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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Stock exchanges and blockchain: open positions

| 18-7-2017 | Carlo de Meijer |

Just like banks, a growing number of exchanges worldwide have already taken a serious look at the way they can leverage blockchain technology. This in order to ‘get rid of’ the existing time consuming, cost inefficient and risky operations. Ranging from Abu Dhabi to Toronto they are experimenting with various use cases ranging from settlement, over-the-counter trading to proxy voting. Others have just started and have or are having hosted blockchain events such as the Jamaica Stock Exchange (Blockchain Masterclass) and the Tel Aviv Stock Exchange (Hackathon) not wanted to be left behind. In this blog I will make a ‘tour de table’ (in alphabetic order) around the various blockchain-related activities of stock exchanges worldwide.

Exchanges: Tour de Table

Abu Dhabi Securities Exchange (ADX)

The Abu Dhabi Securities Exchange (ADX) has started implementing blockchain technology, enabling shareholders to participate ‘with further transparency’ while using e-voting techniques. The technology was used recently (end March 2017) at the annual general meetings (AGM) for six listed companies, including two private joint stock companies and four public joint stock companies, on the ADX.

“I encourage companies to use blockchain technology. I am confident that more training and practice of this technology will widen positive outcomes and bring more companies to use this technology. This will go in line with Abu Dhabi 2030 Economic Vision that seeks to strengthen digital transformation in the UAE.”Rashed Al Blooshi, ADX chief executive

Australian Stock Exchange (ASX)

One of the forerunners in the blockchain race is the Australian Stock Exchange (ASX). The ASX already announced early 2016 that it had teamed up with blockchain startup Digital Asset Holdings to develop a new distributed ledger solution for investors, listed companies, and intermediaries, for clearing and settling trades. This to replace the existing Clearing House Electronic Subregister System (CHESS).

The exchange has now completed the initial phase of its DLT testing, and their blockchain prototype has ‘met performance, security and scalability thresholds’. The company’s shareholders report, released in February, stated that the ASX is on track for a decision in late 2017 on whether distributed ledger technology (DLT) represents a suitable replacement for the ASX’s CHESS system. The final decision on the company’s post-trade infrastructure will be made in 2018. Only then will a blockchain solution progress into full production

The ASX recently built a dedicated blockchain showcase space, called ‘acceler8’, in their Sydney headquarters. The set-up of a ‘purpose built demonstration suite’ is aimed to ‘bring to life’ the possibilities of distributed ledger technology, to help stakeholders understand what is possible.

“It is one thing to talk about blockchain, but in order to really understand its capabilities, you need to see it in action.” Peter Hiom, ASX deputy CEO

Deutsche Börse Group

Deutsche Börse Group has been making substantial investments in the development and introduction of ‘state-of-the-art’ blockchain services. The German exchange is working on several prototypes related to blockchain technology and DLT.

Recent developments include a solution for cross-border securities transfer in cooperation with the Liquidity Alliance and a functioning prototype for the settlement of securities transactions in cooperation with Deutsche Bundesbank, Germany’s central bank.

Deutsche Börse and Deutsche Bundesbank presented their first functional prototype for the blockchain technology based settlement of securities transactions against instant and delayed payments in November 2016. This concept is based on a blockchain from the Linux Foundation’s Hyperledger project, and will allow for functionality for the settlement of securities in a delivery-versus-payment mode for centrally-issued digital coins (as collateral).

“Along with the Deutsche Bundesbank we are innovatively and creatively addressing potentially radical technological opportunities for the financial sector. We will continue to do our utmost to leverage blockchain’s efficiency potential and to better understand and minimize the associated risks of this technology.” Carsten Kengeter, CEO of Deutsche Börse

The system will also be capable of settling basic corporate actions such as coupon payments on securities and the redemption of maturing securities. Next to that the prototype will enable the maintenance of confidentiality and access rights, which will be done in a blockchain-based concept on the basis of a flexible and adaptable rights framework.

The Deutsche Bundesbank and Deutsche Börse stated that they plan to further develop the prototypes during 2017. They said that the developed products will be used to “analyse the technical performance and the scalability of this kind of blockchain applications”.

Euronext and others develop blockchain infrastructure for SME post trade

Euronext (Amsterdam, Paris and Brussels) and a number of financial institutions including names like BNP Paribas Securities Services, Caisse des Dépôts, Euroclear, S2iEM and Société Générale, in collaboration with Paris EURPLACE, last year June signed a Memorandum of Understanding to explore together the development of a post-trade blockchain infrastructure for SMEs in Europe.

“We wanted to engage collaboratively in order to mount an innovative project with the potential to drive the transformation of the post-trade market. By pooling our strengths in this ground-breaking area, we are focusing on new solutions that will give small and mid-sized companies — key actors for growth in Europe – easier access to the financing they need. With this project, we are securing the means to seize opportunities that blockchain distribution can offer: speed of execution, low cost and security.”

Open to other international partners, this pilot agreement aims to improve SMEs’ access to capital markets while facilitating secure and transparent post-trade operations. It is part of the development of a new regulatory environment in France that allows the issue and circulation of securities using blockchain technology.

Mission will be to harness blockchain technology in the design, development and deployment of innovative solutions for post-trade. By reducing transaction costs while maintaining a high level of security, the company would help SMEs raise funds more easily on capital markets.

National Stock Exchange of India (NSE)

The National Stock Exchange of India (NSE), HDFC Securities, along with a group of domestic Indian banks are collaborating on a know-your-customer (KYC) data trial, testing blockchain technology. Blockchain startup Elemential provided the technology for the trial. 

The NSE has been testing the tech since as early as September last year. The test involved a shared environment in which the stock exchange would on-board customer data, while different entities (banks and regulators) could access this information in real-time. The first stage of the trial was completed in January. The next stage is expected to see the use of real customer data.

Japan Exchange Group (JPX)

Early last year, it was revealed that IBM had teamed up with Japan Exchange Group (JEX), which operates the Tokyo exchange, to start experimenting with blockchain technology for clearing and other operations. The Japan Exchange Group (JPX) and IBM are working towards testing the potential of blockchain technology for use in trading in low transaction markets. JPX is embracing a proof-of-concept that is investigating how blockchain could be used to create new systems for the trading of low-liquidity assets.

They had run two separate trials and concluded that digital ledger technology “has the potential to transform capital market structure by encouraging new business development, improving operation efficiency, and contributing to cost reduction”.

JPX is also working on trials with Nomura Research Institute (NRI) to examine how blockchain technology could be applied in the securities market.

Korea Exchange Exchange (KRX)

South Korea’s securities exchange operator the Korea Exchange (KRX) launched a blockchain-powered platform for the off-board trading market, linking sellers and buyers to trade securities. This platform named Korea Start-up Market (KSM), is an OTC- platform for using blockchain technology to enable equity shares of startup companies to be traded in the open market. South Korea’s exchange was revealed to be developing a blockchain platform to facilitate securities trading between buyers and sellers, directly, as early as March 2016.

The new feature will see its roll-out by implementing a blockchain platform called ‘Coinstack’, developed by Korean startup Blocko. With a focus on document and identity authentication, Coinstack is serviced both via cloud and on location, while supporting all protocols and applications build on the blockchain technology.

“This is the first example of commercialization in which blockchain is applied to the Korean over-the-counter market. Notably, the Coinstack development platform supports both Bitcoin blockchain-based contracts and Ethereum-based smart contracts.” Blocko CEO Won-Beom Kim

London Stock Exchange (LSE)

The London Stock Exchange (LSE) has emerged as one of the most active on blockchain technology. In late 2015, the exchange was already among a cross-industry group of institutions investigating how blockchain technology could be used to change the way securities trades are cleared, settled and reported in Europe. The group — named Post Trade Distributed Ledger Working Group — also includes UBS, CME Group, Societe Generale, LCH.Clearnet and Euroclear. The consortium, which is particularly interested in using blockchain for post-trade processes, now has nearly 40 members.

If you want to read about more stock exchanges please refer to the full list in Carlo de Meijer’s article on LinkedIn.

Open positions of exchanges towards blockchain technology

The number of exchanges worldwide that is joining the many financial institutions in the blockchain and distributed ledger technology race is continuously growing. The potential to enable stock exchanges to significantly reduce the cost, complexity and increase the speed of trading and settlement processes in a secure manner, has attracted many exchanges worldwide to explore this new technology. However, it remains to be seen whether blockchain will soon be accepted by exchanges on a large scale and form the backbone of future stock exchanges. This given the many remaining challenges. But the optimism is certainly high. For the time being stock exchanges are taken open positions.

 

Carlo de Meijer

Economist and researcher

 

How to convince a manager as a treasurer

| 17-7-2017 | Theo Paardekooper |

Management decisions are generally made based on analysis of data. However, this statement is far from correct. Arguments count, too. However, having the correct arguments does not mean that they are convincing. Being right is not the same as getting what you want.

How is this possible? If you are in full control of this principle, every action will become a success. To understand this principle we have to get involved in the world of behavioral finance. It is the cross section of economics and psychology. As a treasurer or financial professional you have to discuss issues regularly with your management and some background on this topic might come handy now and then.

One of the main biases is the risk appetite of a human being. People are risk averse if they can get a profit, but they are risk minded to make a profit to reduce former losses.

Another bias is about the difference between perceived risk and actual risks. A human being expects that small risky events will occur more often, than high-risk events. For this reason people buy a lot of insurance products that will cover these small risks, like travelling insurance, biking insurance, etc. Also the success of big lotteries is linked to this bias. The chance to win a million Euro’s in a lottery is as big as the risk to get involved in a car accident.

Decision-making is highly influenced by former experience. This can create a bounded awareness on the topic. People can get overconfident about their opinion or over-optimistic about the likelihood of outcomes of actions. People who are overconfident are often surprised, while people who are over-optimistic are often disappointed.

Every human being is influenced by bounded awareness. Just take a look at the example.

Didn’t you spot the gorilla? If you didn’t don’t be ashamed; almost half of all people don’t see it.

Decision-making is often a group process. Groups have effect on decision making by itself.

Just take a look at the following experiment.

It is hard to understand but from a behavioural perspective it is not important to know why, but it is important to know how. If you can use these non-rational principles to influence the decision making process, it will help you to convince everyone.

Are you convinced, if not, I probably forgot some other non-rational principles…

 

Theo Paardekoper 

Independent treasury specialist

Roadmap for unwinding derivatives

| 14-7-2017 | Roger Boxman |

Banks offer proposals to smaller companies and housing associations to unwind interest rate swaps. The benefit for the banks is that this will reduce their risk weighted assets. Whether this offer is attractive or not depends on several issues.

A short-list of advantages of unwinding to keep in mind is found below:

  • The advantage of skipping break clauses and uncertain margin call events and therefore a reduction of liquidity risk.
  • Creating a potential current tax loss on the unwinding fee which can be possibly offset in the near future.
  • Opportunity to restructure the funding structure and refinance against lower interest rates.
  • Optimise the redemption schedule and therefore to create lower interest rate risk in the loan portfolio.
  • Reduce costs of monitoring and supervision.
  • No hedge accounting issues with unexpected profit and loss accounting in combination with latent taxes.

Off course the decision to unwind or not depends highly on the amount of the fee and the specific expectations of the organisation. No situation will be the same, an exact blueprint simply does not exist. In a substantial number of situations, the ‘do nothing option’ will be the best.

Roger Boxman

Senior Advisor Internal Control

TreasuryXL: How the eating of the pudding goes so far…

| 13-7-2017 | treasuryXL |

In April 2016 we started a new venture – treasuryXL – and as with most brilliant ideas, the proof of the pudding is in the eating. Now – one year and a few months further – we look back to see how the eating went. In a positive sense there was enough pudding provided and we are proud to present to you some real XL-growth figures.

 

Connect and share information with the treasury community!

This is what we aim for: to be an open platform for organizations with treasury and cash or risk management exposure with or without a treasurer and or the experts surrounding them. We want to share news, opinions, vacancies and events on a daily basis with you. The figures show that you know how to find us.

Plenty of articles – one every workday

 With the help of our group of experts and partners, we really did reach one of our main targets: publishing a new article every workday and we find this quite an accomplishment.

The topics varied  from news items to background information, all treasury-related and the treasury community reacted very positively. If you want to take a look I invite you to visit our articles page on treasuryXL and fill in the ‘Search’ for a specific topic.

XL growth figures

If you start a website for a community from scratch you always have to wait and see how readers appreciate what you present to them. In the case of treasuryXL we are proud to tell you that almost 10.000 (unique) readers found our website and opened approximately 19.000 different pages since the site went online.

Approximately 1.300 unique users regularly open over 10.000 pages per month and stay quite long to read articles, vacancies or other information. There has been a steady consistent growth in visitor numbers and the figures have trebled since April 2016. That is a fantastic growth for us and proof that we are realizing a need within the market for professional, well written treasury related articles.

We also found a considerable number of new partners who consider treasuryXL a valuable partner to promote their products and services. It goes without saying that the benefits are mutual. The most important is, of course, to provide valuable information for our readers. If you want to bring your own products and services under the attention of treasurers, CFO’s and other financial professionals do not hesitate to contact us.

Towards new horizons

These figures make us proud, but are no reason to stand still. We will continue to develop our interaction with the community, as shown by our unique, bespoke and innovative Flex Treasurer service. We have plenty of plans for events and new projects and  will be available to you every day with interesting news and relevant information.

 Annette Gillhart – Community Manager treasuryXL

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Why Is Bank Independency Important?

|12-7-2017 | Mark van de Griendt | PowertoPay/Unified Post | Sponsored content |

As financial technologies develop, bank independency is something more and more companies adopt. Bank independency not only means that financial streams are dealt with online and require less manual interventions (straight through processing). Mainly not having to rely on the services provided by the bank where the account is held is also an important one when talking about bank independency. A couple of things mentioned below emphasise the importance of being, or becoming, bank independent.

The changing landscape

Since the economic crisis, the banking landscape has become a more dynamic environment. Besides banks going bankrupt we have also seen banks that have withdrawn themselves in certain geographical or business areas. This gave CFO’s in the corporate sector headaches for having to find another bank and to ‘move’ its business. A good example of a (sudden) change of the financial landscape is the Brexit. Not knowing what the Brexit will bring in this perspective, one thing we do know is that the changing banking landscape is here to stay.

Where using bank-independent tools, products or instruments doesn’t solve the problem of finding another bank, it does take away having to start up a time-consuming project changing the applications used in the various financial processes. Bank independency will become more and more common as the banking landscape continues to change.

Formats & Interfaces

Another good reason to use bank independent solutions is not to find yourself in a so called lock-in situation when looking at file-formats and interfaces. Where local formats or proprietary interfaces may have their benefits, formats and interfaces will be subject to change or even may be replaced by the bank offering the service. Recently a bank had decided to phase out a proprietary reporting format. Although this was done with an alternative reporting format and customers had a reasonable period to migrate, many of them were confronted with major changes in their business applications from which many of them being legacy systems.

Again in this case using a bank independent solution will not prevent you from change but a good bank independent solution or tool will offer the flexibility to deal with this type of change outside the corporate IT domain. Still a project but one with less impact on the organisation. When using fully bank independent instruments (for example MT101) the number of changes are limited to a bare minimum and in case of compliance will always be dealt with by the vendor as part of its service.

Cost Savings

Last but not least a bank independent will save costs. Of course there is an investment consideration with regards to a bank independent solution but when looking at the business case the benefits of not having to manage changes due to compliancy or technological developments will in most cases create a break-even point somewhere in year 2.

Recent customer case-studies even showed a significant decrease in costs in year 1 simply by not having to change its output from their applications creating payment instructions when expanding their business to other regions using new local banks. By itself not a bad investment, even when leaving the non-qualified benefits of bank independency aside.

Mark van de Griendt – Cash Management Expert at PowertoPay

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Please also read: 7 reasons why you should do e-invoicing too.

 

Decentralised data capture, centralised data analysis: a case study

| 10-7-2017 | Hubert Rappold | TIPCO Treasury Technology GmbH | Sponsored content |

From now on, Faber-Castell will be organising its cash flow forecasting, accounts and derivatives with TIP. Regardless of where in the world, TIP allows the many subsidiaries of the multi-national to forecast and plan without major time inputs. Data capturing is decentralised while data analysis is centralised.

Case study

Groups with international subsidiaries need to regularly request all financial data from their subsidiaries spread around the world. This requires a lot of time and robust review procedures. Our web-based treasury information platform, TIP, allows the decentralised input of these data, irrespective of the various source systems, and their automatic reporting to Group Treasury. On behalf of the well-known family-owned company Faber-Castell, we recently implemented a solution which allows this stationery manufacturer to access and plan its group-wide data, ranging from its financial status and cash flow forecasting to its derivative management. Find out more about the implementation and how Quick Guides helped Faber-Castell subsidiaries to get started with the new system in their case study.

TIPCO Treasury Technology

TIPCO provides treasury reporting and cashflow forecasting solutions for over 120 companies. TIP automatically compiles existing data from various systems (TMS, ERP, etc.) and prepares analyses of these. This avoids the need to capture data manually, which is one of the most common causes of inaccurate data. Huge data volumes can be processed within seconds and reports can be set up and managed flexibly, even if the company’s requirements change. A smart cashflow forecasting module utilises that data and allows modification and simulation of forecasts.

You can read more about their case study by clicking on this link.

If you want to find out more about TIPCO and their services and products please refer to their company profile on treasuryXL.

Hubert Rappold – CEO at TIPCO Treasury & Technology GmbH

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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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The EU and blockchain: taking the lead? (II)

|6-7-2017 | Carlo de Meijer | treasuryXL |

In his article ‘The EU and blockchain: taking the lead? ‘, our expert Carlo de Meijer writes that the EU, after having a ‘wait and see’ attitude for a long time, seems to be taking steps (may be) to become one of the leading economic blocks in the blockchain race. He believes that it is worthwhile to take a closer look at the EU initiatives. We have made a summary of this article. In part (I) we dealt with the European Commission. Today we present you the summary of what Carlo de Meijer writes about the European Parliament, the European Central Bank and the European Supervisory Authorities.

European Parliament

European Parliament  votes for smart regulation of blockchain technology

Last year June the European Parliament voted for ‘smart regulation’ of blockchain technology, taking a hands-off approach. The MEPs voted in a proposal set out in a resolution drafted by Jakob von Weizsäcker, suggesting that a new task force established at the EU level which would be overseen by the European Commission, should build expertise in the underlying technology. It would also be tasked with recommending any necessary legislation, but the text warns against taking a ”heavy-handed approach” to this new technology.
The proposal clearly stated that distributed ledger technology should not be stifled by regulation at this early stage.

EPRS blockchain report

In February the European Parliamentary Research Service (EPRS) published a new report “How blockchain technology could change our lives”, providing an introduction for those “curious about blockchain technology” and aimed at stimulating reflection and discussion.

“Spotlight on Blockchain” workshop

In collaboration with the European Commission, the European Parliament has organised various blockchain events including a kick-off conference on “Demystifying Blockchain” and a series of workshops to look at blockchain developments and use case applications.
A session of discussion early May held at the European Parliament (EP) centred on the future of blockchain regulation in the 28-nation economic bloc. The “Spotlight on Blockchain” workshop, was hosted jointly by the European Parliament and the European Commission.
Part of the program initiated by the Blockchain Observatory was to cautiously approach the who, what and why of blockchain legislation.

European Central Bank

Report: Distributed Ledger Technology (DLT) – challenges and opportunities for financial market infrastructures

The European central bank (ECB) has led a study to analyse the benefits and risks of blockchain technology and consider its possible integration in its market infrastructure. The final report named Distributed Ledger Technology (DLT) – challenges and opportunities for financial market infrastructures was published in March this year.

In the report the ECB acknowledges the various benefits of DLT, such as the ability to lower back office costs and improve reconciliations by enabling automatic updates of records as well as shortening settlement cycles and therefore reducing collateral requirements.
The ECB however concluded that the distributed ledger technology does not (yet) meet the Bank’s requirements in terms of safety and efficiency. The bank is not firmly opposed to blockchain, but it considers that the technology is not mature enough to be integrated into its infrastructure as it is constantly evolving, citing deficiencies in safety and security. The report’s tone is in keeping with the ECB’s cautious approach to DLT and mirrors previous statements made by bank executives.
The European Central Bank has ruled out using distributed ledger technology within the so-called Eurosystem’s market infrastructure for the foreseeable future, until the software meets high safety and reliability standards.

“Yet the technology does not yet meet the ECB’s standards for safety and efficiency, says the report” “The ECB is open to considering new ways to enhance its market infrastructure. However, any technology-based innovation would have to meet high requirements in terms of safety and efficiency.

DLT Project Team

Nonetheless, the ECB is keeping its options open, recognising the benefits that the technology could bring to securities settlement. To this end, the ECB has created a DLT Task Force to “bring together market experts on financial innovation and cyber security. Its objective is to avoid any negative consequences of technological innovation regarding the harmonisation and integration of post-trade markets in Europe and to explore the potential of DLT to help remove some of the remaining barriers to a fully integrated post-trade market in Europe”. For that they hired a senior technology executive, Dirk Bullman, with practical experience in distributed ledger applications and front and back office project management expertise

T2S

The ECB will continue to monitor DLT’s developments and could use the technology in the administration of Target2Secrities. The report states that DLT could play an important role in the administration of Target2Secrities, as well as helping to achieve its overall aim of “deeper integration of financial markets”.
Bullmann’s group is now exploring how DLT could be used in its new securities clearance platform T2S. Central securities depositories (CSDs) that participate in T2S today can effectively pool their securities so they can be bought and sold by investors across Europe. Since some technology would need to be selected in standardizing the issuance, Bullmann said DLT was a natural candidate for testing.

ECB – Bank of Japan joint initiative

The ECB has also launched a joint research project with the Bank of Japan in December last year to study the impact of new innovations of the global financial market and explore possible use of blockchain technology for market infrastructure services.
Bullmann’s task now is to coordinate with the Bank of Japan (BOJ) to explore topics such as how financial market participants could send payments using the technology, prioritizing how a certain payment might be cleared, for instance.

European Supervisory Authorities

The joint committee of the European Supervisory Authorities has released a report in April on Risks and Vulnerabilities in the EU Financial System, in which cybersecurity, including the rising use of blockchain technology, is marked as a major concern for the financial sector.

While further study is required before the EU submits new regulation regarding the financial sector and FinTech adoption, also the European Securities and Markets Authority (ESMA) has undertaken a study of cyber risk and controls of financial institutions throughout the EU. These results will be analyzed in light of existing regulations and used in making future recommendations. In June the ESMA publicized its response to the commission’s proposal on FinTech regulation following a public consultation.

ESMA and regulation

The ESMA, has stated in a new report that the current regulatory framework in effect does not pose a hurdle for the adoption and development of blockchain or distributed ledger technology in the short term. The report acknowledges the benefits of adopting blockchain before notably adding that blockchain applications are still at a nascent stage and, as such, do not require regulation. Regulatory action for blockchain technology at this ‘early stage’ is ‘premature’, said the European Securities and Markets Authority (ESMA) in its report.

The ESMA states that it does not see blockchain technology, through its fundamental core concept of decentralization, post a threat to central financial market infrastructures. The ESMA deems it “unlikely” that blockchain technology would eliminate financial market infrastructures such as Central Securities Depositories (CSDs) and Central Counterparties (CCPs). Still, the watchdog says it “realizes” that blockchain technology may render some traditional processes redundant, or affect and “change the role of some intermediaries through time”

ESMA adds that the presence of blockchain technology “does not liberate users from complying with the existing regulatory framework, which provides important safeguards for the well-functioning of financial markets.” The ESMA will continue to monitor developments in the Fintech space, to assess if blockchain technology requires a regulatory response.

European Union Agency for Network and Information Security (ENISA)

The European Union Agency for Network and Information Security (ENISA) also entered into the blockchain debate with a report launched in December 2016 aimed to provide financial professionals in both business and technology roles with an assessment of the various benefits and challenges that their institutions may encounter when implementing a distributed ledger.
ENISA analysed the technology and identified security benefits, challenges and good practices. There are however new challenges that the technology brings, like consensus hijacking and smart contract management. Additionally, it highlights that public and private ledger implementations will face different sets of challenges.

ENISA has identified good practices to overcome the issues identified as well as introduce the key concepts that decision-makers should be aware of when approaching this technology. Some good practices are: using recovery keys; using multiple signatures for authorizing and processing transactions; and, using library of standardized smart contracts.

In this paper, they also identified that there are challenges that may require further development, such as: anti-money and anti-fraud tools; interoperability of blockchain protocols; and, legal provisions and tools for implementing privacy and the right to be forgotten.

You can read the full article by clicking on this link.

 

Carlo de Meijer

Economist and researcher

 

 

Banking license Klarna & Adyen: The end of their competitive advantage?

| 5-7-2017 | Pieter de Kiewit |

Last weeks the payment service providers (PSPs) Adyen and Klarna received banking licenses. The gap between Fintech and traditional banks is being closed with the new kid on the block entering the traditional market. I can see the parallel to Amazon taking over Wholefoods and entering traditional retail. Markets are reshaped over and over. The question I ask myself is: will these new kids be able to change how traditional retail and banking is done and make a real difference?

Compliance

As to compliance in the banking sector this might be a challenge. The regulators think that by imposing new legislation on banks they will prevent all that went wrong in the past. I think this is an illusion. The effect is an increasing demand for experts who can take care of compliance. As a treasury recruiter I know bankers, also the ones with the proper expertise are fleeing the bank because compliance is demotivating a lot of them. This results in an increase in recruitment assignments and salary levels. This is not an issue relevant for Amazon.

The upside for the PSPs in comparison to Amazon is that they will be able to work with state of the art technology and challenge traditional banks who have to work with legacy systems. As far as I know, Amazon is not planning to close traditional outlets. And retail always has had a quite modern infrastructure. I cannot see yet how they would be able play the technology trump as hard as the PSPs can.

Both modern challengers do have an obvious competitive advantage. Especially for the PSPs I wonder if the extra burden of compliance will outweigh this advantage. Both client perception and cost levels will have to be monitored closely. The interesting thing of this all is that, by the time we might be able to know, the market situation might have been flipped twice again. It are interesting times, not?

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

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