Tag Archive for: treasury management system (TMS)

Instant Payments: the SEPA Instant Payments rulebook is published, what’s next?

| 20-2-2017 | Boudewijn Schenkels | Sponsored content |

At the end of last year the SEPA Instant Payments requirements from the European Payments Council have been published. Consequently the Dutch requirements 3.0 from the Dutch Payments Association were published last month.

SEPA Instants Payments (also called SCT Inst – SEPA Credit Transfer Instant) will allow sending and receiving money 24/7 in seconds. European banking communities can go live from November 2017, the Dutch community has planned to go live from May 2019 with the first Instant Payments services. The development of the SEPA Instant Payments infrastructures of the banks and processors are in train. In april 2018 the start of the inter-CSM testing is planned, the end-to-end bank tests and the pilot phase from January until April 2019.

From our Instant Payments training classes for business professionals and IT staff, we find that participants are not fully aware of the large impact Instant Payments will have on the complete value chain and the opportunities it will bring. In order for you to understand the impact and opportunities, I will explain how Instant Payments are processed.

To give an impression of all the change aspects for users, the banks and the interbank processing side:

For corporates amongst others:

  • Different and new initiation processes, including, if applicable, instant insight in the failure of the payment;
  • New cash management and/or ERP applications or upgrades;
  • Reconciliation aspects;
  • Requirements for instant insight of bank account mutations;
  • Changed processes to monitor late payments (as they can be delivered eg. in the weekend);
  • Evaluate the potential of new services based on Instant Payments;
  • 24/7 operation required?
  • Possibilities in product differentiation.

 For banks amongst others:

  • Support new payments processes;
  • Real time and 24/7 reporting;
  • Extra notifications and reach filtering (as SEPA Instant Payments is not mandatory);
  • Revised (24/7) operational processes;
  • Changes to fraud/AML/sanctions management;
  • New sales and product management activities and roles;
  • Changes liquidity management processes and monitoring;
  • New clearing channel(s).

For processors amongst others:

  • New clearing and settlement processes;
  • Revised operational processing and monitoring;
  • New sales and product management activities and roles

As the launch dates come nearer it certainly triggers managers to now thoroughly evaluate scope and time scales for (required) internal projects and ensure to be ready and steady before launch in 2019 as well as business professionals to anticipate and grasp the potential opportunities.

The key differences between the current SEPA Credit Transfer and the new SCT Inst scheme are:

  • 24/7 available (no downtime)
  • real-time (5 seconds in Netherlands round trip)
  • real-time failure notifications
  • single transaction only

Instant Payments process

In our training, we also explain the differences between the normal payment flow (SCT) and the Instant Payments flow (SCT Inst). The process flow is described below in summary and will take place in several seconds.

 

Figure 1. (Source: EPC Rulebook)

Several key actors are involved in the payments process:

  • Originator: party sending the payment (payer, customer of the bank)
  • Originator bank: the bank of the payer
  • CSM: interbank party that clears and settles the payments between banks (Clearing and Settlement Mechanism)
  • Beneficiary bank: the bank of the payee
  • Beneficiary: the party receiving the payment (payee, customer of the bank)

The new process in summary:

The Originator Bank receives an SCT Inst Instruction from the Originator (Step 1). It verifies the instruction and sends the transaction to the CSM (Step 2), which verifies the message, ensures that the Originator bank has enough funds and instantly sends the SCT Inst Transaction message to the Beneficiary Bank. The Beneficiary Bank instantly verifies the payments and if it can be booked on the account of the Beneficiary (Step 3). The Beneficiary Bank confirms to the CSM if it was successful (positive confirmation) or not (negative confirmation with an immediate Reject) (Step 4). The Beneficiary can withdraw the funds (Step 5) instantly if in the previous step the confirmation was positive (and after the Beneficiary Bank has ensured that the CSM received the positive confirmation message). The CSM instantly reports to the Originator Bank if the SCT Inst Transaction had been successful (or not) (Step 6). In case the Originator Bank receives a negative confirmation about the SCT Inst transaction which indicates that the funds had not been made available to the beneficiary, the originator bank is obliged to immediately inform the originator (Step 7) and lift the reservation of the amount made in step 1.

All in seconds and 24/7!

This all means, that beside the flow of money, there is also a flow of messages between the customer and the bank. Both Beneficiary and Originator will be informed (in a few seconds) that the transaction is done (or not).

Are you interested in what the new SEPA Instant Payment will mean for your organization?
Come to our next open training (March 15 in Utrecht) or inquire about the possibilities of an in-house training.
More information at: www.paymentsadvisorygroup.com.
If you have any questions please contact us via: [email protected] .

 

Boudewijn Schenkels

Senior Consultant Payments @ Payments Advisory Group

 

 

Business intelligence for cash flows & cash positions

| 10-8-2017 | Treasury Intelligence Solutions GmbH (TIS)  | Sponsored content |

How do strategic professionals decide on the best path to success for their company? The key for strategic finance professionals and the best path to success lies in transparency and real-time reporting across company-wide cash flow and liquidity levels, bank transactions, customer and supplier relations and working capital.

When cash flow visibility is the lifeblood of your company, you want full control and knowledge. Direct access to insights on profitability and potential business risks allow you to make better decisions based on solid business intelligence that is accessible anytime and anywhere. Companies now can experience the power of the Business Discovery Manager – a business intelligence module within the TIS cloud platform. Supplier, salary and treasury payments can be easily analysed along with cash flows, liquidity and working capital via easy-to-use dashboards and reports. The tool, enhanced through state-of-the-art BI technology, enables users to access all strategic insights in a single, flexible, web-based and multi-bank, multi-ERP capable platform, available 24 hours a day from anywhere in the world.

Do you want to find out more about this interesting topic?
Do you want to discover the benefits and functions of the Business Discovery Manager in detail?

 

Treasury Intelligence Solutions (TIS)

You can request the TIS Factsheet via the red button.

 

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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“Systems om je bank buitenspel te zetten” – Verslag van mijn Financial Systems presentatie

| 23-5-2017 | Pieter de Kiewit |

Dit is een verslag en korte samenvatting van mijn presentatie die ik mocht houden op het Financial Systems evenement. Afgezien van een gênante vertraging door mijn gebrekkige Powerpoint skills was het een prettige sessie afgerond met een pittige discussie tussen experts in de zaal. Eerst een korte samenvatting:

Als Feyenoord fan ben ik dit jaar gelukkig en weet veel van voetbal, ook al speel ik het niet. Daarin ligt een parallel in mijn werk als treasury recruiter. Maandelijks krijg ik van circa 100 experts persoonlijk college en zie een veelvoud aan cv’s. Ik denk dat ik hierdoor inzicht heb in systemen die worden gebruikt om treasury processen te managen en ik zie de afgelopen decennia interessante ontwikkelingen die de laatste jaren in een versnelling zijn geraakt.

Zonder namen te noemen van leveranciers, ik doe geen software sales, heb ik een lijst gemaakt van diensten en producten die de gereedschapskist van de treasurer kunnen vergroten en afhankelijkheid van zijn bank verkleinen. Toen ik deze lijst opstelde, viel me op dat er tussen de vakgebieden cash & werkkapitaal management enerzijds en funding anderzijds interessante ontwikkelingen zijn zoals bankonafhankelijke betaalplatforms, crowdfunding en het bankkosten inzichtelijk maken. In het managen van risk zie je bijvoorbeeld trade finance in blockchain en partijen die FX transacties tegen ongebruikelijk lage marges bieden.

Banken daadwerkelijk buitenspel wordt lastig en is volgens mij ook niet het streven. Banken bashen vind ik een zeer onsympathieke hobby. Daarbij is de Fintech wereld ook nog niet volwassen met alle bijbehorende consequenties. Voor de drukbezette treasurer, voor de DGA en CFO die maar incidenteel te maken hebben met het vakgebied kunnen deze ontwikkelingen nogal onoverzichtelijk zijn. Helaas is er geen oplossing die snel inzicht verschaft. Wel denk ik dat er mooie kansen liggen voor degene die vooraan wil meelopen in ontwikkelingen.

De discussie die zich ontspon tussen financiële lijnmanagers en treasury experts ging, onder andere, over de vraag of bankkosten daadwerkelijk inzichtelijk zijn en wat de toekomstige rol van de banken zal zijn. De Powerpoint presentatie is onder dit artikel opgenomen. Ik verheug me op verdere events waar discussie rond dit thema kan worden verder gevoerd.

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

 

Klik hier als je de presentatie van de sessie wilt bekijken.

 

 

 

 

Singing from the same hymn sheet

| 26-4-2017 | Hubert Rappold | Sponsored content |

Hubert Rappold from TIPCO Treasury & Technology, puts the case for a treasury information platform (TIP), which acts as an information hub for the treasury department and reduces companies’ reliance on “Excel-based monstrosities” that are doomed to fail.

 

A typical treasury department runs a number of systems: a treasury management system for day-to-day operations, a trading platform, a market information system, electronic banking software and so on. So why on earth would you really need a separate treasury information platform (TIP)? After all, the data already exists in a multitude of other systems. Well, that is certainly true but also part of the challenge. If there is no single place where all the data can come together to create your reports at the press of a button, you will most likely be forced into a mediocre data warehouse solution also used by other departments or into a ‘handmade’ spreadsheet-based solution with all its drawbacks.

On top of that, even in an ideal world, when all your data is in a single system, there are circumstances where it is almost certain that you will need to integrate additional data. Just think about acquisitions. lt usually takes years before the systems are harmonised. So what do you do in the meantime?

Requirements of a TIP

A TIP needs to fulfil a range of requirements in order to satisfy the needs of treasury departments.

  • lt needs to be easy to use
  • lt needs to integrate existing data sources
  • lt needs to have a flexible reporting engine
  • lt needs to be easy to maintain
  • lt needs to be extensible

What happens if these requirements are not fulfilled is quite easy to imagine. Your reporting will be cumbersome, error-prone and data quality will be poor. Ultimately, the reporting project will fail and a new generation of interns will develop yet another Excel-based monstrosity doomed to failure.

Let’s look at these requirements in greater detail:

  • If it is not easy to use, it will not be accepted by your users, resulting in poor data quality and frustration. The benchmarks are spreadsheet­based solutions. If the handling is as easy as in these systems, then your users will be happy.
  • If it does not integrate existing data sources, you force users to duplicate entries, resulting in frustration and hence in poor data quality. Of course this is not a one-way street. Think about the FX exposure captured by your subsidiaries as part of the forecasting process and locally contracted FX transactions. Your risk manager will be more than happy to have this information in his or her treasury management system. Think about payment advices. Collect this information and you can use it to optimise the funding of your cash pools. Your TIP will act as an information hub for the treasury department, passing data back and forth between various systems.
  • If it does not provide a flexible reporting engine, you will not be able to react to ever­changing requests from internal and external sources and will essentially resort to time­consuming, cumbersome and error-prone spreadsheet reporting. Flexible not only means that it covers all functional aspects. lt also means that even without being an IT guru you should get meaningful information out of the system. However, be on your guard if you are told that you will be able to create sophisticated reports within minutes without any training. That only works well in promotional videos. Invest some time in proper training and be the master of your reports.
  • If it is not easy to maintain, you will be frustrated by the administrative overhead of the system instead of working straight on the analysis of the data. lt needs to be straightforward to add new users, companies and company groups. Whether via manual input or interfaces, the data needs to end up in your reporting solution without delay, without reprogramming, and without any external expertise.
  • If it is not extensible, you will be forced to install even more systems if a new function is required, such as cash flow forecasting, bank relationship management and guarantees. Therefore, think ahead. Before selecting a system, clearly state what you want it to do now and in the future.

Outline of system architecture

Below, I have outlined how such a system could fit into your existing system environment and what the interactions are between these components.

The TIP acts as the information hub between the various systems. lt receives and passes on data to and from other systems. Based on this data, all the reports are created without any need for manual consolidation.

Benefits of a TIP

  • The TIP receives the data from other systems and passes it on to other systems. This reduces the number of interfaces between systems and hence the overall complexity.
  • The reports are created from a single common data source. There will never again be any more mismatches between different reports as they are all created from the same set of data.
  • lt becomes less costly and less risky to replace components of your system architecture. If you need to replace one of the components, you can be sure of having a minimal impact on the overall system architecture. If you use a new treasury management system (TMS), you only need to replace a few interfaces between the TIP and the TMS. If you switch to a new market information provider – no problem, just replace the interface to the TIP. lt will pass on the data in the established way to all the other systems involved.
  • lt becomes easier to add new functionality: If you require a new function, for example, cash flow forecasting, it is also easier to update or extend a lightweight TIP instead of relying on the next release cycle of your TMS provider.
  • lt becomes easier to add acquisitions: Even if newly acquired companies are not integrated into your system infrastructure, they can use uploads or simple screens to provide their data.

Selecting a TIP

Usually, a TIP is selected because there is one burning issue that needs to be solved, for example, a group-wide overview of bank accounts or cash flow forecasting. If you select a TIP for any of these functionalities, always ask yourself what could be the next burning issue. These are usually identified by analysing the existing spreadsheet-based solutions. Any of these is a good candidate to be replaced by the TIP.

With this list in mind, look at the existing providers and make sure that they cover all your needs and not only the one that currently causes most of the pain. Also make sure that the system provider has treasury experience. Just think about cash flow forecasting. Most system vendors will tell you that planning is part of their system. However, a closer look will show you that basic functionality is missing; for example, the connection to the financial status as the starting point of the forecast or the display of credit facilities according to their maturity structure. Basic things, if you are treasurer, but a different world for the average system provider.

Also make sure that the system has an intuitive user interface, especially where large amounts of data are captured, for example, for the cash flow forecast. lt should be as easy as a spreadsheet­based solution in order to gain the acceptance needed. Interfaces should exist to all relevant standards and systems. Last and definitely not least, a large customer base that happily acts as references is a must. If this does not exist, the chances are high that the system provider will develop the system at your expense.

Look at your current treasury reporting. If you encounter lots of spreadsheet-based solutions, if you see files transferred via e-mail, if a lot of manual work is needed to create reports and if you find yourself tracking down differences between different reports time and again, you should consider a treasury reporting solution like TIP.

For more information please refer to TIPCO Treasury & Technology

Hubert Rappold – CEO at TIPCO Treasury & Technology

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Basel III and the impact on cost of hedging

| 30-3-2017 | Arnoud Doornbos | Treasury Services |

Corporates will save hedging costs and administrative costs significantly if they shift their hedging activities to exchanges such as CME (Chicago Mercantile Exchange).
In the summer of 2007 a large number of defaults on U.S. mortgage loans did arise. The banks were hit hard by the global domino effect that resulted. A major financial crisis which was followed by an economic crisis led to a revision of the capital requirements of Basel I and Basel II.

New Basel III

The core of Basel III is that many banks have to hold more capital and liquidity to their outstanding investments than they used to in the past. The rules are implemented as from 2013 and should eventually be fully effective in 2019.

Basel III will be a huge challenge for banks in the coming years. The impact on the pricing of financial products and transactions between banks and their clients will be significant.
Since July 2008, the Basel Committee for Banking Supervision has been working on Basel III for all banks worldwide. The European Commission has introduced three Capital Requirements Directives which contains concrete actions and requirements in terms of risk, capital and liquidity management within a bank. The new requirements, part of Basel III, aim to improve the quality and level of capital reserves of banks.

The capital requirements of certain products have increased and banks are encouraged to create additional capital buffers during good economic times so that they are better positioned to absorb losses during periods of economic stress.

Impact of Basel III on liquidity management

Besides sharpening the capital requirements Basel III has a major impact on liquidity management. The new liquidity standards are based on a stress test. In addition Basel III also introduces new long-term liquidity standards that reduce the mismatch between the maturities of assets and liabilities.
Banks will have to increase their reserves sharply in the coming years. Previously, banks only had to keep 2 % capital to their outstanding investments. Now with Basel III this capital requirement has been increased to 7 % (4.5 % hard buffer and an additional 2.5 % margin in bad times) . As a result banks will probably not distribute their profits in the coming years but will add to their capital buffers. Furthermore many banks will have to issue new shares in order to attract extra money in order to meet the new demands.

Counterparty risk

Within Basel III it has been determined that capital must be held for the credit risk on a counterparty a bank is exposed to in OTC derivatives or equity financing transactions. In addition, market participants are encouraged to take one central counterparty (clearing houses) for OTC derivatives. Any time a bank takes a risk against another party the probability of default exists. To offset this concern, and to support on-going stability within the interbank market, banks have long emphasized the importance of measuring and managing counterparty risk. Now banks have becomes noticeably less comfortable trading with other counterparties including other banks.

The recent deterioration in credit ratings that has hit many U.S. and European banks has led to a heightened sensitivity over counterparty risk. These apprehensions may not be voiced directly, but they become evident when front office trades that would have cleared in the past, no longer do because credit lines have been reduced. There is increasing focus on limiting exposures, even among global banks. And that is starting to affect the way we do business.
CVA (Credit Valuations Adjustment) desks have grown in popularity, as banks seek more effective ways to manage and aggregate counterparty credit risk.
The market has changed now in terms of how counterparty credit risk was calculated. Now, no client is assumed to be truly risk free. Different prices are now expected for different clients on that same interest rate swap, depending on variables including the client’s rating and the overall direction of existing trades between both parties.
On all new interest rate, FX, equity, or credit derivatives, CVA desks price the marginal counterparty risk for inclusion into the overall price charged to the client. CVA is a highly complex calculation.

CVA looks at default through the spread of the counterparty. A swap facing a single B credit that trades at 1200 in CDS is going to be charged a lot more than the same swap facing a AA counterparty. The CDS spread is normally a core input of CVA pricing.

What we see in practice is that in the manual process, the CVA desk team of a bank often passes along suggestions to the salesperson for improving the credit risk in a trade and enabling the sales person to offer the trade at a lower credit price. Examples of that would include improving the collateral agreement with a client, or inserting a break clause.
In the traditional CVA approach, a bank accepts a new trade, takes a fee and uses that fee to buy good hedges for all the risks in that trade. These hedges should eliminate all of the bank’s risk, but this is not necessarily the case once Basel III is taken into account.

Basel III does not recognize all types of hedges that the bank might want to use. Therefore the regulatory capital for certain trades will not be zero, even if the bank has used the full CVA fee to hedge all its risks.
The first impact Basel III has on CVA desks is on pricing. Pre-deal pricing needs to be reviewed to ensure the costs of imposed regulatory capital are covered. If not, additional pricing may need to be added. And the decision on which risks are efficient to hedge also becomes affected not just by strategic or business reasons, but also by the regulatory capital impact.
As part of Basel III’s updated regulatory capital guidelines, a new element has been added: V@R on CVA. Regulators have specified very precisely how the underlying CVA must be calculated for this charge. Banks will therefore need to decide whether to adjust their pricing and balance sheet CVA to match the Basel III rules, or to use different CVA calculations for pricing and regulatory purposes.

EMIR / Dodd-Frank

The Dodd-Frank / EMIR financial reform bill gives a new set of derivatives rules that either will clean up the market or send the world spiraling off the deep end. The truth is probably somewhere in between. The crux of the derivatives regulation is the requirements that standardized swaps be centrally cleared and traded on a Swap Execution Facility, or SEF. This moves derivatives from bilateral agreements between bank and client to centrally cleared products where credit risk is no longer bank-held, but is centralized in a clearinghouse where daily margin is managed. Once clearing is in place, customers no longer are locked into a single dealer, long and short positions can be netted, and SEFs can begin to match buyers and sellers without having to worry about the credit lines of each counterparty or dealer.

This will begin the migration of the derivatives business from a principal-based OTC market toward an agency-based bid/offer SEF market.

Treasury Services’ analysis:

  • Hedging is penalized decreasing the liquidity in the markets leading to increased costs to hedge financial risks for corporations. This is further emphasized by the penalization of the interbank markets through requirement of more capital, and additional constraints on liquidity on interbank transactions.
  • There will also be an increase in administration costs for corporates costs due to EMIR.
  • Corporate credit by banks is penalized: More capital is required in general. For back-up facilities on commercial paper programs it is required that banks will have to have 100% of liquid assets whilst these facilities are fully undrawn. The cost of carry will obviously be invoiced to the client. The ability of the bank to borrow long term will determine the availability of back-up facilities.
  • Restrictions in maturity mismatch (including for repayments) are introduced. This may mean that the risk of borrowing short term to finance long term investments will be transferred to the corporate sector.

The advantages of the OTC market compared to exchanges has become questionable. High cost savings can be achieved by shifting your hedging activities to exchanges such as Chicago Mercantile Exchange (CME).
Shifting hedging activities to an exchange such as CME requires changes in your risk management function. This supplies the possibility to bring the cost of hedging back in your control.

 

Arnoud Doornbos

Associate Partner

PSD 2 : The implementation of PSD 2: a lot of opportunities but also big challenges – Part II

| 1-2-2017 |  François de Witte |

After having examined the detailed measures of the PSD2 in my first article, in the 2nd part we will examine the impact of PSD 2 on the market. In order to help you read the text we will once more start with a list of abbreviations.

 

LIST OF ABBREVIATIONS USED IN THIS ARTICLE

2FA    :   Two-factor authentication
AISP  :    Account Information Service Provider
API :       Application Programming Interface
ASPSP : Account Servicing Payment Service Provider
EBA :     European Banking Authority
PISP :    Payment Initiation Service Provider
PSD1:    Payment Services Directive 2007/64/EC
PSD2  :  Revised Payment Services Directive (EU) 2015/2366
PSP :     Payment Service Provider
PSU:      Payment Service User
RTS :     Regulatory Technical Standards (to be issued by the EBA)
SCA :     Strong Customer Authentication
TPP :     Third Party Provider

Impact on the market

A major implementation journey:

The ASPSP (mostly banks) will have to make large investments in order to comply with the PSD2, in the following fields:

  • Implementing  the infrastructure enabling the application of the PSD2 scheme to the currency transaction in the EU/EEA area, and to the one leg transactions.
  • Ensuring that they can respond to requests for payment initiation and account information from authorized and registered TPPs (third party providers), who have received the explicit consent of their customer for to this. They will have to develop interfaces that enable third party developers to build applications and services around a bank. Internal banking IT systems might need to be able to cope with huge volumes of requests for information and transactions, more than they were originally designed for.
  • Ensuring their security meets the requirements of the SCA (strong customer authentication). This will be a big challenge both for the banks and for the other payment service providers).

PSD2 will make significant demands on the IT infrastructures of banks. On the one hand the IT infrastructure has to be able to be interact with applications developed by the TPPs (PISP and AISP). On the other hand, banks have to develop their systems in such a way that they don’t have to do this from scratch every time a TPP approaches them. This will require a very flexible IT architecture. The banks have to have a middleware that can be used by their internal systems, but also by the applications of the PSP’s.

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 third party 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 real challenge is to create standards for the APIs specifying the  nomenclature, access protocols and 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. The EBA (European Banking Authority) will develop RTS (Regulatory Technical Standard) with more detailed requirements regarding the interface between ASPSPs and TPPs. While these are expected to be published early 2017, based on the EBA’s recent draft RTS, the question is whether they will define the interface’s technical specifications.

Emergence of new players and business models

By integrating the role of new third party payment service providers (TPPs) such as the PISP and the AISP, the PSD2 creates a level playing field in the market. Several market experts expect that this will foster innovation and creating new services. For this reason PSD2 should increase competition.

This might lead to a unique open race between traditional players, such as the banks and newcomers for new services and a possible disintermediation of banking services, as illustrated in the figure down below:

Source: Catalyst or threat? The strategic implications of PSD2 for Europe’s banks, by Jörg Sandrock, Alexandra Firnges – http://www.strategyand.pwc.com/reports/catalyst-or-threat

PSD2 is likely to give a boost to the ongoing innovation boom and bring customers more user-friendly services through digital integration. One can expect that the automation, efficiency and competition will also keep the service pricing reasonable. PSD2 will foster improved service offerings to all customer types, especially those operating in the e-commerce area for payment collection. It will enable a simpler management of accounts and transactions. New offerings may also provide deeper integration of ERP functions with financial services, including of their multibank account details under a single portal, and smart dashboards.

PSD2 also enables a simplified processing chain in which the card network can be  disintermediated. The payment can be initiated by the PISP directly from the customer’s bank account through an interface with the ASPSP. In  this scheme, all interchange fees and acquirer fees as well as all the fees received by the processor and card network could be avoided. The market expects that new PISPs will be able to replace partly the transactions of the classic card schemes. A large internet retailer could for example ask permission to the consumers permitting direct account access for payment. They could propose incentive to encourage customers do so. Once permission is granted then the third-parties could bypass existing card schemes and push payments directly to their own accounts.

On the reporting side, the AISP can aggregate consumer financial data and provide consumers with direct money management services. They can be used as multi-bank online electronic banking channel. One can easily imagine that these services will be able to disintermediate existing financial services providers to identify consumer requirements and directly offer them additional products, such as loans and mortgages.

The PSD2 is for banks a compliance subject, but also an opportunity to develop their next generation digital strategy. New TPPs can provide their innovative service offerings and agility to adopt new technologies, enabling to create winning payments propositions for the customer. In turn, traditional players like banks can bring their large customer bases, their reach and credibility. Banks have also broad and deep proven data handling and holding capabilities. This can create winning payments propositions for the customer, the bank and the TPP.

Banks will have to decide whether to merely stick to a compliance approach, or to leverage on the PSD2 to develop these new services. The second approach will require to leave behind the rigid legacy structures and to change their mindset to ensure  quicker adaption to the dynamic customer and market conditions. A first mover strategy can prove to be beneficial.  Consumers and businesses will be confronted with the increased complexity linked to the multitude of disparate offerings. There also, the incumbent banks who will develop new services  can bring added value as trusted partners

Essentially, PSD2 drives down the barriers to entry for new competitors in the banking industry and gives new service providers the potential to attack the banks and disintermediate in one of their primary customer contact points. New players backed by strong investors are ready to give incumbents a serious run for their business. This is an important battle that the incumbent banks are not willing to lose.

The biggest potential benefits will be for the customers, who can access new value propositions, services and solutions that result from banks and new entrants combining their individual strengths or from banks becoming more innovative in the face of increased competition. Market experts also foresee an increased use of online shopping and e-procurement.

Several challenges to overcome

The PSD2 will be transposed in the national legal system of all the member countries. The involved market participants will have to examine the local legislation of their country of incorporation, as there might be some country-based deviations.

The authentication procedure is also an important hot topic. PISPs and AISPs can rely on the authentication procedures provided by the ASPSP (e.g. the banks)  to the customer but there are customer protection rules in place. Hence, they must ensure that the personalized security credentials are not shared with other parties. They also may not store sensitive payment data, and they are obliged to identify themselves to the ASPSP each time a payment is initiated or data is exchanged.

ASPSPs are required according to PS2 to treat payment orders and data requests transmitted via a PISP or AISP “without any discrimination other than for objective reasons”. A practical consequence for credit institutions will be that they must carry out risk assessments prior to granting payment institutions access – taking into account settlement risk, operational risk and business risk. One of  the main issue is the handling of the customer’s bank credentials by third party payment service providers. The bank needs to be able to perform strong authentication to ensure that the authorized account user is behind the initiation message

There are concerns about security aspects related to PSD2. An example hereof is the secure authentication. All the PSPs will have to ensure that they can demonstrate compliance with the new security requirements. How it will be achieved and monitored ? How will TPPs  interact with banks, since there is no need for a contract to be signed?

If something does not work correctly, there will also be discussions on the liability side. The PSD2 states that the TPP has to reimburse customers quickly enough that they are not bearing undue risk, but one will have to determine which TPP had the problem and work with them to resolve it. This will require further clarifications from the regulators.

In addition the PISP and the AISP vulnerable for to potential frauds. Web and mobile applications could become easy target for cybercriminals for various reasons, including the inherent vulnerabilities in the APIs that transfer data and communicate with back-end systems. The openness of the web could allow hackers to view source code and data and learn how to attack it. APIs have been compromised in several high-profile attacks that have caused significant losses and embarrassment for well-known players and their customers. The PSD2’s ‘access to account’  increases not only the number of APIs, but adds layers of complexity to the online banking/payments environment, adding to the risk of fraudulent attacks.

The market is waiting for the RTS (Regulatory Technical Standards) to give guidance on how some remaining security issues will be solved. These include:

  • Treatment of PSU’s (payment service user)security credentials
  • Requirements for secure communication between the PSP and banks
  • Full details and definition of strong authentication
  • Safety of the PSU funds and personal data
  • Availability of license registry for real-time identification of the PSP (PISP or AISP)

It is important that the required clarifications are published soon, in order to avoid a time lag between the implementation of PSD 2 in the national legislations and the real move in the market.

Conclusion

The PSD2 creates challenges, such as the huge investments to be made by the banks, compliance issues and protection against fraud and cybercrime. However several topics need to be clarified such as the RTS and the market players need also to agree on common standards for the interfaces. The clock is ticking in the PSD race.

Traditional players such as the banks appear to have a competitive disadvantage vis-à-vis the new emerging third party payment service providers. However, the Directive opens up new forms of a collaborative approach that can overcome this. New players can provide their innovation and resilience, whilst banks can add value thanks to their large customer base, credibility, reach and ability to cope with high volumes.

The biggest potential benefits might be for customers, who will benefit from new value propositions, services and solutions from new entrants, from banks and new entrants combining their individual strengths, or from banks becoming more innovative in the face of increased and agile competition.

François de Witte – Senior Consultant at FDW Consult

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Is your payments process limiting your business?

| 18-1-2017 | Treasury Intelligence Solutions GmbH (TIS) | Sponsored content |

TIS iVWith globalisation and an increasingly complex business environment, having an efficient and centralised payment system is vital to any multinational’s success. Recognising this, we at HSBC are proud to have successfully connected to Treasury Intelligence Solutions (TIS) in Asia for automated payment and bank statement processing.

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“We have reached a unique milestone in Fugro. With great enthusiasm and dedication, we managed to have our payment entered in our ERP routed via TIS directly to the bank. This new setup will result in significant time saving on our operations as well as IT systems maintenance,” praises Karregat.

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TIS (Treasury Intelligence Solutions GMBH)

 

 

 

 

Read also: How can you protect your company against fraud?

 

How can you protect your company against fraud?

| 16-12-2016 | Treasury Intelligence Solutions GmbH (TIS)  | sponsored content |

Dangers lurk in the online banking and electronic payments world for private consumers. However, the risks can be even more devastating for companies that are not properly protected, in some cases even leading to bankruptcy. Have you experienced phishing or “CFO trick” e-mails in your organization? Do you know, prior to the end of the month, how much money has perhaps been transferred out of each of the many subsidiaries in your organization? What happens when an employee has left the company, yet is still active in your systems, in some cases even still being listed with signatory rights?

 “How to protect your company against fraud”, provides insights into how you can gain a clear and central overview of your bank relationships, how you can arrange your cash positions and liquidity in a transparent way, and how you can standardize your electronic signatory authorizations.

To help you maneuver the payments and banking jungle, TIS GmbH reviewed the solutions that enable you to consolidate central processes through a Software as a Service platform. If you want to read more about this subject please click on in this whitepaper.

Treasury Intelligence Solutions GmbH (TIS)

Since 2010, Treasury Intelligence Solutions GmbH (TIS) has been combining their treasury management experience and know-how with their cloud computing and virtualisation expertise. The TIS solution is the result of these efforts: comprehensive, highly scalable and extremely secure SaaS solution to process, analyse and document all treasury management processes.

 

 

Why seems TMS market leadership to be a relay race?

| 23-11-2016 | Pieter de Kiewit |


geen-naamThe number of treasury management software brands I read about in resumes since 1996, the year of my first treasury placement as a recruiter, has continuously grown. In other markets market dominance has been more stable, BMW, Microsoft and Calvé have been able to keep long market leadership. What is so different in the TMS market? Without comprehensive research I can think of the following reasons.

TMS technology reasons

Technology is moving forward very quickly. Solutions are often based upon the possibilities new technology offers and not developed based upon client needs. Different backbone technology often comes with other providers, hence other TMS suppliers.

Integration after take-over

There is a number of small solutions that grew to be successful over time. The founders of the companies that offer these solutions often choose to sell after a number of years. This because they are technology driven and cannot handle the marketing and operational hassle. Or the other way around: after successful sales they have to build a better product and do not have the technological staff. Or they just want to cash. The bigger companies that take over are not capable to absorb the smaller without losing the warm connection with the clients. Service and flexibility go down, prices go up. Sales staff is demotivated after a setback in remuneration. Support does not know the application. The clients go to the next supplier.

Marketing reasons

Last but not least, successful start-ups that work with partners in various countries are not able to share the wealth of success. Discussion over equity, profit sharing and ownership are often deal breakers. In this market there is not one dominating expansion strategy that has been the success formula: own staff is not strong enough or too expensive, partner sales is often not based upon enough commitment or lacks a proper contractual basis.

What do you see in the market of TMS suppliers?

Pieter de Kiewit 

 

 

Pieter de Kiewit
Owner Treasurer Search