Tag Archive for: treasury

The link between financial performance and working capital metrics

| 10-07-2018 | Theo Paardekooper | treasuryXL

Managing working capital is an important task for treasurers in order to reduce the financial risk of a company and to improve the financial stability. In various studies the costs and benefits of working capital have been claimed.

According to Blinder and Maccini (1991), supply costs and price fluctuations can be reduced by larger inventories and this can prevent loss of business due to scarcity of products. However, there are also effects of investment in working capital, which may lead to a negative impact on firm value. Firstly, keeping stock available imposes costs such as warehouse rent, insurance and security expenses, which tend to rise as the level of inventory increases (Kim & Chung, 1990). Secondly, larger investments in working capital, involves opportunity costs and financing costs (Kieschnick, Laplante, & Moussawi (2013) and this will increase credit risk. Summarizing, working capital management affects the perational performance of the company and external circumstances can influence working capital management accordingly. The corporate treasurer is the key person to create working capital policies and initiate managerial focus on this topic. In order to define the added value of a treasurer in the perspective of working capital management the main question is:

Is there a link between the financial performance of a company and its working capital metrics?

This question can be mathematically rephrased as

Where the working capital metrics are defined in the Cash Conversion Cycle (CCC)

Several studies conclude that a faster rise in the cost of higher investment in working capital relative to the holding of more inventories and or granting trade credit to customers may lead to a decrease in corporate profitability (Deloof 2003) and Shin and Soenen (1998) find in a comprehensive study a strong negative relationship between working capital metrics and corporate profitability for US corporates. Most studies focuses on the linear relationship between financial performance and working capital metrics, however a non-linear relationship between financial performance and working capital metrics is at stake. On top of the non-linear relationship industry specific effects might play an important role. After investigating the statistics of a database containing the financial information of 39.052 non-US listed corporates in a time period between 2010 and 2017 2 samples of scatter charts below give a view on the data

  • The results indicate that in 50% of the industries a relationship between financial performance and working capital metrics is confirmed, and this relationship is non- linear. A certain optimum for financial performance is at stake.

  • The cash conversion cycle is industry driven as we see a wide range of different cash conversion cycles over various industries.
  • Working capital management can improve the financial performance, however based on the data, we see a lot of different results in the working capital metric compared to financial performance. This can indicate there is room for more focus on working capital management

 

Theo Paardekooper

Independent treasury specialist

 

Wat zijn de mogelijkheden van een Flex Treasurer binnen het MKB?

09-07-2018 | treasuryXL |

Laagdrempelige en hoogwaardige expertise van ZZP’ers uit de treasury wereld voor kleine en middelgrote organisaties die geen treasurer of cash manager in dienst hebben.

WAT IS EEN FLEX TREASURER?

U bent de eigenaar van of werkt in een kleine of middelgrote organisatie die geen treasurer of cash manager in dienst heeft. U denkt waarschijnlijk dat er binnen uw organisatie geen plaats is voor een dergelijke functie. Maar, oordeel niet te snel: ook het MKB heeft behoefte aan professionals als het gaat om treasury en cash management. Toch gaat het aannemen van iemand vaak een stap te ver.

Welke mogelijkheden zijn er?

treasuryXL en Treasurer Search hebben de handen ineengeslagen om laagdrempelige en hoogwaardige expertise van ZZP’ers uit de treasury wereld te koppelen aan kleine en middelgrote ondernemingen die geen treasurer of cash manager in dienst hebben.

We willen met deze dienstverlening geen substituut worden voor de grote treasury consultancy organisaties maar we bieden graag ondersteuning bij vraagstukken die nu onbeantwoord blijven. U kunt de vraag aan ons stellen en wij zullen u vrijblijvend in contact brengen met de juiste deskundige. Leidt dit tot een samenwerking, dan kan dit op urenbasis, als lump sum of in een abonnementsvorm ingevuld worden.

Beschikbare diensten

Wij kennen Flex Treasurers uit verschillende vakgebieden: risk, bankrelaties & technologie, regulations, non-profit, financiering, trade finance, cash management, SME & overige gebieden.

Meer informatie kunt u terugvinden op onze website. Hier kunt u bijvoorbeeld een overzicht van de diensten vinden die we aanbieden in samenwerking met de Flex Treasurers zoals bijvoorbeeld een treasury  quickscan en een treasury coach.

 

Best read articles of all time – This is why corporate treasury is great – The laymen introduction to corporate treasury

| 26-06-2018 | by Pieter de Kiewit |

My father was a civil engineer and would have liked one of his kids to follow in his footsteps. Regretfully for him we all went in different directions, me landing an engineering degree of the wrong type. What I did like to learn from my first business management professor was about creating bridges between various functional areas. That is what I have been doing as a recruiter for almost 25 years, the last 8 solely in corporate treasury. Why treasury?

All organisations, even the small ones, can benefit from good treasury. Only the bigger ones hired permanent experts. The main three areas, perhaps oversimplified, they focus on are:

  1. Money logistics: opening and closing bank accounts, doing (bulk) payments, forecast money coming in and going out;
  2. Managing (treasury) risk: understand and manage the implications of interest or currency fluctuations. If your manufacturing costs are in Euro and you sell in Dollars and the price of the Dollar drops, what to do? What to do if you have excess cash on your current account;
  3. Funding: where do you get your money for new or current business? Bank loans, equity, mortgage, leasing?

This does not sound sexy, does it? But do understand that during the crisis treasurers found solutions for companies how to survive. They found funding to pay salaries, helped sales finding creative funding solutions to make complex transactions achievable, helped prevent companies going belly-up due to currency exposures, forced banks to offer better solutions at a more acceptable price.

Treasurers manage huge amounts of money and operate very close to the CFO. They are involved in mergers & acquisitions, reorganisations and international expansion. They act in small numbers but have huge impact if they would stop doing their work. And the job type evolves continuously. Creating new treasury bridges to traditional job types like accounting, tax, sales helps all doing a better job. The academic world is showing increasing interest. In the Netherlands the post graduate education at the Vrije Universiteit is becoming more prominent in the treasury community. Corporate treasury is very dynamic!

What I love doing is helping CFO’s, HR, internal recruitment and senior treasury managers with their staffing questions. What qualifications and personality type matches best with your current and future business situation. If you only hire one treasurer per year, what do you need to know to choose the best candidate? I hope now you can understand my passion for creating bridges in treasury and recruitment.

I look forward to your thoughts to the above and further contact,

Pieter de Kiewit
[email protected] / +31 6 1111 9783

Pieter de Kiewit

 

 

Pieter de Kiewit
Owner Treasurer Search

 

Best read articles of all time – Corporate Governance – It is all about the rules

| 20-06-2018 | treasuryXL |

Corporate governance is the rules and processes by which a company is controlled and directed. It is a balancing mechanism between different stakeholders – directors, shareholders, management, government, external financiers etc. The treasury function performs highly skilled and complex tasks to ensure continued and harmonious execution of all cash related functions. At the same time, there is much interaction with both internal and external stakeholders. The corporate governance within the treasury function should always be performed in accordance with predetermined and approved metrics as laid out in Treasury statutes. This means undertaking operations that are consistent with the governance within the corporation.

Corporate governance helps to define the strategies of a company, and highlight how these strategies will be implemented throughout the policies, procedures and working processes. Normally, Treasury statutes are drawn up by treasury and management – detailing the accepted methodology to perform the approved tasks – whilst responsibility and approval is granted by the directors. Once agreed upon, the statutes have to be observed by staff carrying out their duties and responsibilities.

As the treasury function is highly complex – both in financial products as well as regulatory frameworks – both directors and management need to fully comprehend the functionality as well as the implications of different financial products and services. The onus lies on the treasury department to ensure that other stakeholders not only have enough knowledge about the products, but also awareness and understanding of the relevant risks. This is vital to ensure that the right decisions are made at the highest strategic level.

Directors and management need to understand:

  • Financial risks undertaken whilst running the business on a day-to-day basis
    Operational controls to protect the business from fraud
    Risks inherent in approved financial instruments
    Strategies used to identify and mitigate financial risk
    How risk is measured and reported
    Potential exposure as a result of the agreed policy
    Acceptance that not all risks can be qualified and quantified
    The influence of external factors – market risk, counterparty risk, interest rate risk etc.

Proactive role of the Treasury

  • Accurate valuation of financial products used – if you cannot value it, you should not be using it
    Quick recording of all transactions
    Ensuring with controllers that all financial products are correctly input for accounting purposes
    Implementation and management of agreed Treasury policies
    Determining if bank covenants are being maintained
    Ensure compliance with all external regulatory frameworks
    Collaborating with auditors – both internal and external

Policy is influenced by strategy and objectives. The role of Treasury is to help to fulfil those objectives. Treasury has a dual function – it both mitigates risk as well as being the source of risk. Treasury enters into financial transactions on behalf of the business in order to mitigate risks; however, something like an unauthorised trade could subject the business to financial loss.

It is essential that directors and management understand both the risks that treasury manage, together with the potential risks that those transactions can create.

What corporate treasury can learn from corporate insurance

15-06-2018 | Treasurer Search | TreasuryXL |

Last week Treasurer Search sent it’s monthly newsletter that included below article. Not all people in the market will think the same as the author, but we think it is definitely an interesting way of looking at our insurance colleagues.

 

One of the many benefits of being a recruiter is that every meeting is a lecture of an expert about his professional life and developments. An excellent way to learn and keep up-to-date. Every second week I try to transfer this knowledge to my colleagues in Team Treasurer Search and the risk topic often gets attention. I also want to share my observations about insurance and treasury with you.

First, perhaps a bit cynical, why is corporate insurance reporting to the group treasurer more often? The importance and professional level of insurance is increasing, this is also acknowledged by CFOs. To prevent their span of control becoming too big, they delegate the profession to legal, procurement and recently often to treasury. Many treasurers are not motivated by insurance tasks and ignore the overlap that exists. Traditionally the risk types “market risk” and “liquidity risk” create primary tasks for treasury departments that often motivate the candidates I meet. Recently counterparty or credit risk gets a bigger role, not only with financial services companies. My recent conversations with corporate insurance managers brought me new insights in how risk can be analysed and managed.

In previous blogs I wrote that “new school treasurers” distinguish themselves by better connecting with their business partners and provide understandable solutions that make sales, operations and finance happy. Insurance managers were already forced to talk with the business their whole life. If an insurance manager does not understand what his business partners do, he will not be able to make a proper assessment of the risk. And that does include all types of risk: staff getting sick, goods not being supplied, tornados, computer viruses, politicians starting embargos, etcetera. They are closer to enterprise risk managers than treasurers are. By now there are practical and scientific strategies to mitigate various risk types. Insurance managers know.

In my perception treasurers can learn from insurance how to connect to business partners and help them finding solutions for complex and diverse problems. Do you think me setting them on a pedestal is right or am I too positive?

If you want to find out more about Treasurer Search and their services visit their company profile on treasuryXL.

Is cash still king?

| 11-06-2018 | by Patrick Kunz |

All treasurers and most financials know the statement “cash is king”. I do not have to explain the meaning; it is best for a company to have cash above any other forms of (accounting) income. Not talking about the problems of not having any cash. Having cash makes a company stronger and opens possibilities to use this cash (dividends, M&A) and cash is also needed to pay the bills.

However, since several years we are living in a world where interest rates are negative. So it costs money to own cash. It is suddenly costly to be a bigger king. This has some implications for companies and treasuries.

Active cash management

Because it is expensive to have and hold cash it is important for treasurers to know where all the cash is and what the position is. Only holding the cash and doing nothing means that the cash balance will decrease because of negative interest. It therefore makes sense to look into options to reduce the cash level. This does not necessarily mean spending the money!

Several options include:

  • Compensating negative cash balances with positive cash balances, also between different currencies (fx swaps)
  • Repaying loans
  • Paying dividends
  • Paying suppliers earlier to receive a discount

Of course above options are examples and depend on the specific company. Most important aspect in doing above actions are the cash flow forecast. The actions you are taking now have an impact on your future cash position so if some actions are good for now they should also be beneficial in the future situation. Simulations and forecasting software can help with this. For example a simulation on your credit lines, changing interest rates and changing payment terms can be very interesting.

Floors and term

If you are with your bank for a long time there is probably nothing agreed about negative interest rates on your cash as this was not foreseen by banks 10 years ago. This gives you an opportunity to negotiate with the bank on your term for having cash. Some possibilities I have seen with my clients:

  • Floors in the interest rates. This does not necessarily have to be 0% floor
  • Thresholds: for example the first 10 mln no negative interest charge
  • Combinations of above
  • Spread between credit and debit amounts; a lower spread is often better.

Invest

Another option to reduce the interest charge on your cash is to invest the money. This is a sensible topic as most treasurers are risk averse. The more return is expected the higher the risk associated to the investment. Cash at a bank is considered fairly safe (given the cash is divided over several banks with a good credit rating and depending on the amounts). Furthermore the liquidity of the investment is important. Cash is readily available. If you invest the money it first has to exchanged or transferred to cash which can take time or can have an impact on the return. Most treasurers are prudent on investments and/or internal rules do not allow these.

Cash is still king

Overall looking at above cash is still king. For every company it is better to have cash then to be short on cash. However, having too much cash can hurt a company too as the return on cash balances is very low and in most cases negative. In these times the value of a treasurer looking at the cash balances and optimizing it uses (and return) is big. So does your company not have a dedicated person looking at the (excess) cash and the optimization of the cash now and in the future (cash forecasting) then it might be the time to a assign somebody on this task. In most cases the return on this person if positive (even though the interest rate is negative).

An external treasurer or flex treasurer can be of help too.

 

Patrick Kunz

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

 

Cyber Security and Business Intelligence

| 5-6-2018 | TIS |

Fintech Hotseat – AFP 2017: Alongside smaller companies, there are still many medium and large sized companies that have not yet implemented real-time monitoring of their payment processes. The result? These organizations then fail to discover missing cash until the end of the month. In this interview during the AFP Conference 2017 Giancarlo Laudini, SVP Global Sales and Marketing Operations, gives you insights how business intelligence can help you to prevent cyber crime and fraud in your organisation.

To see full interview click here

Content originally posted on TIS on 15/1/2018

Stageplek gezocht | Wetenschappelijke onderzoeksvraag op het gebied van treasury

| 18-05-2018 | Roland Koster | treasuryXL

Voor de masteropleiding management MSc, ga ik begin juni een keuze maken welke richting ik op wil gaan in het kader van het afstuderen (eindscriptie). Ik wil dit doen in de richting ‘Financial Decision Making’ op het gebied van financiering en ben daarvoor op zoek naar bedrijf waar ik mijn onderzoeksopdracht kan uitvoeren.

Ik kan dan naast de inhoudelijke rol een probleemstelling wetenschappelijk onderzoeken waar het bedrijf ook wat aan heeft zodat er een win win situatie ontstaat.

Als jij dit leest, zie jij dan mogelijkheden? Reageer dan om een afspraak te maken om onder het genot van een kop koffie hierover van gedachten te wisselen.

Je kunt contact met me opnemen via [email protected] of 06-44480825. Ik ben terug te vinden via LinkedIn https://www.linkedin.com/in/roland-koster/

PS: Ik denk er overigens over om na deze master door te gaan voor RT.

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Best read articles of all time – PSD 2: a lot of opportunities but also big challenges (Part II)

| 16-05-2018 | 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 – Founder & Senior Consultant at FDW Consult and Senior Expert – Product, Business development and sales manager at Isabel Group

 

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Best read articles of all time – PSD 2: a lot of opportunities but also big challenges (Part I)

| 15-05-2018 | François de Witte |

The Directive 2015/2366 on payment services in the internal market (hereinafter PSD2) was adopted by the European Parliament on October 8, 2015, and by the European Union (EU) Council of Ministers on November 16, 2015. The PSD2 updates the first EU Payment Services Directive published in 2007 (PSD1), which laid the legal foundation for the creation of an EU-wide single market for payments. PSD2 came into force on January 13, 2016, and is applicable from January 13, 2018 onwards. By that date the member states must have adopted and published the measures necessary to implement it into their national law.

PSD 2

PSD2 will cause important changes in the market and requires a thorough preparation. In this article, we are summarizing the measures and highlighting the impact on the market participants. In today’s Part I we will focus on abbreviations and main measurers introduced by PSD2.

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

EBF :  European Banking Federation

EEA :  European Economic Area

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

Main Measures introduced by PSD2:

The  PSD2 expands the reach of PSD1, to the following payments:

  • Payments in all currencies (beyond EU/EEA), provided that the two PSP (Payment Service Provider) are located in the EU /EEA (two legs)
  • Payments where at least one PSP (and not both anymore)  is located within EU borders for the part of the payment transaction carried out in the EU/EEA (one leg transactions)

A second important measure is the creation of the Third Party Providers (TPP). One of the main aims of the PSD2 is to encourage new players to enter the payment market and to provide their services to the PSU (Payment Service Users). To this end, it creates the obligation for the ASPSP (Account Servicing Payment Service Provider – mainly the banks) to “open up the bank account” to external parties, the so-called, third-party account access. These TPP (Third Party Providers) are divided in two types:

·        AISP (Account Information Service Provider) : In order to be authorized, an AISP is required to hold professional indemnity insurance and be registered by their member state and by the EBA. There is no requirement for any initial capital or own funds. The EBA (European Banking Authority) will publish guidelines on conditions to be included in the indemnity insurance (e.g. the minimum sum to be insured), although it is as yet unknown what further conditions insurers will impose.

·        PISP (Payment Initiation Service Providers): PISPs are players that can initiate payment transactions. This is an important change, as currently there are not many payment options that can take money from one’s account and send them elsewhere. The minimum requirements for authorization as a PISP are significantly higher. In addition to being registered, a PISP must also be licensed by the competent authority, and it must have an initial and on-going minimum capital of EUR 50,000.

Banks will have to implement interfaces, so they can interact with the AISPs and PISPs. However, payment initiation service providers will only be able to receive information from the payer’s bank on the availability of the funds on the account which results in a simple yes or no answer before initiating the payment, with the explicit consent of the payer. Account information service providers will only receive the information explicitly consented by the payer and only to the extent the information is necessary for the service provided to the payer. This compliance with PSD2 is mandatory and all banks will have to make changes to their infrastructure deployments.

A third important change is the obligation for the Payment Service Providers to place the SCA (Strong Customer Authentication) for electronic payment transactions based in at least 2 different sources (2FA: Two-factor authentication) :

  • Something which only the client knows (e.g. password)
  • A device (e.g. card reader, authentication code generating device, token)
  • Inherence (e.g. fingerprint or voice recognition)

 

The EBA (European Banking Authority will provide further guidance on this notion in a later stage. It remains to be seen whether the current bank card with pin code is sufficient to qualify as “strong customer authentication”. This “strong customer authentication” needs to take place with every payment transaction. EBA will also be able to provide exemptions based on the risk/amount/recurrence/payment channel involved in the payment service (e.g. for paying the toll on the motorway or the parking).

PSD2 also introduces some other measures:

  • Retailers will be authorized to ask to the consumers for permission to use their contact details, so as to receive the payment directly from the bank without intermediaries
  • There will be a ban on surcharges on card payments
  • There will be new limitations on the customer liability for unauthorized payment transactions

In a second article soon to be published on treasuryXL, François de Witte will focus on the impact PSD2 has on market participants. 

François de Witte – Founder & Senior Consultant at FDW Consult and Senior Expert – Product, Business development and sales manager at Isabel Group

 

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