PSD2 – Update and new developments

| 17-8-2017 | François de Witte |

Early 2017, I published a post about PSD2, a lot of opportunities, but also big challenges. Now half a year later, I would like to update you on some developments in this area. PSD2 still needs to be transposed in the national legal system of all the member countries, and according to my knowledge several countries, including Belgium, have not yet released the draft laws. This creates quite some uncertainty in the market, as there will be several country-specific specifications. Hence one can expect that Fintech’s and other TPPs might already have started their certification application in countries that already enacted PSD2 in their local legislation.

LIST OF ABBREVIATIONS USED IN THIS ARTICLE

2FA: Two-factor authentication
API:  Application Programming Interface.
EBA: European Banking Authority
PSP: Payment Service Provider
PSU: Payment Service User
RTS: Regulatory Technical Standards (final draft issued by the EBA on 23/2/2017)
SCA: Strong Customer Authentication
TPP: Third Party Provider

Main updates on the regulatory framework

On 23 February 2017, the EBA published the final draft on the SCA (Strong Customer Authentication) and Secure Communication.
In this final draft, the EBA clarifies the new rules to be followed for customer authentication, applicable both for operations performed in traditional channels and over the new API (Application Programming Interfaces) services. The key clarifications concern the following:

The 2 factor authentication

Following systems would comply:

1. The 2-device-authentication, where the user has two independent devices:

  • one device to access the banking website or app
  • another device to authenticate himself or a payment: the authentication device, usually a hardware authentication token, a combination of a smart card and smart card reader, or a dedicated app on a mobile device.
    The authentication device generates one-time passwords (OTPs) over transaction data

2. The 2 app authentication:

This approach does rely on two different apps running on the same mobile device.

  • Banking app : when a user wants to make a payment, he opens the banking app and enters the transaction data.
  • Authentication app: When the user has submitted the transaction, the banking app opens the authentication app. After verification and confirmation of the transaction data by the user, the authentication app generates an OTP (One Time Password) linked to the transaction data and sends it back to the banking app, which submits it to the banking server for verification

The dynamic linking

In order to dynamically link the transaction, the draft RTS states the following requirements must be met:

  • the payer must be made aware at all times of the amount of the transaction and of the payee;
  • the authentication code must be specific to the amount of the transaction and the payee;
  • the underlying technology must ensure the confidentiality, authenticity and integrity of: (a) the amount of the transaction and of the payee; and (b) information displayed to the payer through all phases of the authentication procedure (the EBA hasn’t specified the nature of this “information”);
  • the authentication code must change with any change to the amount or payee;
  • the channel, device, or mobile application through which the information linking the transaction to a specific amount and payee is displayed must be independent or segregated from the channel, device or mobile application used for initiating the electronic payment transaction.

The exemptions from the SCA

The exemptions from the SCA including also:

  • Transactions between two accounts of the same customer held at the same PSP
  • Low risk transactions: Transfers within the same PSP justified by a transaction risk analysis (taking into account detailed criteria to be defined in the RTS),
  • Low value payments or contactless payments < 50 euro, provided that that the cumulative amount of previous consecutive electronic payment transactions without SCA, since the last application, of the SCA < 150 euro
  • Unattended transport and parking terminals

The draft RTS (not finalized, not approved yet) also states that Screen scraping is no longer allowed. Screen scraping is a method to take over remotely the data on the screen of the user. This creates a lot of opposition in the financial community, in particular the Fintech’s, as this complicates the interaction between the bank, the TPP, and the PSU. On the other hand, the both the EBA and the EBF (European Banking Federation) are against it. There is a power game ongoing.

Main developments

Banks will have to implement interfaces, so they can interact with the AISPs and PISPs. This compliance with PSD2 is mandatory and all banks will have to make changes to their infrastructure deployments.

Although PSD2 does not specifically mention the API (Application Programming Interfaces), most technology and finance professionals assume that APIs will be the technological standard used to allow banks to comply with the regulation.

An API is a set of commands, routines, protocols and tools which can be used to develop interfacing programs. APIs define how different applications communicate with each other, making available certain data from a particular program in a way that enables other applications to use that data. Through an API, a TPP application can make a request with standardized input towards another application and get that second application to perform an operation and deliver a standardized output back to the first application. For example, approved third parties can access your payment account information if mandated by the user and initiate payment transfer directly.

In this framework, the challenge is to create standards for the APIs specifying the nomenclature, access protocols, authentication, etc.”. Banks will have to think about how their new API layers interact with their core banking systems and the data models that are implemented alongside this.

At this stage, following working groups were constituted to further elaborate on these standards:

  • UK’s Open Banking Working Group (OBWG). This initiative of UK Treasury aims to deliver a framework for open banking and data sharing via APIs for the UK’s banking industry. The joint industry/government initiative recently released its report on establishing the framework for an Open Banking Standard for the UK alongside a timetable for implementation.
  • The Berlin Group, a-European payments interoperability coalition of banks and payment processors, is pushing for a single standard for API access to bank accounts to comply with new regulations on freeing up customer data under PSD2. The aim is to offer operational rules and implementation guidelines with detailed data definitions, message modelling and information flows based on RESTful API methodology. It will be published for consultation in Q4 2017
  • STET has also released of a RESTFUL API standard which will allow TPPs to access payment accounts. This API has been built with the latest technology standards using REST, OAuth2, JSON and HTTP-signature. It relies on ISO 20022 elements for structuring the data to be exchanged between TPPs and ASPSPs

In the meantime, several providers are developing their services, including in the Benelux Equens Worldine, Capco, Sopra Banking and Isabel.

Along with the arrival of open API banking, there is also clear momentum for providing real-time services such as “instant payments”. This requires banks to shift their entire product and service mindset towards immediate delivery and to make fundamental changes to their legacy systems. While this is a challenge, it also presents opportunities (see also my article in TreasuryXL on this topic: SEPA Instant Payments – a catalyst for new developments in the payments market (https://www.treasuryxl.com/news-articles/francois-de-witte/sepa-instant-payments-catalyst-new-developments-payments-market and https://www.treasuryxl.com/news-articles/francois-de-witte/sepa-instant-payments-a-catalyst-for-new-developments-in-the-payments-market-part-ii/).

The large banks have already started working on being PSD2 compliant and on building for the opening of their banking architecture to the TPPs. However, several small or medium sized banks only started recently on this project. Hence a lot has to be done, and I do expect some shortages in resources in the next coming months.

With regard to the access to TPPs, article 113.4 of PSD2 explicitly states that the member states shall ensure the application of the security measures with the 18 months following the entry in force of the Hence, we might expect that this part of PSD2 needs only to be implemented by mid-2019. Given the strategic importance and the IT act, I recommend starting this exercise much earlier.

Conclusion

The PSD2 creates challenges. Several topics need to be clarified such as the RTS and the market players need also to agree on common standards for the interfaces.
However, there are initiatives, such as the Berlin Group, the UK’s Open Banking Framework and the STET group, which help give further clarity and direction in the absence of specific technical detail.
Consequently, there is no justifiable reason for any bank to delay starting these projects.
The clock is ticking in the PSD race.

If you want  further update on this topic, you can join the 1 day training session on this topic, which I will give on 22/11/2017 at Febelfin Academy.

 

François de Witte – Founder & Senior Consultant at FDW Consult

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Please read my earlier articles on PSD2:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2: A lot of opportunities but also big challenges (Part II)

Sepa instant payments – A catalyst for new developments in the payments market (Part I)

Sepa instant payments – A catalyst for new developments in the payments market (Part II)

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SEPA Instant Payments – a catalyst for new developments in the payments market (part I)

| 19-7-2017 | François de Witte |

On 29 June 2017, I attended a workshop organized by Fintech Belgium on how Instant Payments will push the financial sector to innovate. In this article (the first part of 2) I will set the scene by presenting some use cases. In the second part (online next week) I share some views on how Instant Payments, in combination with PSD2, will be a game-changer in the market. 

The new generation customer claims “I want it all, and I want it now”. It is his anthem for having packages delivered, ordering food or finding a taxi driver. Payments are next, and they expect the financial industry to follow by offering real time or near real time experience.

As opposed to real-time payments with smartphones, transferring money between banks or cross-border payments often takes several days to be processed. For this reason, the EPC (European Payment Council) decided to introduce SCT Inst scheme: a real-time payment system where interbank transactions will be cleared within maximum 10 seconds at any time of the day and 365 days of the year. Similar schemes were already successfully put in place in other states (e.g. Denmark, Sweden and the UK).

Setting the scene – some use cases

As already mentioned by Boudewijn Schenkels on TreasuryXL, the characteristics of the new SEPA Instant Credit Scheme are the following:

  • SCT Inst is proposed by the EPC, and is hence not a mandatory scheme
  • it is a 365/24/7 available (no down time)
  • it is near real execution time (maximum 10 seconds, and some communities try to reduce this execution time)
  • there are real time failure notifications of the beneficiary
  • the funds are immediately credited and reusable by the beneficiary
  • a very important feature is the irrevocability of the payment. Once the payment has been initiated, it cannot be revoked, except in case of fraud
  • the scheme only cover single transaction only – no batch processing
  • currently the scheme limit is set at 15.000 euros, but this limit is expected to increase later on

The scheme should be operational in November 2017, but in some countries it is already live (e.g. Finland and Spain). Besides the processing, an important aspect is to ensure that the beneficiary is advised.

As Alessandro Longoni outlined earlier on treasuryXL, both from a cash management, and from a treasury perspective, Instant Payments open many new possibilities both for merchants, and corporates.

Thanks to its irrevocability, the SCT Inst will also be a disruptor for existing PSPs such as Paypal and Amazon Pay. It is expected that the banks will charge much lower fees then them. We might also expect that this scheme would also challenge in the cards market, where new players could benefit from both PSD2 and SCT Inst to offer more competitive payment schemes. However the card operators might also react by adapting their prices and/or offering additional new services.

For the banks, merchants, and the payment industry more widely, the PISP (Payment Initiation Service Provider) model will have a significant impact on the way in which consumers and merchants transact in the future. Unlike the traditional four-party card model, customers would “push” cleared funds to merchants, with ACH transactions replacing the current card CSM (Clearing & Settlement Mechanism). This will significantly simplify the existing payment model, with fewer players and interactions involved.

The drawing down below illustrates this quite well:

Source: OVUM – Instant Payments and the Post-PSD2 Landscape

We also expect that thanks to the new schemes and competitors, the use of cash will decrease, although cash will remain important for a while. Cash is accessible to all, also those who do not have a bank account. It enables immediate settlement without intervention of a third party. Cash is the only payment instrument that currently guarantees the user’s privacy and anonymity, while all electronic transactions are traceable.

In the second part of this article, which will be online next week, I will tell you more about instant payments as a game changer.

François de Witte – Founder & Senior Consultant at FDW Consult

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More articles from this author:

Treasury for non-treasurers – cash conversion cycle and working capital management

Flex Treasurer – Besparing na een Treasury Quickscan: nog meer praktijkvoorbeelden

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How long is your money tied up in stock?

| 7-7-2017 | François de Witte |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about. Our expert François de Witte explains the cash conversion cycle and working capital managment.

Background

One of the main tasks of the treasurer is to ensure that the company has the required funds to operate. The treasurer will usually contact the banks for this funding. However, he can also finance the activities of the company by working on cash conversion cycle and the working capital management.

Cash Conversion Cycle

The cash conversion cycle (CCC) is the length of time required for a company to convert cash invested in its operations to cash collected as a result of its operations. A company’s operating cycle is the time it takes from the moment the company pays the invoices to its suppliers until cash is collected from product sales. In other words, it is the difference between when you pay for things and when you get paid.  Here is a simplified example:

When you build an equipment, you need to purchase parts. Let’s assume that you pay them 25  days after the receipt of goods and of the invoice. 10 days following on the invoice for the parts, the equipment is ready to be sold.  It takes another 20 days to sell the equipment to a customer. Let’s assume that the clients pay on average after 30 days. In this case, the cash conversion cycle is 35 days.  Hence, the business needs to have enough “working capital” to fund this transaction until it gets paid.

The following drawing illustrates the cash conversion cycle:

 

The real challenge for a company is to shorten cash conversion cycle, so as to free up cash, which can be reinvested in business or to reduce debt and interest.

If a company wishes to reduce its cash conversion cycle, and hence its working capital requirement, it can work on the following parameters:

  • Order to cash cycle: this is the time it takes from the moment of the receipt of a sales order, until the moment of the effective payment of the order.
  • Purchase to pay cycle: this is the time it takes from the moment that you issue a purchase order, until the effective payment of the order
  • Inventory management: aiming at reducing as much as possible the inventory levels

You can reduce your Order to Cash Cycle by e.g. :

  • Reducing time between delivery of goods and services, and the invoicing.
  • Optimizing the collection processes, by managing the payment delays and ensuring an active monitoring of overdue invoices
  • Using the right Payment instruments, e.g. by replacing cheques by direct debits
  • Automation of the reconciliation

You can optimize your Purchase to Pay cycle by e.g.:

  • Reducing manual and paper-based processes, duplication of data entries, reconciliation and matching processes
  • Automating the processes by moving to digital documents through OCR or other techniques
  • Aligning of the supplier terms and early payment discounts.

Working Capital Management Metrics

If you wish to monitor your performance in this area, it is important to have the right metrics. The most use measurement instruments for the working capital management are the following :

Days Sales Outstanding (DSO) :

This is the average number of days it takes for a company to collects its invoices. It is computed by dividing the commercial account receivables by the annual sales and multiplying this number with 365.

Example: A company with EUR 100 million turnover has end 2016 outstanding accounts receivable of EUR 15 million.

DSO = (EUR 15 million / EUR 100 million) * 365 =  54,75 days

The challenge for a company is to try to reduce the DSO as much as possible, hence shortening the cash conversion cycle. This can be done by reducing the payment terms and actively managing the overdue account receivable (credit control).

The DSO can vary from sector to sector, but as  rule of thumb, when this figure exceeds 60 days, this is an alert that there is an improvement potential.

 Days Inventory outstanding (DIO):

This is the average number of days of inventory a company has. I suggest to compute this by dividing the inventory  by the annual sales and multiplying this number with 365.

Example: a company with 100 million turnover has end-2016 EUR 12 million in inventory.

DIO = (EUR 12 million / EUR 100 million) * 365 = 43,8 days

Here also, the aim is to keep the inventory very low. This is not always possible, because for some sectors, there can be a lengthy production process. In addition, the company needs to ensure that it has in its shops the most used products, in order to avoid losing clients. However by putting an place a good production planning and inventory management, the inventory levels  can be further decreased.

 Days Purchase Outstanding (DPO):

This is the average number of days it takes for a company to pay its suppliers. It is computed by dividing the commercial account payables by the annual costs of purchases (goods and  external services) and multiplying this number with 365.

A company with EUR 100 million turnover, EUR 50 million of external purchases has end-2016 EUR 8 million in accounts payable.

DPO = (EUR 8 million / EUR 50 million) * 365 = 58,4 days

Traditionally, it has been recommended to try to increase the DPO much as possible, hence shortening the cash conversion cycle. This can be done by e.g. increasing the payment terms. However, when a company is cash rich or has an easy access to credits, it can be beneficial to decrease the payment terms by negotiating discounts.

The DPO will also vary from sector to sector.

Length of the Cash Conversion Cycle (CCC):  

This can be computed as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding.

Example:

  • Average receivables collection period = 54 days
  • Inventory conversion period = 43  days
  • Average payable deferral period = 50 days
  • CCC = 54 days + 43 days – 50 days = 47 days

Cash Conversion Cycle (CCC) in absolute amount:

I recommend to also look at the overall figure of the CCC:

CCC in absolute amount  = Accounts payable + Inventory – Accounts Payable

Example :

  • Accounts Receivable = EUR 15 million
  • Inventory = EUR 12 million
  • Accounts Payable = EUR 8 million
  • CCC in absolute amount = EUR (15 MM + 12 MM – 8 MM) = EUR 19 million

Why active working capital management is important

Working capital management is a cheap source of financing, because, except in the case of early payment discounts, there is no financing cost.

The following example illustrates the gains a company can generate by improving its cash conversion cycle.

  • Turnover : EUR 100 million
  • Accounts receivable: EUR 15 million or 54,75 days
  • Inventory : EUR 10 million or 43,8 days
  • Accounts Payable : EUR 8 million or 58,4 days
  • Average financing cost : 3 %

By reducing the DSO from 54,75 to 45 days, and the inventory from 43,8 to 40 days, the company can reduce its financing needs as follows:

  • Accounts receivables: from EUR 15 million to 12,33 million (or EUR 2,65 million)
  • Inventory: from EUR 10 million to 10,96 million (or EUR 1,04 million)
  • Reduction of the CCC: from 40,15 days to 26,6 days
  • Reduction in financing needs: EUR 2,65 million + 1,04 million = EUR 3,69 million
  • Financing cost savings: EUR 3,69 million * 3% = EUR 110.700

Hence, when making up your financial plan, make to also focus on optimizing your cash conversion cycle, as this enables to realize easy gains. In reality this is not always easy, but it is worth the effort.

François de Witte – Founder & Senior Consultant at FDW Consult

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From Fintech to Regtech… from potentially disruptive to leaner compliance opportunities

| 31-5-2017 | François de Witte |

On 18/5/2017, I attended a seminar covering the topic “From Fintech to Regtech… from potentially disruptive to leaner compliance opportunities” organized by The Finance Club of Brussels, the Free University of Brussels (ULB), the Solvay Finance Society and Thomson Reuters.

Introduction

Fintech describes a wide range of innovation in financial technology, going from payment systems to lending and trading platforms.
Fintechs are seen in many cases as potential disruptors of the traditional intermediation of heavily regulated banks and other financial institutions See also my articles on PSD2 further down.
However Fintechs can also be enablers, helping banks and financial institutions to streamline their regulatory reporting and compliance, or help the disruptors in coping more easily with compliance in the future.

Setting the scene

Fintechs are playing an increasing role. The investments in Fintechs exceeded EUR 25 billion in 2016, and they bring a real digital revolution. Fintechs are perceived to foster the Digital Revolution, but equally to increase the digital divide in our society between the skilled and/or wealthy and those who are not.

Regulatory compliance is time-consuming and expensive for both financial institutions and regulators. The volume of information that parties must monitor and evaluate is enormous. The rules are often complex and difficult to understand and apply. There is a lot of data to be analyzed. Much of the process remains highly labor-intensive, or still depends heavily on manual inputs.

The Regtechs can be considered as an outgrowth of Fintec. Regtech use digital technologies— including big data analytics, cloud computing, robotics, behavioral analysis, blockchain technology and machine learning to facilitate regulatory compliance. Amongst  other things, Regtech applications automate risk management and compliance processes, enable companies to stay aware of regulatory changes around the world, facilitate regulatory reporting and support strategic planning.

In recent years banks have seen opportunities to ask Fintechs to solve their large regulation and compliance issues. They can change the paradigm of banks from heavy IT releases to agile sprints, from integration to standardizing protocols, from static functions to workflows.

Hence financial institutions are more willing to consider using Fintechs for getting more efficiency. During the seminar, somebody of the panel mentioned: “Collaboration is the best innovation”. Banks can also help Fintechs thanks to their experience in managing large databases, managing risks and providing the required critical mass.

We have seen some applications recently in areas such as the KYC (Know Your Customer) domain.

Regtech – some other considerations

However, as mentioned during the seminar by Antonio Garcia Del Riego, Head of EU Corporate Affairs at Banco Santander, in Europe there remain obstacles in using Fintechs. The Bank Regulators in Europe expect the banks to deduct the goodwill from the core capital of the banks. This implies that software investments cannot be capitalized and need to be written off immediately in the P&L. A second challenge is the ability to attract digital talent, given the fact that the regulators limit the way in which the remuneration can be paid, whilst startups can be very creative here.
For the regulators, there also remain challenges. Once banks will have automated their reporting, the regulators will have to follow. They also will have to attract digital talent, to treat all these data in an automated way. If they do not succeed in this, they might challenge the use of Regtechs, and this is not what we want.

Regtechs can potentially offer similar benefits to regulators as they do to financial institutions. We recently observed that some (quite few) Regtech providers have emerged to serve the significant needs of regulators. There have seen recently some examples in Fintechs bringing behavioral models to the regulators, or new cognitive technology or the use of Blockchain technology (smart contracts), to trigger automatic alerts for the regulators when the banks exceed some thresholds.

Some regulators are taking initiatives to foster innovation. In 2016, the FCA (US) created its “regulatory sandbox,” a space where financial services companies are encouraged to test new products without regulatory consequences. Recently the Australian Securities and Investment Commission also created its regulatory sandbox, suggested to establish a new regtech liaison group, comprising industry, technology firms, academics, consultancies, regulators and consumer bodies, and announced that it would host a Regtech hackathon later in 2017.

Other countries have also taken steps to support Fintech and Regtech innovation. The Monetary Authority of Singapore is in the process of developing a regulatory sandbox. We might expect other regulators to also take similar initiatives.

Conclusion

Thanks to their digital technology, Regtechs enable banks and other financial institutions to reduce the burden of compliance. However some steps need to be taken to create a level playing field and some topics will have to be clarified.
One can ask oneself the question how far these innovations can become game changers, awakenings for the banks, or even force them to more transparency and predictability towards regulators.

 

François de Witte – Founder & Senior Consultant at FDW Consult

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More articles on this subject:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2 : The implementation of PSD 2: A lot of opportunities but also big challenges (Part II)

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Long term or short term debt – your choices

|18-5-2017 | François de Witte |

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about. Today our expert François de Witte will explain de difference between long term and short term debt.

One of the main tasks of the treasurer is to ensure that the company has the required funds to operate. The treasurer will usually contact the banks for this funding. They can also extend long term loans (LT) or short term loans (ST).

Raising short term debt has several advantages, because it is more flexible, there is a lower cost due to the lower margin (smaller risk profile than long term debt) and usually lower interest, funds can be raised quickly and usually, you can repay your debt without penalty.

However, there are some drawbacks. The required repayment comes quicker than for LT loans, there can be potential difficulties in renewing short term loans, and it will be more difficult to combine ST debt with a fixed rate interest.

For this reason, many corporates take up long term loans. It helps them to improve the financial structure (better liquidity ratio). During the term of the credit facility, there is no renewal risk, and long term loans can be taken up with fixed or floating interest. Many banks will see long term loans as a prerequisite to finance fixed assets and investments.

In that case, the corporate will have to accept a higher price on these loans, a longer set up time and a possible prepayment penalty in case there is a fixed interest rate during the long-term loan.

Financing policy

The classic financing policy aims to match the maturity of the financing with the maturity of the assets. Under this policy, long term assets will be financed by long term loan, and short term assets by short term loans. An area of concern are the working capital needs. Are these to be considered as long term assets as short term assets? Usually the uncompressible part of the working capital need is considered as a long-term asset, whilst the fluctuating part (including the seasonal requirement) is considered as short term asset.

Some companies use a more aggressive financing policy and chosse short term financing to finance all the working capital needs, which can be risky. Others are more conservative and use long term loans to finance also the fluctuating part of the working capital needs.

Bank Financing versus bonds or Commercial Paper financing

Usually midcorporates and smaller corporates will use bank financing, also for the long-term financing, because it is easier to be set up. There is no need to have a complex prospectus or to ask for an external rating and there are less disclosure and reporting requirements. In addition, there is more flexibility in the repayment schedule, and it will be easier to negotiate a floating rate.

However larger corporates, those with an external rating or a large name recognition, will also consider bond or Commercial Paper financing. The bond financing will allow for longer term maturities, and the possibility to lock in the interest rate for longer periods. Bonds and commercial papers enable a diversification of funding sources, and can be traded in the market. In addition, there is no obligation provide side business to the lenders.

Bond financing

The world’s bond market can be divided into two broad groups:

  • The domestic bond market (issued in a country by resident issuers)
  • The international bond market (issued in a country or in the international markets by non-resident issuers). These also include the Eurobonds

Different bonds

The most common bonds are the straight bonds. In this case, the issuer issues securities for a fixed term with an annual or semi-annual interest payment at a fixed rate.

Example: Issuer A issues on 10/6/2017 EUR 100 Million debt at 6 % for 7 years.  In this case, the bondholders are entitled to receive an annual interest rate of 6 % (also called the coupon) on the 10th June of each year from 2018 until 2024, and the full reimbursement of the loan on 10/6/2024.

We also see quite frequently the issuance of Floating Rate Notes. This is a medium term or long term bond with a coupon based upon a floating rate based on a benchmark rate (e.g. Euribor or Libor) plus a “spread” based upon amongst others the credit quality of the issuer.

Zero-coupon bonds that do not foresee for periodic interest payments, but for the full reimbursement of the capital and interest at the final maturity of the bond.

Convertible bonds can be exchanged later or with another instrument, mostly shares.  The coupon is usually lower because of the option granted to the bondholder.

Public bonds are bonds issued by a bank syndicate through a public offering with prospectus. These bonds are focusing both on the retail and on the professional investors. They also must comply with the specific requirements for the prospectus, which sometimes needs to be submitted beforehand to the competent authorities for approval.

A private placement (or non-public offering) is a bond issue through a private offering, mostly to a small number of chosen investors. Private placements have less heavy constraints in term of prospectus.

Since 2000, the global bond markets size has nearly tripled in size. Today it is worth more than $100 trillion

(Source: Bloomberg, June 2016).

François de Witte – Founder & Senior Consultant at FDW Consult & Flex Treasurer

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More articles of this author:

Treasury for non-treasurers: Short term loans from a treasury perspective

Working capital management: Some practical advice on the optimization of the order to cash cycle

Management of bank mandates – EBAM – A lot of challenges

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Short term loans for financing your company

|11-5-2017 | François de Witte | treasuryXL

You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about.
Our expert François de Witte tells us more about an important task of a treasurer: funding, namely short term loans.

Background

One of the main tasks of the treasurer is to ensure that the company has the required funds to operate. The treasurer will usually contact the banks for this funding. The banks can extend secured or unsecured credit facilities. These can be long term or short term. In the current article, we will cover the unsecured short term loans.

Overdraft lines

The most flexible credit line is the overdraft loan: when providing an overdraft facility, the bank authorizes the company to go below zero on its account up to a certain amount. Overdrafts can be a good way to borrow  money for a short period of time. For example, if you don’t have enough money in your current account to cover your outgoings, and are uncertain about when your accounts receivables will be collected, you can negotiate with your bank an overdraft limit. If in that case, you have say 1 million Euro of expenses you can pay them, even if your account balance goes below zero. Once you will collect the accounts receivables, the overdraft position will be settled.

Usually the banks charge in case of use of the overdraft facility an interest rate based upon the internal rate of the bank plus a margin, and in some cases an overdraft fee charged on the total amount of the facility.

Having an overdraft can act as a useful buffer to cover your peak cash needs. It is the most flexible loan, because, in case you have cash inflows, they can be immediately used to reimburse the facility. However if the cash need is more structural,  overdrafts are not a very effective way of borrowing, because they may come with a higher rate of interest than some other loans such as the short term advances.

Short term advances

When you have a more structural cash need for a certain period of time, it can be useful to consider short term advances or straight loans. In this case, the bank will extend a short term advances (straight loans) facility.

When the client wishes to utilize this facility, he will ask for a drawdowns amount made available for an agreed upon period at an agreed upon rate. On the required date, the bank will make the amount available, e.g. 1 million Euro, on the account. At the maturity of the short term advance, the borrower needs to repay the advance and the interest. The interest is usually calculated on a benchmark, e.g. Euribor or Libor plus a margin.

The client determines the timing of the drawdowns. Advances are usually extended in the framework of a credit line, although in some cases, the client can just ask a punctual advance to cover a specific need.

Short term advances are less flexible then overdrafts. If you have a short term advance of say 1 million Euro for 1 month, and 15 days later you receive a large collection of say over 1 million, you cannot reimburse your short term advance, and will hence during the last 15 days pay interest on your short term advance, without any or almost any remuneration on your current account. For this reason, we recommend to use short term advance for long(er) term cash needs.

Conclusion

Overdraft facilities are the most flexible loans, but are quite expensive. If you have long(er) term cash needs, it might be useful to consider straight loans, as they are usually less expensive.

There exist many other solutions to finance the short term needs of your business, such as the financing of accounts receivables and factoring. This will be covered in a separate section.

 

François de Witte – Founder & Senior Consultant at FDW Consult & Flex Treasurer

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Flex Treasurer – Besparing na een treasury quick scan: Nog meer praktijkvoorbeelden

| 22-3-2017 | François de Witte | Patrick Kunz |

Als je ondernemer bent of als financiële professional werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft, vraag je je wellicht af of je alle treasury taken wel goed geregeld hebt. Iemand aannemen voor deze taken gaat misschien een stap te ver. Maar dat betekent niet dat je geen kosten zou willen besparen of dat er geen mogelijkheden zijn voor bijvoorbeeld funding. Wij hebben jullie al eerder kennis laten maken met onze Flex Treasurers en de Treasury Quick Scan die zij kunnen uitvoeren in een onderneming. In een eerder artikel hebben wij al praktijkvoorbeelden gepresenteerd. In dit artikel nog twee voorbeelden, waaruit blijkt dat een Treasury Quick Scan grote besparingen kan opleveren.

Onderneming C: Internationaal Handelshuis in voedselproducten

Omzet ca 1 miljard Euro

  • C is handelaar in voedselproducten in de B2B markt. Wereldleider in zijn segment en op alle continenten actief. Producten worden standaard in USD geprijsd. C heeft geen treasurer in dienst, de finance managers deden dit erbij.
  • Een treasury scan in 1 dag liet zien dat een besparingspotentieel op treasury processen mogelijk was van minstens EUR 200.000 per jaar (oplopende tot EUR 1.000.000 op jaarbasis)
  • Door optimalisatie van cash management processen en heronderhandeling van transactiekosten is binnen een maand EUR 300.000 jaarlijkse besparing gerealiseerd
  • Door optimalisatie van interne processen en toevoegen van extra banken en een online handelsplatform is op FX hedging een verdere besparing van EUR 100.000 gerealiseerd. Verder is het proces verbeterd waardoor er minder tijd wordt besteed aan de processen.
  • C heeft inmiddels een eigen treasurer, treasury afdeling en treasury management systeem. De flex treasurer is nog steeds betrokken bij projecten.

Onderneming D: vastgoedbedrijf

Omzet ca 125 miljoen Euro.

  • D had een treasurer in dienst welke met pensioen ging op korte termijn. Een flex treasurer is aangenomen om kritsch te kijken naar de treasury processen welke intern en extern gedaan werden
  • Alle terugkerende treasury activiteiten zijn naar intern gehaald. Dit zorgde voor een besparing van ca EUR 50.000 per jaar.
  • Een treasury rapportage werd opgezet zodat (senior) management en lijn management beter geïnformeerd zijn over treasury activiteiten
  • Cash Management en cash flow forecasting is geoptimaliseerd welke het renteresultaat verbeterde. Besparing ca. EUR 10.000 per jaar.
  • Corporate finance activiteiten werden verbeterd waardoor er zeer scherp in de mark geleend kon worden.
  • Treasury kon uiteindelijk afgebouwd worden van 36 uur naar 8 uur per week. Besparing ca EUR 60.000 per jaar.

 

Herken je een of meer situaties uit je eigen organisatie? Heb je een vraag? Onze experts zijn gaarne bereid om met jou in gesprek te gaan. Zij werken als Flex Treasurer en helpen jou graag verder. Overigens ook als je bijvoorbeeld na een treasury quick scan behoefte hebt, om tijdelijk een (flex) treasurer in dienst te nemen.

 

François de Witte 
Senior Consultant at FDW Consult

 

 

 

 

Treasury & amp; Working Capital Quick Scan Methodologie – Voorbeelden uit de praktijk

| 7-3-2017 | François de Witte | Patrick Kunz | treasuryXL

 

Als je ondernemer bent of als financiële professional werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft, vraag je je wellicht soms af of je alle treasury taken wel goed geregeld hebt. Iemand aannemen voor deze taken gaat misschien een stap te ver. Maar dat betekent niet dat je geen kosten zou willen besparen of dat er geen mogelijkheden zijn voor bijvoorbeeld funding.

 

 

Heb je al eens gedacht aan de mogelijkheid van een treasury quick scan?

Wij bieden je aan om deze quick scan voor je uit te voeren.
Een ervaren hands-on treasurer maakt een scan van jouw organisatie om te kijken of het de moeite waard is om te investeren in treasury. En vaak blijkt dat je door deze quick scan flink geld kunt besparen, zoals de volgende praktijkvoorbeelden laten zien.

Onderneming A: Productie onderneming in de verpakkingssector

(omzetcijfer ca. 150 miljoen euro)

  • A gebruikte voor zijn financiering een combinatie van EUR 5 MM met straight loans aan 2,25 % en EUR 3,5 MM met factoring (totale factoring faciliteit : EUR 10 miljoen) aan een rente van 0,75 % + 0,15 % flat op het omzetcijfer (of 225.000 euro op jaarbasis).
  • Een treasury quick scan maakte snel duidelijk dat er een besparingspotentieel was indien de onderneming een deel van zijn bankfinanciering verschoof naar de factoring. Het beroep op de factoring werd verhoogd naar EUR 7,5 miljoen, wat toegelaten heeft een jaarlijkse besparing toe realiseren van EUR 60.000.
  • De facturen werden niet altijd tijdig opgesteld en werden per post opgestuurd. De quick scan maakte duidelijk dat er besparingspotentieel was. Dankzij een strikter facturatieproces en het overgaan op e-invoicing is de onderneming er in geslaagd 3 dagen te winnen in de Order to Cash Cyclus of een besparing van ca EUR 1,25 miljoen aan werkkapitaal en ca. 30.000 euro aan financiële lasten.

Onderneming B: Groep die een aantal autoconcessies bezit

(omzetcijfer ca. 175 miljoen euro)

  • B gebruikte voor zijn korte termijnfinanciering (ca. EUR 13 miljoen) korte termijn kredietlijnen bij banken (financieringskosten voor van 1,90 %) en bij de financieringsmaatschappij van de importeur (financieringskosten van 1,10 %).
  • Een treasury quick scan maakte duidelijk dat er een besparingspotentieel was indien men een deel van de bankfinanciering verschoof naar de importeur financierings-maatschappij. In casu besloot de onderneming EUR 7,5 miljoen meer op te nemen bij deze, wat een jaarlijkse besparing aan rentelasten heeft toegelaten.
  • B had regelmatig credit saldi op een aantal bankrekeningen, terwijl ze debetsaldi op andere bankrekeningen had. Een van de aanbevelingen van de quick scan was het invoeren van een dagelijkse opvolging van alle banksaldi. Hierdoor is onderneming B erin geslaagd het gemiddeld uitstaand bedrag aan bankleningen te doen dalen met EUR 1,6 miljoen, wat een rentebesparing oplevert van 30.000 Euro.
  • B ondervond regelmatig vertraging in de incassering van facturen op leasingmaatschappijen, omdat de dossiers niet in orde waren (ontbrekende documenten, etc.). De quick scan maakte duidelijk dat een striktere opvolging van de procedures en keurige dossiers (first time right) zou toelaten de gemiddelde incassoperiode te reduceren van 23 naar 18 dagen. De onderneming heeft uiteindelijk een besparing van werkkapitaal van 800.000 Euro en een jaarlijkse rentebesparing van meer dan 15.000 Euro gerealiseerd.

Herken je een of meer situaties uit je eigen organisatie? Heb je een vraag? Onze experts zijn gaarne bereid om met jou in gesprek te gaan. Zij werken als Flex Treasurer en helpen jou graag verder. Overigens ook als je bijvoorbeeld na een treasury quick scan behoefte hebt, om tijdelijk een (flex) treasurer in dienst te nemen.

 

Patrick Kunz

Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV

 

 

 

MEER INFORMATIE

Wil je gebruik maken van een treasury quick scan of een Flex Treasurer of heb je een andere vraag?
Of wil je je aansluiten als Flex Treasurer?
Pieter de Kiewit helpt je graag verder.

[email protected]
+ 31 (06) 1111 9783

 

Working capital management : Some practical advice on the optimization of the Order to Cash Cycle

| 27-2-2017 | François de Witte |

 

As mentioned in my article “Treasury : proposed “to do” list for 2017”, working capital management will remain a hot topic throughout the year. The first priority is to reduce the working capital needs and financial expenses by optimizing the Order to Cash cycle. In this article, we will develop a plan of approach and propose some concrete actions enabling to generate tangible savings.


Background

The purpose of the Order to Cash optimization is to improve the whole cycle from the moment of the ordering of the goods or services, until the final payment, with the aim to:

  • reduce operational inefficiencies and risks such as delays between goods or service delivery and invoicing, credit management issues, unapproved discounts and deductions, data quality issues, etc.).
  • improve a number of processes such as the invoicing, the dispute management, the credit management and credit control
  • assess the current the tools, build business case for the improvement thereof, and implement them.

Plan of Approach

When starting such a project, I recommend to have at first a quick scan of the overall Order to Cash process so as to identify the critical areas and to assess the business case. Based hereupon, one can then subdivide the project in a number of streams.

In such a project, typically the following processes should be covered:

Ordering processes:
It is important to have a client acceptance process (for me a must in the B2B) and a clear policy on the way orders are accepted. I recommend to only accept written orders. For nonstandard goods, we also need to examine if a prepayment is required before an order is accepted, so mitigate the risk in case that the client does not execute this obligations. It is also useful to check beforehand if the exposure on the client will not exceed the existing credit limits.

Current invoicing processes:
Ideally the sending of the invoice should coincides with the delivery of the goods or services. Furthermore it is important to have the invoices sent timely. These actions enable to reduce the “hidden DSO”. Quite a lot of companies lose several days of easy working capital by neglecting this.
A good customer database is key, and in combination with the ERP, this  enables an automation of the invoicing process.  I recommend to use as much as possible e-invoicing, so as to reduce the costs and the postal delays.

Current credit management processes:
A formalized credit policy is a prerequisite. A number of solution providers offer solutions for the scorings of your clients, so as enable you  to define the credit limits in function hereof. In some sectors this information can be enriched by market information. Of course, one need to ensure that sales staff comply with this and check beforehand that the  credit terms have been duly approved. The credit manager needs to work hand in hand with the sales staff.

Current dispute management processes:
Prevention is important. For this reason, when ordering nonstandard goods, it is recommended to check beforehand the availability of the goods and the timing of the delivery, so as to manage the expectations of your clients. Throughout the process (from the order acceptance to the delivery and the invoicing) one should apply thee “first time right” so as to avoid disputes and litigation afterwards. Check also if some services and repairs are to be done under a maintenance contract or warranty, in which case they should be invoiced to other parties.

Current collection and credit control processes
It is important to have a well-organized credit control process enabling to send reminders quite soon after the due date (if possible the first reminder after 15 days). It can help to send to send to your clients some days before a gentle reminder of the forthcoming due invoices. Once the 2nd reminder has been sent, and provided that there is no dispute, it can be useful to block the delivery of goods and services to your client, so as to have an additional leverage, and to have  the credit collectors should calling the clients to see why they do not pay, and agree with them on an action plan.
When the classic reminder and call actions do not succeed, involve also the sales department and consider first a final call  by another person, before sending your clients to the debt recovery service or to the debt collection agency.
It is important to also ensure an automation of the processes, in particular if one has to address high volumes. If you cannot do it with your current systems, there exist good solutions in the market.

Reconciliation and allocation of incoming payments:
This is a big challenge for many companies. Make sure that your clients use the right payment instruments and payment messages, so as to facilitate the reconciliation process. Within the accounting department, incoming payments are not always allocated promptly, distorting the real accounts receivable outstanding. As a result, reminders can be sent unduly, leading to client dissatisfaction.

KPI’s and Dashboards:
It is important to foresee KPI’s for all the involved stakeholders, as well as incentives to ensure that everybody play the game. Dashboards should enable to remain in control and to monitor regularly a number of key indicators. An area of attention are the overdue receivables. A too high percentage of overdue receivables/total portfolio might be an indicator of possible uncollectable receivables and the need for write-offs.

Attention points

An Order to Cash optimization program is complex and we need to address a number of issues such as :

  • The resistance to change: people will come up with several reasons to keep on with the current processes. Overwork or client dissatisfaction will be used as excuse for deviations with the processes. Hence involve all the stakeholders, take time to listen to them and to make sure that they buy in the change. If the change is well explained, people will tend to accept the changed processes. The support of the senior management is key to address this resistance.
  • The limitation of the systems such as e.g. the ERP or the accounting package: Quite a lot of companies miss opportunities because they do not understand the capacities of their ERP. Involve from the start system experts and examine with them possible workarounds.
  • The standardization of processes throughout the organization : This can be an issue, in particular when working on multiple locations. Processes should be well documented. Once this is done, one can look for the automation.
  • The information and training of the stakeholders: Make sure that process documentation is easily accessible, and consider organizing training sessions for the involved staff.
  • The time and effort needed to implement external solutions: This requires a good business case, including all the aspects. Do not underestimate the cost, the effort and time to implement the tool.
  • The determination of the KPI’s and incentives: this should not only involve finance, but also other Sales, sales administration, the production department and the other involved stakeholders. Build in incentives to ensure that everybody play the game. Make sure that the KPI’s are monitored regularly so as to be able to take corrective action in case of divergences

Conclusion

By managing better the order to Cash Cycle, you can generate a lot of savings. This requires a global approach involving all the stakeholders. To be successful, an optimization requires a number of concrete process improvements, but also the buy-in of all parties involved. A good change management should ensure that the improvements are embedded in the organization, and smart dashboards will enable to monitor that one remains on track.
Technology can help to automate the processes, but do build first a business case and to not underestimate the effort.

It can be a long journey, but in the end, it is worth the effort.

 

 

François de Witte

Senior Consultant at FDW Consult

 

 

More articles of the author:

PSD 2: A lot of opportunities but also big challenges (Part I)

PSD 2: The implementation of PSD 2: A lot of opportunities but also big challenges (Part II)

Treasury: Proposed “to do” list for 2017

Working capital management – not just a finance issue