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Do treasurers really need instant payments? some implications.
| 30-01-2018 | Patrick Kunz |
Per 13 January 2018 we have a new payments service directive (nr. 2) live in the European union, PSD2 for short. One part of PSD2 is the possibility for banks to offer instant payments between banks in the EU. Within max 10 seconds money flows from one bank to the other, also on weekends and on holidays. In this paper I want to discuss the implications for treasurers of instant payments.
Cash flow forecasting
Forecasting is an important part of the daily/weekly routine of a treasurer. He/she needs to predict the future to know his cash/risk/financing position. On the ultra-short term spectrum of this forecast a treasurer might use intraday bank statement (MT942) to take into account the incoming funds during the day. These are often updated hourly. With instant payments a treasurer can have a look at their bank account and the balance that is showing is the real-time balance with all incoming transactions being settled. As said before a treasurer might already have intraday statements but there is (1) a time lag in those and (2) there might be transactions not processed yet. Bottom line this difference amounts to several hours lag. Depending on the size of the company and the amount and size of transactions there is some impact but not very sizeable. Furthermore, those treasurers that do not use intraday balances for their forecasting have no impact of instant payments. However, how about the due payments on non-working days? In the future these are normal payments dates. Previously due payments on weekends are either set on Friday or Monday depending on the terms of the contract. These could now be forecasted on the exact day. But that depends, payments are often done during business hours, so it is possible that nothing changes. Depending on the size of the transactions there is importance to check this with your suppliers and clients. This also depends on bank processing of yourself and your client/supplier.
Bank processing
Instant means instant in time but also in days. In the past we were dependent on the opening hours of the banks and later of the ECB. That could mean that if we send money just after close on Friday and there was a public holiday on Monday we would only see the money coming in on Tuesday. The money was “lost in translation” in between. This is not very modern in an age where we send an email from Tokyo to South Africa in minutes but not money. We could literally fly there with cash and be faster. After all banks have implemented PSD2 money flows 24/7. So also in the weekend and on holidays.
This has an impact on the processing of your bank statement. You now receive bank statement for Saturday and Sunday. Most accounting/treasury departments do not work on the weekends so there is a chance that these statements are not processed. This means you must process 3 statements on Monday. Some companies have automatic processing of bank statements, so the weekend statements might be processed but not (automatically) consolidated leading to more open positions on Monday.
Ok big deal, there is more work to do on Monday due to more bank statements. But there is more: not necessarily for treasury departments. Think about customer services (helpdesk) departments. If a client with an overdue payment calls it would be great if the helpdesk employee is able to verify statements of the customers if the says he has paid or will pay immediately. This however only works if processing is automatic or if the helpdesk employee can access/search the incoming payments on the bank account (which might not have processed in accounting). Not all companies will have this yet.
Overdue calculations might be faulty in some ERP systems as only working days are considered. If a payment is due on Sunday, you can pay on this Sunday and not necessarily on the Friday before.
Conclusion
Instant payments are only a fraction of PSD2 which is often not very interesting for most treasurers. They get some information faster but that does not really help them too much. There is however more to it. Since payments can now arrive and be made in the weekends the cash flow forecasting should now contain 7 days in a week instead of 5. Payment can be spread out more but also receipts will be. Bank processing is more work; 7 daily statements per bank account per week instead of 5. Extra processing or extra automation needed. The extra information might be needed by other departments too even though the treasury/accounting department is not working.
Overall the implications could be bigger then you might think and are different for every company and depending on their existing (bank) processing.
Most bank are planning to introduce weekend reporting by H2 2018 while instant payments are due beginning 2019. For business transactions this might even take until H2 2019.
Some time left but a good time to already think about your current processes in comparison to the new reality under psd2. Treasury is moving to a 24/7 information economy. It’s about time.
Time will tell if there will be fintech’s stepping in helping with above issues with direct connections to the bank, which is another important part of PSD2 but not within the scope of this article.
If you need help with automating your bank statement processing or with your cash flow forecasting, then look at this author and other Flex Treasurers on this website for answers.
Patrick Kunz
Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV
Beware of Greeks bearing bonds
| 29-01-2018 | Lionel Pavey |
Well, looking at it from another perspective it is clear that Greece is not in such a strong shape compared to the USA. Unemployment in USA is 4.1% – Greece is about 5 times higher at 20.6%. Clearly there must be another reason for lower yields in Greece. Athens hopes to issue new bonds in 2018 with tenors of 3, 7 and 10 years. The answer would appear to be the very low to negative yields on German debt. The yield on German 2-year bonds -0.57% and on 10-years 0.63%. As investors search for any positive yield they have been attracted to the Euro countries on the periphery – Greece, Spain etc.
The ECB have regularly said that they think inflation will remain below their target for the foreseeable future. This has encouraged investors to seek out alternative countries that are offering a positive yield. There is almost a 2% yield pick up on Greek paper over Germany. This has proven to be attractive even though Greek debt-to-GDP ratio stands at 190%.
However, EU creditors hold around 80% of existing Greek debt. As they are wary of Greece reverting to the problems seen a few years ago, issuing new bonds could be difficult. With all the promises made in the past to ensure bail-outs for Greece, the rest of the EU will be extra cautious and vigilant – leading to no easing of the current reforms and restrictions that the EU has put in place.
It would seem, therefore, that the market is temporarily out of synch. The market is being distorted by the fact that there is an appreciable yield pick up in EUR (so no FX risk) when looking at Greek bonds versus German bonds. There appears to be no other logical explanation as to why Greek yields are significantly lower than those in USA.
If bond markets turn sour this year, which would you rather hold – Greek or American paper?
Lionel Pavey
Cash Management and Treasury Specialist
It’s India, you stupid
| 26-01-2018 | Rob Beemster |
In our daily business, we attend to corporations and institutions in their foreign activities. We notice among our clients more and more attention and interest in India. Several of our clients have invested in factories, what can be economically seen as Foreign Direct Investment in India. Others are increasing their sales and we also notice many newcomers who are firstly orientating on the country.
The policy of Prime Minister Modi is clearly opening the eyes of the international economic community. Indian corporates see chances of doing business abroad. These new economic partners built bridges to learn from each other, resulting in rising economic flows.
Many of our clients are active on the higher end of the agricultural value chain. They produce machines for vegetable processing, storage, cooling etc. India is known for its large waste of vegetable products; the government sees this as a big problem and it has to be eliminated. Collaboration of the Indians with institutions like the Worldbank and countries with decent knowledge in agriculture (like Holland ) are bound to find solutions to this waste issue. This “opening of doors” has resulted in the increase of Dutch corporate turnover with India.
And… there is a lot more to come. The spin-off from the agricultural segment to other segments can be enormous. India has tremendous opportunities for European corporations. The Dutch Embassy and the “Landbouwraad” in Delhi, are very active to help the Dutch in opening markets in India.
Non-Deliverable Forward
India has a much-regulated monetary system. Reserve Bank of India wants (full) control and insight on currency moves to or out of India. Hereby it has installed a so called non-deliverable forward system for off-shore rupee exchange. Currency hedging can be done, but not with regular forward contracts, where underlying amounts are bought and sold. At the end date of an NDF, the difference of the NDF price and the fixing is exchanged.
Currency risk
Very often the pricing in a tender and invoicing is done in Euro. So, one could say that currency risk is only ran by the Indian investor. “The European participants do not suffer due to eventual currency movements of Indian Rupee against the Euro”. One has to realize that if counterparty runs the full currency risk, there is still an indirect risk position for the supplier. So even the Euro receivers have to take a defensive stance.
Volatility
The necessity of taking care of the currency risk is because of the large volatility of the EUR/INR. It is dangerous to put all the risk at the Indian partner. Orders can be cancelled due to big swings in the value of the currencies. Profit margins of your client can diminish, which may end the relationship. The graph shows the rate moves of EUR/INR of the last five years. Even on short periods, large differences can be noticed. This should assure businesses to take full control of the currency risk. Rate changes of more than 10% within half a year have occurred several times.
Your guide in India
Transactional risk can be avoided by a good hedging structure. Economic currency risk on your long-term investment is another issue and has to be thoughtfully considered. Barcelona can help to make the hedging transparent. As said, hedging can be done but needs accurate and professional advice. Due to our experience in the Indian business of our clients, we are able to find the best solution for each trade or investment.
Rob Beemster
Owner of Barcelona valuta experts BV