the conference was the inherent contradiction in the way many banks operate on a global level yet die locally. Global banks are tied to and affected by sovereign ratings, yet their business spans the world. It comes back to the ‘too big to fail’ argument, where some banks are too large for the national tax payer. One idea put forward was the need create a global authority with global taxes and a global winding up regime.

Conclusion

The transaction bankers sitting in the room expressed the fundamental strength of this single pillar of banking and felt they were among friends with a common purpose. But they are well aware of the massive change waiting in the wings to revolutionise their business model.

Interestingly, one of the most popular sessions explored the world of mobile banking and social media. Although the two case studies focused mainly on the retail banking sector, the opportunities for innovation opens up a new paradigm in banking and soon this will spill over into the corporate banking space.

Social media engages users and encourages collaboration in a way the banking industry has never seen before. Organisations such as BAFT-IFSA will need to be at the forefront of this encouraging trend.

Kathleen Gowin, interim chief executive officer (CEO) and president, BAFT-IFSA, encourages interested readers to join BAFT-IFSA to add their voices and keep the momentum going.

First published on www.gtnews.com 

Wire Payments Maintain the Lead, as SEPA Gains Ground

07 Feb 2012

While wire transfers remain at the top of the list given their significant risk mitigation effect, automated clearing house (ACH) credits and single euro payments area (SEPA) instruments (both e-payments) will grow in importance in the near future.

Electronic payments (e-payments) are the vast majority used to make payments on a regular basis, given the large presence of wire transfers (87%). This is followed by cheques (62%), which are specific to some geographic areas, such as North America, Middle East and Asia-Pacific. The third and fourth placed most used payment methods are automated clearing house (ACH) credits (55%) and debits (47%), reinforcing the electronic nature of payment transactions today.

“When money must be sent fast, a bank wire transfer is often the best option,” says Enrico Camerinelli, contributing editor, gtnews. “In addition, payments made this way are more certain, as banks only send money if the sender has available funds. They are often used for important and high value transactions.”

Interestingly, purchasing cards represent a significant portion of regularly use methods of payments within North American companies (68%). Only companies between US$10m and US$500m remain ‘loyal’ to cheque payments, although presenting a dramatic reduction from 61% currently down to planned 43% over the next three years.

While wire transfers remain at the top of the list given their significant risk mitigation effect, ACH credits and single euro payments area (SEPA) instruments (both e-payments) will grow in importance over the next three at the expense of cheques, which is expected to experience an 18% drop from the current use of 62% down to a planned use of only 44%.

This is the first year that gtnews has questioned survey respondents specifically about their usage of SEPA Credit Transfer (SCT) and Direct Debit (SDD) instruments. SEPA-related payments are still a minority, with 34% of respondents using SCTs and 14% using SDDs. As expected, European companies are using more SEPA-related payments than companies in other regions.

SEPA

When asked the reasons for not investing in SEPA, interestingly only 1% picked the certainty of the end date. Companies still lack a clear and agreed-upon understanding of the benefits SEPA can bring. It's not a question if SEPA brings benefits - the real issue is how to calculate the benefits and align them with each company's payments strategy. However, more than half (56%) said that SEPA was not applicable to their company.

Figure 1: What are Your Organisations Reasons for Not Investing in SEPA? (%)

Source: gtnews

Very large (>US$10bn) companies have a clear understanding of SEPA and its potential impact. Their denial to implement SEPA derives almost exclusively from the non-applicability of such payments standard to the company's processes.

When asked what percentage of the company’s total annual payment transactions will SEPA cover, 21% of respondents do/expect to use SEPA instruments to cover more than half of their payments transactions. Only less than a quarter (23%) keeps a low profile with an expected SEPA involvement of less than 10% of their payment transactions. Camerinelli says: “SEPA-enthusiasts will certainly appreciate the results to this question.”

As many Asia-Pacific companies trade with European counterparts, their expectation of SEPA payments is relatively high. Again, western European companies expect the highest impact of SEPA on their payments - 39% expect to/do use SEPA instruments to cover more than 50% of their total annual payment transactions.

Top reasons for already or planning to invest in SEPA services include: cost savings (66%); centralisation of payments, using one format (55%); and full SEPA adoption is inevitable, so I want to be prepared.

The survey results match the roles played today by banks, enterprise resource planning (ERP) suppliers and consultancy firms. “Banks are expected to focus more on providing information and services on SEPA to facilitate adoption, while consulting companies are rather involved to implementing and advising on the best services to run. Software modules are sourced from ERP suppliers,” says Camerinelli.

Treasury Control Over Payments

Treasury has a good control over payment initiation in 60% of the respondent population. However, 20% saying that more than 20 departments other than treasury can initiate payments independently shows a situation that can be interpreted in two ways: treasury has no control; or treasury has such a high level of control that it enables other departments to execute payments on their own, freeing up treasury to work on other more value-add activities.

Corporates in western Europe report a higher number of business units initiating payments on their own than other regions - with 34% reporting this. CEE corporates have the greatest control over payments - 67% report that no other business unit can initiate payments other than treasury.

Figure 2: Number of Business Units Independently Initiating Payments by Region (%)

Source: gtnews

Looking at the results in terms of company size, treasury appears to have good control over payments initiation across the board. The high percentage of ’20 or more’ business units is reported in organisations with revenue >US$1bn (26% for companies with revenue between US$1bn and US$10bn and 31% for those with revenue >US$10bn).

“Large corporations also likely have more structured governance for their treasury operations,” according to Camerinelli. “Hence, the distribution of business units able to operate payment initiations is consequent to treasury policy that centralises strategies and control allowing for decentralised decisions making, i.e. when to initiate payments.”

Use of SWIFT for Payments

The use of SWIFT services for payment processes is not prevalent, although they have a small edge (52% report using SWIFT, while 48% do not). The anecdotal evidence that North American companies are not as proactive in adopting SWIFT is confirmed by these survey results.
Fast-growing, emerging regions, such as Asia-Pacific, CEE and Middle East/Africa, are more actively adopting SWIFT because they don't have significant legacy systems to maintain and can leapfrog to new solutions. The attention to SWIFT in these countries is also a good proxy of the success of the SWIFT for Corporates initiative, which was launched in January 2007.

The results reflect the expectation that very large (>US$10bn) organisations use SWIFT as a channel for their payments transactions. The cost for the SWIFTNet connections and for the related operations services is still prohibitive for smaller companies.

However, there are still chances for an expansion of SWIFT: more than a quarter (27%) said they will move to SWIFT, while another 58% have said that there is a possibility. “These results suggest that SWIFT should plan a robust communication campaign to raise awareness and help companies evaluate the [ROI] return on investment of a SWIFT investment,” says Camerinelli.

The Annual Payments Survey was conducted by gtnews in October-November 2011. A total of 312 corporate level respondents participated in the 2011 Payments Survey, a large proportion of which operate on a global basis: 41% reported that their organisation operates in more than 20 countries.

First published on www.gtnews.com