Technology in Treasury Management: Payment systems review
In 2010, long established trends in payment systems continued. Cash payments and cheques continued to be slowly replaced by cards and other payment systems. The roll-out of same-day settlement options in ACH clearings continued world-wide. The development of the Single Euro Payments Area (SEPA) continued its somewhat stuttering progress and there were some small, but nonetheless important, improvements in other cross-currency/cross border payment services. The biggest developments in 2010 were in collection services, as companies focused on improving their receivables management. New to the mix are developments in mobile phone payment systems and services. By Jack and Wolfi Large.
Payment systems usage The large majority of all payments are, as they always have been, domestic. Even in Europe with its large number of small countries, only 3-5% of payments are estimated to be made cross-border. In terms of transactions, cash still dominates the global payments market, used for more than 60% of all transactions, even in developed countries; for the larger banks transactions within the same bank group amount to as many as 50% of their transactions. In terms of value non-cash payment systems, particularly in developed countries, take more than 50%.
The Bank for International Settlements review of non-cash payment system usage in the 20 leading economies, which is published a year late, showed the massive impact of the liquidity crisis in 2009 with the number of transactions declining to 127 trillion, from 216 trillion in 2008. The survey also showed the continuing long-term trends in the decline in the use of cheques, minus 6%, and other paper-based clearing systems world-wide. The use of direct debiting was shown to have grown rapidly, by 19%, and was predicted to overtake the use of credit transfers in 2010.
Payment cards remain the most used non-cash payment method. Although there was a 50% decline in payment card usage from 2008 to 2009, reports from MasterCard and VISA indicate that in 2010 usage levels went straight back up to 2008 levels, with debit cards dominating. Debit cards are by far the most widely used payment card in the world, exceeding cheque payments even in the US in 2010 for the first time. The usage of same-day payment systems continues to expand, with most of the growth in the low-value clearing systems such as the UK‘s Faster Payments service. In the UK the number of transactions made through the high-value system CHAPS sterling grew by 1% in 2010, though the value per transaction fell by 5%. The number of transactions through the Faster Payments system grew by 47% and the value per transaction by 57%, with an average value of £385 per transaction.
The UK Payments Council, which set a target date of 2018 for ending payments by cheque, is finding the payment habits of consumers and companies difficult to shift, with a backlash from both consumer groups and SMEs. The council says it has been focusing on gaining an understanding of what payment methods customers will accept as alternatives to cheques and will this year publish a list of gaps where such alternatives do not exist. It seems doubtful it will win over the hearts and minds of dedicated cheque users and fill in the gaps left by the withdrawal of the cheque payment system in the next seven years.
All payment systems are basically the same, only the detailed formats and clearing cycles vary. Both banks and companies around the world are now installing payment hubs, which offer significant cost savings, improved throughput and greater centralized control, to process all their payments through a single system.
The Bank of America Merrill Lynch payment services hub is a typical example of these advanced systems, as shown in Figure 1. Banks must now accept payments from a growing number of different devices, including SWIFT, host-2-host, e-mail, voice, mobile devices and the web and send payments to many different clearing systems around the world. When new payment hubs have eventually replaced all remaining legacy payment systems, they will not only cut the costs of processing payments dramatically but offer the perfect opportunity for really cost-effective value added payment services.
Figure 1 – BofA Merrill Lynch payment services hub
Source: BofA Merrill Lynch
Similarly, large corporations are finding that by installing payment hubs they can not only cut their costs considerably but, more importantly, that centralized processing gives them greater control of their cash flows. Payment hubs are likely, eventually, to be used by all corporate payment factories. Same-day ACHs
Many ACHs now provide same-day payment services for low-value payments. The demand for shorter clearing cycles is growing. Many merchants now demand receipt of value before they despatch goods, particularly for downloads of information on the internet, as consumers use them for paying all sorts of bill and person-to-person payments, and as businesses incorporate same-day payments into their bill payment processes. All the ACHs around the world providing same-day clearing services are reporting rapid growth in usage of at least 20% and some considerably more.
The FedACH Same-Day service, on which payments are settled on the processing date, was launched in the US in 2010. The service accepts a range of payments, including converted cheque payments as well as telephone and web consumer debit payments but is limited to non-governmental payments at present. Files submitted to the ACH can contain a mix of same-day and next-day payments but same-day payment details must be delivered by 4 pm. It is still early days in the roll-out of the service, with many outstanding issues to be resolved, including a consistent commitment to funds being moved in a stated time-frame, faster returns processing and more bank participation. But it is clear that there is a huge pent-up demand for such services. Steven Cordray, project manager for the FedACH Service at the Federal Reserve Bank of Atlanta, claims, "The service has generated considerable interest given we have not had a material settlement change in 35 years. Participation will accelerate once the economy improves and credit payments are supported."
The future of SEPA is either bleak or rosy, depending on your outlook. Bleak if you believe it unlikely that the euro will still exist in its current state in 10 years’ time. Rosy if you believe it will and that the announcement by the European Commission of deadlines for the implementation of the new SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs), which could well be as early as the end of 2012 for mandatory migration to SCTs and the end of 2013 for SDDs, will materialize. The euro crisis has, if anything, increased the determination of the European Commission and the European Central Bank to press ahead, but protests have already begun - from the Association of German Banks, to name but one. The banks, unconvinced that deadlines will be set, are leaving it as long as possible before making the investment necessary in the required changes to their internal systems. But, if SEPA SCTs and SDDs are really to take off, mandatory migration is probably the only way. Greater transparency of payment dates and standardized pricing may well appeal to corporate clients, but they are not great incentives for the banks.
Some of the potential of SEPA services is beginning to be exploited. The new SEPA Direct Debit services from Lloyds Bank Corporate Markets enables its corporate users to use a single euro account in the UK to collect direct debits from banks in all 32 countries of the SEPA region, rather than having to open local bank accounts in each country. The service has limitations. For example, some banks will only accept consumer-to-business direct debits, which can be refunded, even authorized transactions, for up to eight weeks, but not business-to-business direct debits, which are non refundable. Lloyds is finding that some clients are having to use a mixture of consumer-to-business and business-to-business mandates to ensure they can collect direct debits in all 32 countries. There are two SDD services, the Creditor service for companies wishing to collect funds and the Debtor service for companies wishing to make payments.
The Creditor SDD service can be used in two ways. The first is pure file delivery, in which the client carries out all the direct debit mandate management internally and simply provides Lloyds Bank Corporate Markets with details of the individual collections. The second is a complete direct debit service which is internet based and provides mandate management and collection capability. A major fashion house and a large automotive company are already using the service and a wide range of smaller companies are being installed on the system. Benefits to companies include the avoidance of having to set up local bank accounts, only one direct debit file is required to be submitted for the whole of Europe. Bank charges of around €1 per direct debit, even less for large-scale users, have some users already claiming 15% or more savings.
Danske Bank is also seriously promoting the concept of SEPA services as ideal for corporate treasury management in the euro payment landscape, arguing that it is now possible for a shared service centre to have a single euro account per company for all incoming and outgoing payments, as shown in Figure 2. Peter Storgaard, first vice president and head of global cash management at Danske Bank, claims, "SEPA opens a lot of possibilities for corporates to optimize liquidity and interest, and at the same time make more efficient processes. We are in close dialogue with our customers to find the best solution for each individual corporate."
Figure 2 – Single euro accounts for all EUR payments
Source: Dankse Bank
There are, however, different opinions as to how to optimize payments and collections in the SEPA region. Relying on a single euro account, as Danske suggests, is one. But Darrell Fielding, managing director of The SEPA Consultancy, suggests a more cautious approach, "SEPA is a product-led development rather than a clearing and settlement-led initiative. Until this changes the only effective solution for large corporates with pan-European coverage is to choose banks with in-country capability in their markets because that is the only way they will get control of their receivables." Cross-currency/cross-border payments
Several new cross-currency/cross-border payment services were launched by banks and third-party suppliers in 2010, all claiming to cut the cost of making payments and at the same time improve levels of service.
One such new service for SMEs is Earthport Direct, which has been live since September providing access to local clearing systems and enabling companies to make payments in 26 currencies in 200 countries and collect receivables in 26 currencies in 40 countries through a single account. Earthport Direct aims to replace cross-border credit card payments and collections and cash and cheque remittances for SMEs such as small importers and exporters. The web-based service simplifies the process of collecting receivables. The user enters the payer’s name, the amount due and the currency and the country in which the payment is to be made. Earthport Direct then creates a PayIn form detailing the local bank and a unique reference to be quoted when making the payment. The user sends the form to its customer, which then makes the payment locally, avoiding any cross-border and cross-currency fees. The Earthport user avoids any credit card-type ad valorum percentage-based fee, instead paying a simple fixed fee of $2-10. The payment typically arrives in the payee‘s account within one or two days. Making a payment using Eathport Direct works in a similar way, the user having three options, either locally in local currency with a charge of $5, a cross-currency correspondent-based payment with a charge of $12.50 or an Earthport-to-Earthport account transfer costing $5.
A non-urgent service designed for clients making large volumes of non-urgent ACH payments, enabling ACH payments to be made in 19 currencies in 40 countries from a single account, was launched by JP Morgan in November 2010. One client is already using the service to make all payroll payments from one account to employees around the world. As a result, it has been able to close numerous local bank accounts, cutting the costs associated with multiple wire fees and managing and reconciling the accounts.
Another improvement in FX payment services is Citi’s Global Transaction Services expansion of its Express Wire service to deliver US dollar payments destined for Asia via a straight-through processing payment to beneficiary bank accounts within minutes of transaction initiation. Express Wire provides access to local and regional clearing channels and gives clients the option to request payments be routed through specific regional clearing systems, including HK-CHATS. For payments into China, Citi offers a dedicated China desk to address any enquiries.
The cost of making cross-border/cross-currency payments is already falling and is likely to fall even more if the International Payments Framework Association (IPFA) achieves its objective. Unlike SEPA, the IPFA is a business not a political initiative. It aims to simplify non-urgent cross-border credit transfers by defining a set of rules, standards and an operating framework currently used in existing payment networks to enable inter-operability between domestic and regional non-urgent payment systems and banks. It was set up in February 2010 by 21 leading banks, clearing houses and payment service providers based in Europe, the US, Canada, Brazil and South Africa. It already has 26 members and a live system.
Two of IPFA’s founding members, the Federal Reserve Bank at Atlanta, US, and Equens in Europe, have begun processing US dollar and euro payments between the US and Europe, as shown in Figure 3. Transactions from Europe have access to accounts at all US banks and transactions from the US to Europe have access to accounts at all the banks in 22 European countries.
Figure 3 - Equens IPFA bridge: US to Europe/$ to $
Insistence on the use of existing standards has been vital in minimizing the necessity of new development and associated costs so, as a starting point, IPFA is sticking to the ISO 20022 standards used by the US ACHs and SEPA. Over the next year IPFA is planning to bring the currencies of Brazil, Canada and South Africa into the framework and looking for more members world-wide. Collecting receivables
2010 was a good year for improvements in collecting payments, with companies increasing the speed of collections and cutting the costs by migrating to electronic processes. There seems to have been a significant change in attitude to direct debiting for business-to-business payments, with the introduction of many new applications, including multi-country direct debiting, and not only in Europe, as buyers and sellers cooperate more closely. The use of single accounts for the collection of all receivables for a region or even globally has also become more widespread.
Although cheque usage is declining world-wide many businesses continue to receive payments by cheque, and lockboxes continue to be provided by banks in the US, the Far East and Europe. The goal of all lockbox services is to have a 100% reconciliation of receipts. BNP Paribas, which has doubled the number of its lockboxes in Europe, now scans both sides of the envelope as well as the receipt documents to ensure maximum reconciliation rates. Filipe Simao, head of client advisory at BNP Paribas Cash Management, claims "a growing demand for value-adding multi-country lockbox services in Europe".
The speeding up of collecting receivables requires an e-billing solution, preferably one which not only includes invoice presentment and payment processes but also provides cash flow visibility. Electronic invoice presentment and payment (EIPP) services are now widely available. One of the key features of an EIPP service is account receivables matching and data enrichment, where key data accompanying collections are captured to achieve a complete match of incoming receivables with the outstandings file.
Companies have also begun focusing on reducing the number of unresolved invoices, invoices past their due payment date and minimizing the number of sales that have not been billed. The key to understanding and improving receivables flows is capturing and analyzing receivables data to show exactly where a company’s cash is trapped, whether internally or externally with banks or customers. Several new products have been launched in the past year to help improve the analysis and control of receivables. Citi launched ReceivablesVision, an online service offering global visibility into receivables data, aggregating it across multiple countries, currencies and transaction types and delivering a consolidated view of a company’s receivables. SunGard now offers statistical models for analyzing receivables portfolios.
Collecting receivables across multiple countries is clearly more efficient than single-country collections, but even greater returns can be achieved when combined with liquidity management. The communications company AT&T offers large multinational customers the option of paying for all the services they purchase from AT&T in just one currency whether they do business in one country or many. AT&T’s Consolidated Statement department converts all a customer’s invoices from various AT&T entities into a single statement in the customer’s currency of choice, providing a convenient way to pay for services.
To avoid paying each AT&T entity its respective portion of every payment made in its own billing currency, Citi set up a single-IBAN account in London to receive all AT&T’s Consolidated Statement customer payments. The receipts are then redirected to underlying sub-accounts denominated in relevant foreign currencies which are linked to a Citi multi-currency notional pool. Citi then provide AT&T with simplified access to the net position without the need to convert or swap currencies. The pool header account is linked to a unique cross-border ‘drain-the-pool’ feature that automatically sweeps the net pool position, in US dollars, from London to New York.
Each day the AT&T accounts receivables department is sent details of the payments received and at the end of each month settles the net transactions with its subsidiaries, with all required FX transactions executed on-line.
This global Consolidated Statement integrated bank account structure and pool solution has given AT&T considerably more control over and visibility of its cash position on a daily basis. As Elaine Lou, director of financial analysis at AT&T, explains, "This is a complete solution for AT&T. It has enabled us to offer an attractive and competitive payment option to MNCs world-wide whilst maintaining credit control of receivables, cutting out manual procedures, eliminating large volumes of FX transactions and improving liquidity management. The multi-currency notional pool is really key. It provides a cost-effective means of moving and deploying funds and makes it easier for us to manage liquidity on a day-to-day basis."
The Consolidated Statement process has not only considerably reduced AT&T‘s FX costs and simplified its treasury operations, it has also simplified its sales procedures. Using a single IBAN account globally has meant that only one set of payment instructions is required, regardless of the payment currency used. The use of a single IBAN account for all collections globally has proved to have many benefits.
Debit cards dominate consumer card payments and business debit cards are the fastest-growing type of business card. Many countries are now at the point where businesses are beginning to accept that debit cards are more efficient than cheques and cash, and much less costly than deferred payment credit and charge cards.
There have been many attempts to make it easier to pay by card in large stores by increasing the number of pay points. In Apple stores any member of staff can accept a payment. Each member of staff has an iPod Touch with an App for accepting card payments and e-mailing receipts to customers. Apple is now piloting this application with other large stores and chains.
Applications enabling smart phones to accept card payments are now well established, and in the US consumer usage is growing. The biggest potential for the use of smart phones as point-of-sale terminals is for small businesses, which would no longer need a dedicated terminal with its associated monthly rental to accept card payments. If small businesses were really to exploit smart phones for accepting payments by card there would probably be a corresponding increase in card usage.
MasterCard and VISA are aiming to increase their share of account payables and financial supply chain transactions by storing payment card numbers in procurement and other systems. They have had only limited success so far, but services such as VISA’s Syncada may yet take a significant share of the market as only the card schemes really have global clearing and settlement systems.
But the corporate payment card market still has its problems. The authorities are still determinedly clamping down on the level of interchange in the bank card schemes, which will not only reduce the banks’ profitability from corporate cards but the levels of rebate they will be able to offer corporate clients. And the predicted development of mobile phones replacing payment cards as a device for initiating payments is another.
Mobile payment systems
The number of mobile phones in use is huge, an estimated 5 billion globally, of which around 500 million are smart phones. The role of the mobile phone in initiating consumer payments is already well established and volumes are growing fast, though still quite small as yet. This growth is likely to continue as new technologies, such as Near Field Communication (NFC), which enables mobile phones to function as contactless chip payment cards, are added. Apple and other mobile phone manufacturers will be launching NFC phones in 2011 and Apple is also planning to launch a new mobile payment services based on its iTunes customer base.
Businesses are now using mobile phones to initiate payments and other types of trade transactions. Standard Chartered Bank, which recently expanded its Straight2Bank Mobile service to include an App for the iPhone to authorize trade transactions, has found that companies are beginning to accept that using the Straight2Bank mobile phone authorization with its multi-level security is far more secure than the online ‘work arounds’ they have used in the past to authorize payments and other transactions when out of the office. Neal Livingston, global head of client access, transaction banking, at Standard Chartered Bank, explains, "Straight2Bank Mobile for the iPhone combines the Apple user experience with a convenient, efficient and secure way for clients to do business."
As working out of the office using laptops, tablets such as the iPad, and smart phones becomes more common, remote authorization is likely to become more widespread.
Store of value
A payment is the transfer of value from a payer or buyer to a payee or supplier. The transfer of value is usually either in coins and notes or from bank account to bank account in recognized currencies, with FX enabling the conversion of one currency to another.
Another form of store of value may be about to take off. The World Currency Unit (Wocu), based on a standardized basket of the national currencies of the 20 largest national economies as measured by GDP, created and operated by independent not-for-profit research group, the WDX Institute, is in advanced stages of development. WDX believes the Wocu will dramatically reduce FX volatility.
In the longer term the number of mobile phones is so vast it is almost inevitable a way will be found to release the potential for making payments. In the shorter term the success story is likely to be same-day ACH services, which meet a recognized customer need. Other more marginal developments are also likely, aimed at cutting the costs of both making and collecting payments.