As you have probably heard, 2021 is the last year where LIBOR can be used in corporate lending. This had been the recommendation of LIBOR’s regulator, the Financial Conduct Authority (“FCA”) for years, being officially announced in July 2017. This decision will have a great impact on financial transactions, given LIBOR’s global utilization. For instance in 2020, LIBOR was the benchmark index for over $400 trillion worth of contracts, with the syndicated loans comprising $12 trillion. The subject of this article is not to explore the reasons behind this recommendation, but rather to detail the different impacts of the LIBOR’s replacement in credit facilities, whether they are existing credit facilities with maturities spanning over 2021 and beyond, or new facilities to be implemented this year.

While it has been confirmed that the LIBOR will cease to be submitted after end-2021, it will not be possible to sign new LIBOR-based credit agreements within the year. The exact calendar however depends on the underlying currency, as the LIBOR is currently produced across 5 currencies (USD, GBP, EUR, CHF and JPY). Here is an overview of the situation.

LIBOR replacement with near Risk-Free-Rates (“RFR”)

In all for the 5 currencies affected by LIBOR’s cessation, working groups have been set up to identify and make recommendations on the most appropriate replacement rate. The purpose was specifically to identify a risk-free-rate that would be based on an active and liquid overnight interbank market.

GBP: The Bank of England (“BoE”) set up an industry-led Risk Free Rate Working Group (“RFRWG”) as soon as 2015 to start developing alternatives to LIBOR, and came up in 2017 with the SONIA (Sterling Overnight Index Average) as its preferred replacement. First introduced in 1997, the SONIA is already widely used, valuing roughly £30 trillion of assets each year, and is based on actual unsecured overnight transactions as it reflects the average of interest rates that banks pay to borrow.

USD: Anticipating the LIBOR cessation, the Federal Reserve appointed in 2014 a group of market participants to identify alternative reference rate. This group, the Alternative Reference Rates Committee (“ARRC”) came up with the Secured Overnight Financing Rate (“SOFR”) in June 2017 as its recommended alternative to USD LIBOR. Unlike the SONIA, the SOFR is based on overnight secured repo transactions, and its activity is much more recent, as its first fixing dates back to April 2018.

CHF: The Swiss National Working Group (“NWG”) recommended in October 2017 to use the Swiss Average Rate Overnight (“SARON”) as a replacement to the CHF LIBOR. It represents the overnight interest rate on the secured money market, and has already been included in Swiss syndicated facility agreements in 2020.

Replacement calendar and processes

In terms of timing related to the GBP LIBOR transition, both the BoE and the FCA recommend to cease new issuances of GBP LIBOR-referencing loans as soon as the end of Q1 2021. This means that starting from April 2021, credit agreements will be based on alternative methods of rate indexation, with the main scenario being the use of SONIA, with banks also advocating for the cost of funds definition. The ARRC has a slightly different approach and recommends to ban new USD LIBOR-based credit agreements by June 30th 2021. Recently, it has been announced that USD LIBOR will continue to be published until June 2023 (except for 1-week and 2-month tenors), which leave more time to amend legacy loans. In line with the GBP LIBOR, CHF LIBOR will also be discontinued by the end of 2021. Therefore the Swiss NWG recommends that no new contracts should reference LIBOR after the end of June 2021.

Regarding existing LIBOR-denominated credit agreements with no pre-empted LIBOR transition provision (“Legacy LIBOR Loans”), several options are available for borrowers.

• In the worst case, the transition has not been anticipated by the end of 2021. An amendment agreement will then be necessary to document the benchmark rate transition. However, this amendment will most likely require all Lenders’ approval, and would probably lead to a suboptimal outcome given the tight deadlines.
• Some banks may consider the insertion of a Cost of Funds provision to replace LIBOR. This alternative is based on each lender’s declarative cost of funds (or at least the Majority Lenders), conferring some discretion to the lenders, as opposed as a purely transaction-based rate such as a RFR. This solution is clearly unattractive for the borrowers.
• To avoid those situations, it is highly recommended to amend the existing credit agreement before the LIBOR cessation date in order to pre-empt the conditions under which the transition will effectively be conducted. Legacy LIBOR Loans can already be amended to directly calculate interest by reference to an RFR-based rate, thus deleting current provisions referencing LIBOR. It is also possible to amend credit facilities in order to include fallback provisions that would allow for a rate replacement at a later stage.

Fallback provisions overview

Most of the credit agreements signed after 2018 already include a “Replacement of Screen Rate” provision, based on a Loan Market Association (“LMA”) publication, specifying that under the discontinuation of the relevant LIBOR, the agreement would be amended with the Majority Lenders’ consent. However, since then, more sophisticated mechanisms have been drafted and are being included in credit agreements:

• The Hard-Wired Switch is a mechanism that allows for a switch from LIBOR to a RFR-based rate at a specified future date before the LIBOR cessation. This provision has been included in the September 2020 LMA Exposure Draft;
• The Hard-Wired Fallback is a mechanism that allows for the switch in relation with the occurrence of specific events related to LIBOR cessation or pre-cessation, not binding it to a specific date in the future. The ARRC published in June 2020 a recommended language related to this fallback for new USD LIBOR loans. The adoption of this provision remains however limited in Europe;
• In line with the 2018 LMA Replacement of Screen Rate provision, the transition can also be addressed through an amendment approach, which has been the favored solution so far. Less complex than Hardwired clauses, this allows for more flexibility in selecting the benchmark rate. This approach does not pre-empt the LIBOR replacement interest rate, but rather streamlines an amendment process (with a Majority Lenders’ approval) in case of LIBOR cessation.

LIBOR effective replacement in the interest calculation

One of the major differences between LIBOR and RFRs lies in their term. LIBOR fixings include a “term” element, a tenor spanning from overnight to 12 months. On the other hand, the RFRs are overnight borrowing rates, and therefore do not have a “term” element. Today, the LIBOR is fixed at the beginning of an interest period, using the appropriate term (e.g. 3-month LIBOR for a 3-month interest period). Since the RFRs are overnight rates, they can only be calculated by reference to historical transaction data, with a “backward-looking approach”.

The different RFRs regulators have started publishing compounded RFRs over the most commonly used interest periods (1, 3 and 6 months). One issue with this approach is that RFRs are not published on non-business days, resulting in a difference between interest period and RFR observation period.

Several methods for computing the compounded RFRs have been explored. Rather than deep diving into those calculations subtleties, it is important to underline that there is no market standard or even consensus for one calculation method. Some market participants have even advocated for forward-looking term RFRs rather than compounded ones. Those could be fixed at the beginning of an interest period as for the LIBOR. The working groups are currently opposed to this approach, as those “term” RFRs are not readily available and would partly lose their purpose of being solely based on overnight transactions.

Another major difference is that RFRs do not include credit risk elements as opposed to LIBOR, leading to a pricing gap between the rates. As a result, a credit spread adjustment has to be included to cover this pricing gap. The methodology to calculate this spread has already been determined for derivatives by ISDA: the median average difference between the two rates over 5 years. This spread is calculated and published by Bloomberg to be fixed on a cessation event. The ARRC and the RFRWG have already recommended this option. However, if a credit agreement is amended prior to a cessation event, spread adjustment would most likely have to be manually included in the documentation (in opposition of an automatic adjustment in the case of Hard-Wired Fallbacks). Bloomberg already indicatively calculates the fallback rates based on the ISDA methodology, so that it can be fixed on the Amendment date. As of February 8^th for instance, the indicative spreads to replace 3-month LIBORs were 0.3 bps for the SARON, 12 bps for the SONIA and 26 bps for the SOFR.

What about the EURIBOR?

Currently, the vast majority of EUR-denominated loans are based on EURIBOR and therefore are not impacted by the cessation of LIBOR, while LIBOR EUR is supposed to be abandoned and is not traded anymore currently.  EUR overnight index (EONIA) is already being replaced by the €STR with a transition deadline in January 2022, and even though there is a working group currently in the process of identifying potential RFR fallbacks for EURIBOR, no replacement is anticipated in a foreseeable future. Some credit agreements might however include a provision to amend the benchmark rate with a qualified lenders majority to smooth a potential transition.

Below we list what we expect to be among the key topics on treasurers’ minds in 2021.

1 – LIBOR Transition: still unclear…

Hedge accounting, existing bonds passing the deadline, bank renegotiation strategies. What should treasurers do?

2 – Digital Transformation: changing with revenge!

Cybersecurity threats, online payment fraud, faster payment / SCT, cash pooling becoming outdated?

3 – Brexit: finally done, but…

Impact on bank pricing / appetite unclear, the impact on supply chains still underestimated, lower economic activity. Credit rating impact?

4 – Rating Pressure: worse still to come

Lower EBITDA / liquidity, higher debt… and banks to really re-rate their clients from Q2 21. IFRS16 still not fully digested. Cash at negative rates. What is your funding strategy? How can you cut costs even more?

5 – ESG Forever – but don’t forget the S and G!

Market appetite getting stronger, finally with pricing benefits. But it’s not all about being green…

Financing

• COVID-19 Impact Report | Priority to reinforcing liquidity
• Rating agencies – between speed and precipitation
• Factoring: a market driven by deconsolidation / “true sales” transactions of trade receivables

Treasury

• Survey – Seven out of ten finance departments to launch cost savings plans
• E-commerce: a strategy to maximize sales while limiting fraud
• COVID-19: Treasury Management System Providers Support Corporate Treasuries
• A Sneak Peek Into the AFP 2020 Service Code Set Update Coming Soon
• Artificial Intelligence for Cash Flow Forecasting

Trade Finance

• The digitization of trade is increasing in velocity
• Commodity Trade Finance between fraud, pandemic and digitization

Let me ask you a question: what is the best short-term financing market in Europe for a European non-financial corporate? If you say the Euro commercial paper market (EuroCP), it’s not the right answer. In fact, the best place for European corporates to be for issuing short-term debt securities is the NEU CP (Negotiable European Commercial Paper) market for maturities of up to one year. The NEU CP market is supervised by the French central bank.

Several CP markets across Europe, but only one standing out…

In Europe, there’s a commercial paper market in almost all countries, but they are small and domestic in nature. The French NEU CP market has some benefits that you won’t find in the domestic markets – most notably considerable market depth and competitive pricing – or in the Euro CP market, which is largely for highest-rated issuers. Investors in the NEU CP market have plenty of appetite for corporate credit, even if it is unrated. The market is also receiving large support from the ECB asset purchase program, putting downwards pressure on pricing and improving its liquidity.

It’s also possible for corporates to obtain funding in the NEU MTN (Negotiable European Medium Term Note) segment for maturities above one year. It isn’t so deep compared to the NEU CP, but it’s promising as a complement or alternative to the Eurobond market, which is mainly used by rated issuers for benchmark-size issues, or even as an alternative to Schuldscheine, which contains financial covenants.

If you use the NEU CP market, you can stop drawing on your bank lines, keep them as backstops, and issue commercial paper at a zero or even a negative rate, and at very low cost in terms of legal documentation.

The NEU CP / NEU MTN market, which was reformed in May 2016, is in line with European regulations and international standards. It is by far the biggest and deepest corporate CP market in continental Europe. According to the ECB estimates, “the market for corporate commercial paper denominated in euros currently amounts to approximately EUR 75 bn. However, the depth of the commercial paper market differs widely across jurisdictions, with France accounting for the largest issuance volume in the euro area”[1].

The NEU CP market has all the advantages it needs to become the pan-European CP market, in which all European blue-chip companies should print short-term debt. This idea is even supported in the framework of the EU’s Capital Markets Union.

What are the criteria to have access to it?

So how can you access this excellent source of funding? The French central bank needs to approve the registration of your NEU CP and / or NEU MTN program if you are to issue these short-term debt securities. So it’s vital that you are aware of a few subtle nuances concerning the eligibility criteria.

First, the NEU CP or NEU MTN program must be rated by one of the five rating agencies that have been approved so far by the Bank of France (S&P, Moody’s, Fitch, Scope Ratings and Spread Ratings / Quivalio) or be guaranteed by a rated entity.

There is a major exception to this rule: the issuer or the guarantor does not need a rating if it has issued bonds or stocks that are listed on a “Regulated Market” (as opposed to a multilateral trading facility – MTF – or organized trading facility – OTF) in one or more countries of the European Economic Area[2] as defined by the European MiFID regulation, or a market outside the EEA that has been granted “equivalence” status by the European Commission. In practice, not all markets in continental Europe are recognized as regulated markets according to the MiFID definition. Only regulated markets or those approved as equivalent can provide access to the CP market for companies without a rating.

As it stands, neither the UK nor the Swiss exchanges have this status. This means companies from the UK or Switzerland wishing to access the NEU CP or NEU MTN market would need a short-term rating or a guarantor that is rated or listed on a regulated market. The same applies if a firm has a bond listed on the Euronext Growth or Luxembourg EuroMTF, which are not regulated markets.

Thus, if your company’s stocks and / or bonds are listed on a “Regulated Market” or if you already have a rating, it will be very easy to access one of the most competitive and flexible sources of funding of the world. If this is not the case, you could consider either obtaining a rating, possibly at a modest cost, or approaching your banks for a guarantee.

[1] https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200403~54ecc5988b.en.html

[2] The 27 EU member states + Iceland + Norway + Liechtenstein

Technology and the development of vast electronic networks fuel an ever-growing global economy that relies on cross-border payments and our ability to send and receive funds from one side of the world to the other, despite our differences and recurring challenges to overcome.

The impact of COVID-19 on global payments revenues

Due to the disastrous economic impact of the COVID-19 virus around the world, revenues from global payments for the first six months of 2020 were 22% lower than the same period in 2019, according to the 2020 McKinsey Global Payments Report. In the last six months of the year, as business regained some level of normalcy, global payments revenues rebounded. By the end of the year, total payments in 2020 were just 7% below 2019. B2B payments—nearly 80% of all cross border payments—are projected to reach $35 trillion by 2022, up almost 30% from 2020 levels, as reported by emerchantpay.

Source: 2020 McKinsey Global Payments Report

How vital are payments revenues in the global banking ecosystem? They make up about 40% of overall banking revenues. Transaction banking remains a huge revenue source, but it is time to give cross-border payments the attention it deserves.

Cross-border payments through bank transfers

There are many different methods to complete a cross-border payment, but bank transfers remain one of the most popular. A transfer typically takes 2-5 business days to complete, depending on the number of intermediary or correspondent banks the transaction must pass through. The lengthy processing time results from the numerous parties required to process the transfer and regulatory delays. About one in every 200 international payments is affected by a regulatory or investigatory delay.

The status of a payment and its associated fees is difficult, if not impossible, to calculate in advance, track, and reconcile at settlement due to the number of entities typically involved in the process.

Determining the cause of a payment failure or where in the process the failure occurred is equally challenging and time-consuming. It is not a surprise that many corporate treasurers rank payment traceability and fee visibility at the top of their priority list when it comes to overhauling cross-border payments.

Fortunately, two new payment options—SWIFT gpi and Visa Direct—are now available to address these cross-border payments issues.

• SWIFT gpi

Around since 2017, the SWIFT global payments initiative (gpi) continues to evolve and gain market dominance in the banking industry with daily volumes of $300 billion. SWIFT gpi allows corporates to track the status of a cross-border payment and gain visibility into the associated fees. SWIFT gpi uses a unique end-to-end transaction reference (UETR)— similar to blockchain technology—to track the status throughout the process. Each bank in the process, from initiation to delivery, is required by gpi to confirm the status and fees of each transaction in real time. When the status report reaches the originating bank, it is subsequently available to the customer, so that all remittance information is transferred to the beneficiary.

Using this same UETR, payments can be prioritized and processed to make payment information available immediately. The beneficiary can use the funds even if the actual transfer occurs at end of day since only the information regarding the payment is sufficient for remittance. Under the legacy cross-border and correspondent bank systems, correspondent bank charges can range anywhere from $5 to $50 for cross-border remittance while a SWIFT gpi message only costs $0.04. Even though banks may not voluntarily reduce their charges, the transparency provided by SWIFT gpi will gives users leverage to negotiate.

SWIFT gpi’s latest development—low-value cross-border payment service—is in the pilot stage and set to be available to all gpi financial institutions in 2021. This service is designed to help retail and small- and medium-size enterprises (SMEs) complete their cross-border payments with the same high-speed rails already in place. As cross-border payments, especially B2B payments, continue to grow with the expansion of SMEs, the dominance of legacy systems and correspondent banking will not continue.

• Visa Direct

Visa Direct provides cost, arrival time, and data transparency for cross-border payments. However, what separates Visa Direct is its ability to send funds to other cards and bank accounts, without integration with correspondent banking networks. Though Visa Direct has been around for a few years, it continues to expand its capabilities in functionality, countries, and currencies. Today, it is available in 200 countries and over 160 currencies for sending and receiving funds. In over 75 countries, customers can receive real time or same day cross-border payments. A faster simpler payment experience than that of international wire transfers or other legacy bank transfers, Visa Direct is a viable crossborder payment option for B2B, B2C, and even peer-to-peer (P2P) payments.

As borders gradually blur with the development of cross-border payments, local payments are still required for a full panel of payment options. Local payments are regional payment methods such as digital wallets, bank transfers, cash vouchers, local debit networks, open invoicing, and many other methods.

Providing options for customers to pay with their preferred local payment methods permits merchants to widely expand their market. From one region to another, these methods can be different as they relate to the country, culture, and technology. For example, credit cards are mainly used in the U.S. Alipay and WeChat Pay are by far the preferred method in China, while cash is still king in Latin America.

Source: Worldpay Global Payments Report 2020

It is crucial that merchants think globally but act locally

Local payment options overtook card payments in 2019 for e-commerce and point of sale (POS) transactions globally. A Worldpay study predicts this trend will intensify in the coming years as payment providers observed a reduction of up to 30% in cart abandonment rates by adding local payments methods.

Cross-border payment trends

• Digital wallets and solutions

Digital wallets are becoming more popular across the globe as payments shift to digital and mobile payments. The pandemic demonstrated the benefits of digital payment solutions by preventing close interactions at the point of sale, thereby reducing the risk of COVID-19 transmission.

Though available beyond a country’s borders, the most popular digital solutions—PayPal (US), Alipay (China) and WeChat Pay (China)—are primarily used locally, accounting for 46% of the e-commerce transactions in Asia-Pacific (APAC). European customers are beginning to follow the same trend using PayPal, Vipps (Norway), or Mobile Pay, while more than 70% of customers in Germany pay with their e-wallet or bank transfer.

• Cards

Credit cards continued to dominate the North America market in 2019, though a large portion of the volume is expected to shift to mobile and digital transactions over the next few years. North America remains a leader in technology payment.

Nevertheless, debit cards and local networks remain essential to perform business in Europe, Latin America, and APAC. These local cards need local processing locally as international payments are unavailable for customers. For example, most of the cards issued in Brazil are domestic use only and cannot be used for cross-border payments. A wide variety of local networks, such as PagoBANCOMAT® in Italy, Cartes Bancaires in France, and BankAxept in Norway, remain essential for buyers in Europe.

Last but not least, even in China where global networks like Visa and Mastercard are available, they still only represent a small portion of the cards issued as CUP is the overwhelming market leader.

• Cash

While cash is king in Latin America at POS, it is also a very popular option for ecommerce transactions. Its market leadership is due to a sizeable underbanked population, high customer fees, and fraud. PostPay is very popular in Latin America, especially in Brazil, with Boleto Bancário. PostPay services, like Boleto Bancário, allow customers to make purchases electronically and then complete their transaction with cash at ATMs, convenience stores, and bank branches. This payment method is popular across Latin America, with Rapipago in Argentina and PagoEfectivo in Peru.

• Bank transfers

This cashless payment method endures in Europe and Asia. The customer does not need a credit card, simply confirming payment by a transfer from his or her bank account to the merchant at the end of the process. This can be done online or by email or phone. Almost 60% of Netherlands customers prefer to pay their e-commerce purchase with Ideal, while 51% of German customers use Giropay.

Multiple payment methods exist around the globe, locally and internationally as well as legacies and new. Despite technological advances, most legacy payment methods like cash or use of the correspondent banking system are unlikely to vanish.

While new payment methods offer many positive features, legacy payments have a place in the local and global economies. However, one thing is certain: the relationship between a business’ success and its access to a plethora of payment options cannot be ignored.

An Insights From the Field special report on the treasury trends and innovations that swept 2020

Every crisis provides an opportunity for change and often produces dysfunctions and accelerates the need for immediate and disruptive actions. Change was already in motion in 2020, and the pandemic only acted as an accelerant.

This publication analyzes the trends and innovations in the treasury world that were already in motion before the COVID-19 pandemic began and that either accelerated or gained tremendous publicity during the pandemic.

– How is the finance-treasury function organized at Albéa?

– A three-person central treasury team in Paris leads the finance-treasury function, and it relies on local relays in India, China, Indonesia and the U.S. This setup provides centralization without a hierarchical relationship. Each financial director has autonomy and the ability to consult local banks. We’re keen to retain this entrepreneurial spirit and enable our local finance directors to evolve freely within a defined framework and shared processes. It’s an organization based on trust, mutual recognition and appreciation — and it works well.

The central treasury department plays a supporting role by providing knowledge and experience. We help everyone to carry out the reporting that is crucial for our executive management team to monitor activity. We also provide tools. Because we have deployed a treasury management system (TMS) for the group, treasury processes between countries and business lines are more secure and homogeneous.0

In terms of financing, the group’s medium- to long-term debt is centralized in our holdings in Luxembourg. Our priority is to fund the working capital needs of our subsidiaries. To that end, we have four cash-pooling schemes – in Europe, the U.S., China, and Indonesia – as well as factoring programs in Europe. Until recently, we also had an Asset-Based Lending (ABL) scheme in the U.S. In China, our factoring program is dormant because our subsidiary’s treasury has a surplus. Financing working capital needs enables us to eliminate the discrepancies between our receipts and disbursements — and ultimately to better manage inventory. This is essential in our businesses.

– What principles guide your banking relationships?

– We seek to establish stable, long-term relationships with banking partners capable of providing quality cash management services in line with local needs. We are still working with too many banks around the world — a total of about 30. Our bank account structure could be simplified so that we can spend less time reconciling, minimize operational and fraud risks, and free up teams’ time for projects with higher added value. The ideal target would be to have two local banks and one international bank in every major geographical area in which we operate.

The adoption of our treasury system has led us to streamline our banking environment with the aim of limiting the multiplication of contracts, licenses and implementations on the one hand and concentrating our side business on the other.

– What challenges did your recent cash management tender in the US involve?

– In the U.S., where we make a quarter of our turnover, we had a single bank. The relationship had existed for a decade or so. We were satisfied with the quality of the cash management services, but the relationship had become strained with respect to the functioning of our ABL program. This collateralized financing, worth some $60 million, had many constraints — do’s and don’ts — requiring the U.S. banking partner to agree to our development strategy. We felt like we had a bank whose team failed to understand our concerns and those of our board of directors.

Repaying the ABL removed all of our obligations to the U.S. banking partner and facilitated all of our M&A operations. As such, we repaid the debt, paid the break-up fees, and put inter-company financing in place. This, in turn, triggered an immediate termination letter from our bank. We had 120 days in which to leave the relationship with the bank. Our priority was to notify our clients and launch the process of selecting a new banking partner for the next 10 years.

– How have you replaced your ABL program?

– Having financing from your cash management bank is convenient, but it’s not indispensable. After the sale of several assets in the U.S. in June 2020, the introduction of new financing was no longer an urgent matter. Our U.S. subsidiaries have no debt, and the proceeds from sales remove short-term treasury requirements. The ABL provides an important financing base on invoices and inventory, which we no longer need as much.

Given the funding envelope required for the next three years in the U.S., we decided to break away from the legal, organizational, structuring and lien (guarantees, cross-guarantees, obligors) constraints of the ABL. This will enable us to avoid the hassles we had experienced when dealing with our former banking partner.

We have naturally switched to factoring, which is a lighter, simpler solution that is not too expensive. This new funding is confirmed for three years, like our European program. From the point of view of rating agencies, it is a stable resource. Finally, in the U.S., factoring is seen as true sales (no recourse) and, therefore, deconsolidating, which is an additional advantage.

– What criteria did you use to select your cash management partner

– We had a preference for a U.S. partner that was fully compatible with our banking communication tool and TMS. We were also looking for a bank recognized by our clients and suppliers. We wanted a partner that was well known and recognized in-house; able to deliver the same quality of service as our former cash management bank, including the capacity of setting up letters of credit, guarantees, leasings and financing beyond factoring; and provide the broadest possible portfolio of services.

The structuring of the tender, led by Redbridge, enabled us to prioritize the essential matters: lockboxes, letters of credit, treasury tool compatibility, forex, and generation of dematerialized checks. We built our specifications in project mode. With the call for tender, which was conducted quickly and efficiently, it was ultimately easy to separate from a banking partner we had worked with for 10 years. We were surprised by Redbridge’s ability to put us in contact with banks that we would never have dreamed of.0

The collaborative approach also facilitated the final decision. We got our U.S. subsidiaries on board before proposing the final choice to Albéa’s Chief Financial Officer, and there was no hesitation in our selection. Moreover, although the priority was to change banks, we achieved the savings that we had envisaged two years ago when we were looking into the matter.

– Constance Veron, you have accompanied for Redbridge your client Albéa in this RFP. Can you briefly explain the choices that were made with Albéa to match the deadline?

– Because Albéa only had one banking partner in the U.S., we needed to find one or two new partners who could address all of their needs and constraints in terms of cash management and financing. We built our specifications in project mode and invited U.S. banks, international banks and lenders to the RFP. We designed the tender to include both cash management and financing while prioritizing essential matters such as lockboxes, letter of credits, treasury tool capability, forex and digital check solutions.

Redbridge already assisted Albéa in our TMS selection, so we were familiar with its treasury operation, and it made the difference in completing the project within the limited timeframe we discussed. We worked closely with the banks to find the best solution and services for Albéa, as well as competitive pricing. Less than three months from the beginning of the project, Albéa found a new U.S. banking partner for our cash management operations. After the review of all the financing offers received, none of the banks or lenders met during the RFP process offered us a factoring program. Instead, most banks were proposing either a new ABL program or a noncommitted or overly restrictive program for Albéa. So, we finally selected a factoring program with one of the group’s partners in Europe that met all of the requirements of the financial department.

– Oliver, how has the migration  to your new bank taken place?

– Once the accounts were live, we first circulated the information to our clients and then called each of them to let them know about the change of bank. Fortunately, we had a strong relationship with our U.S. clientele. We issued our first payments. Apart from electronic checks, which we are not yet fully prepared for, we have re-established the full range of banking services, enabling our U.S. entity to operate as normal. We are currently using our new bank’s in-house platform, and the connection to our treasury tool will take place at the end of the year.

– What about your financing partner?

– We selected Eurofactor for the U.S. factoring program. It already operates our pan-European program and provides a tool compatible with our TMS. True sales involve additional legal costs, but overall the cost of our financial resource in the U.S. has fallen considerably compared with the pre-existing ABL. A slight downside is that financing will only be credited D+1.

– What are Albéa’s treasury plans now?

– We always have a lot of projects on the go! We aim to finish optimizing our treasury architecture with our TMS, to continue aligning our internal signatory processes and operating methods, to train subsidiaries that fall within our TMS, and to activate the new modules on our treasury tool, such as netting, cash forecasting, cash pooling, debt management and exchange rates. We also intend to prepare as best as possible for M&A operations in the near future by starting to reflect on our debt structure and the positioning of our credit profile (credit insurers and rating agencies).

– How would you describe the organization of payments at Criteo?
– Criteo is a French technology company offering online marketing and advertising solutions. Founded in 2005 in Paris, it has experienced very rapid international deployment over the past ten years. We have operations in more than 100 countries through our 25 subsidiaries. Our treasury organization is highly centralized, and the team, based entirely in Paris, is responsible for providing our customers with payment facilities around the world. Our historical large account customers pay for our services through domestic or international transfers (SCT, Fedwire, ACH and local transfers in Asia). The expansion of the group’s customer base to smaller companies, with an average monthly expenditure close to $10,000, changes the matrix of how we think about payment methods. Our collections grow, and the new bills tend to be smaller, while we need to meet the same requirements of a B2B payment environment: namely the security and traceability required for accounting reconciliation.

– As a B2B company, which payment innovations are of interest to you?

Up to now, many payment innovations have focused on the user experience, which is hardly focused on the B2B environment. The increasingly international deployment of payment service providers, enabling the implementation of homogeneous global payment solutions through various means, is a trend of great interest. However, large card networks remain essential elements of the pipeline, and they have not led much innovation as yet.

– Do you follow a specific strategy or blueprint for integrating new means of payment in different geographical areas?

– We analyze payment innovations according to three criteria. The first is the acceptability and capacity of the solution to be rapidly deployed in the various geographical areas in which we are present. The second criterion is reliability, as our payment receipts involve significantly higher amounts than card payments by private individuals and are, therefore, exposed to a higher risk of rejection (lack of funds, ceilings reached, etc.). The last criterion is the ability of the solution to easily identify each payment stream for end-to-end processing.

The ideal means of payment is, from our point of view, the equivalent of SEPA direct debit, which enables us to control the timing (days sales outstanding – DSO) in order to know which bill we are going to collect. Direct debit is not only reliable. It is also efficient in terms of cost and execution time. Our opinion is that card payments are expensive, and are often associated with significant delays in receiving funds (four to five days on some payments in the United States) and have lower success rates.

But culturally, direct debit is not always as well accepted in some countries as it is in Europe. For example, it is not always well accepted in B2B relationships in the US. This is why we rely on an e-banking blueprint with payment initiation (merchant-initiated transaction) on the due date of the invoice, based on the bank card number recorded by our customer on their profile. We send mass electronic files to our payment service provider, which is responsible for charging the cards for the amount of the invoices due for each geographic area.

In order to process rejections due to technical reasons (management of the due date and the card ceiling), we have implemented a process that facilitates immediate contact with the customer so that they can connect to a Criteo platform and issue their payment themselves. The goal is to quickly resolve any problems so that we avoid any suspension of our service.

Unfortunately, however, there can be difficulties in analyzing the rejection codes. There are around 20 such codes in use around the world, but not all banks apply them in the same way, and we have not yet found a payment service provider capable of supporting us on this issue.

– What are the alternatives?

– Request-to-pay is part of our current thinking, but it will only make a real contribution if it enables payments and bills to be linked. A simple request-to-pay platform does not currently enable us to reconcile invoices or allow two separate customer stakeholders to release the payment. A QR code may be of interest because it enables direct identification of the customer and the invoice, but the disadvantage of this solution results in multiple payments.

– How interested are you in instant payment?

– Instantaneousness is of interest within the context of a specific collections process. We can immediately reactivate customer programs that have been suspended due to non-payment. As soon as a rejection is identified, we can contact the customer and direct them to a request-to-pay payment platform to resolve the problem. Once the transaction has been completed, the account is immediately unblocked.

SCT Inst is also of interest for our supplier payment campaigns, but its current ceiling of €100,000 is too low. In the long term, if the ceilings are raised, we will pay right before the deadline, instead of mobilizing cash over 24 to 72 hours in payment systems.

Read our new Payments Report – Shifting to faster payments

Redbridge’s 2020 Payment Report is a source for trends and insights into today’s dynamic payments environment. This second edition presents how various stakeholders position themselves in the payments industry and explores topics related to innovative payments, instant payments, e-commerce and fraud mitigation.

Contributions from treasury practitioners, bankers, payment service providers and vendors are coupled  with in-depth analysis from our treasury consultants.

Without a doubt, instant transfer is of interest to the treasury, with its ability to replace transfers otherwise referred to as “urgent” or sensitive. SCT Inst removes the stress of bank cut-off times, the late penalties associated with poorly executed payments and complaints from beneficiaries who are unhappy that they have not received their payment. Since the instant payment ceiling rose to €100k in July in France, it has been attracting even more interest among businesses. But how can it be implemented from a practical point of view?

Instant payments can be issued, but are banking communication tools ready?

Web banking tools are generally ready to enable you to issue instant online transfers, but what about the treasury management systems (TMS) you use to issue your bulk payment instructions?

As part of our survey this year, we interviewed seven vendors on how their payment systems need to evolve.

As was the case with banks a year ago, not all vendors are at the same stage of development. At the start of the year, three in seven were working with pilot customers to set up the issuance of instant transfers from their platforms. Some, such as DataLog Finance and Bellin, have developed the issuance of SCT Inst as a test “within the framework of a version upgrade as a standard feature”; others, such as NEOFI, Diapason and FIS, are waiting for their customers to ask them to integrate the issuance of instant payments in their offer, and rely on the fact that “implementation will be very fast (a few days at most), as this new payment method is still based on the existing SCT format”.

However, those who have started experimenting have found that implementing SCT Inst is not so simple.

The Internet enables a transaction to be processed in real time. All vendors have developed new web interfaces, or even mobile applications for instant unit transfer entry, with a relatively simple and fast validation process. However, as DataLog Finance points out, this process “cannot be used for thousands of transfers over a short period of time because of the slow processing of this type of connection”.

“For mass payments, it is recommended to concentrate them into files,” adds DataLog Finance. But how can they be transferred to obtain real-time execution? Only APIs enable direct communication with banks and, unfortunately, there is no harmonization of APIs between banks at present. Each has developed its own application, which means that vendors must develop as many APIs as their customers have issuing banks.

Pending a move towards harmonization, vendors are adapting. Some, such as Sage and DataLog Finance, have chosen to build partnerships and organize workshops with the main banks on the market at the risk of developing a very large library of APIs, even though it “poses homogeneity and cost difficulties, and increases deployment times”. Others, such as ACA, try “to work collaboratively with their common customers in a company-bank-vendor trio”.

Sage anticipates that these banking APIs will be called upon through a strong authentication system, but criticizes what is still a vague delivery and validation process.

In order to encourage the expansion of SCT Inst without waiting for these APIs to be implemented, several vendors are campaigning for instant transfers to be sent under conventional EBICS, SWIFTNet and SFTP exchange protocols in the form of traditional SCT files with a tag in the file or fileinfo or requesttype specifying that the transfer is an SCT Inst transfer. Once again, unfortunately, each bank is able to define its own rules, different from those of its peers, which will complicate the settings and the constitution of instant transfer files for treasurers.

Another approach recommended by FIS is “to use SWIFT gpi. This technology, up to now mainly used by large companies for rapid processing and very detailed tracking of their international payments, may well be the one for issuing transfers that we wish to send instantaneously”.

At present, the only rules all stakeholders agree on are that the remittances of SCT Inst files will have to be quite separate from other traditional SCTs that are submitted and that the remittances will have to be single-bank (one file per bank).

Order tracking

For manual transfers initiated via web banking tools or mobile applications, verification that transactions have been carried out correctly is easy, as the Internet enables information to be refreshed in real time. “The status of SCT Inst is retrieved either during the call from the same web service as sends it, or by calling another web status retrieval service…which means that the user who entered the transfer is immediately alerted in case of a rejection,” confirms DataLog Finance.

“Swift gpi allows for complete visibility over the payment processing chain, and therefore enables the SCT Inst execution to be tracked appropriately. However, it is necessary to accept that the instantaneousness could be tens of minutes and not a few seconds,” as FIS points out.

For mass payments sent via APIs or more traditional communication protocols, tracking will be more complicated as it will depend on the type of information transferred by the executing bank and the time at which it is to be provided. The usual payments status reports will probably remain the best way to track the payment status but, as Sage points out, they will most likely need to be enhanced with “new statuses” more relevant to real time. These return files should be able to be integrated into the tools, like today, and enable the smooth execution of the transactions to be confirmed, end to end, as Bellin recalls.

Diapason plans to offer a view on the statuses directly on the dashboard available to its customers, while ACA will use the real-time instruction tracking monitor developed as part of the Tracker GPI and FIS to develop a “middleware API (called ‘Code Connect’) in order to facilitate API connections by freeing itself from the diversity of the standards developed by each system”.

Bank reconciliation of these SCT Inst transactions could be carried out through a new reconciliation category that is automatic, as for all other types of transactions, “one for one, on any account, whether it is reserved for SCT Inst or not,” according to DataLog Finance.

If the treasurer wishes to manage its accounts in real time, it may rely on the intraday statements of account (MT942) that it may receive on that day, but as its work remains based on forecasts, NEOFI recommends “managing SCT Inst returns intraday and waiting until the next day to reconcile them. Does the treasurer really need to have a statement of its treasury in real time?” This is a subject that even raises questions about the future of the treasurer…

Half of the vendors surveyed by Redbridge indicated that they had adapted their tools in order to enable companies to test their first instant transfer issuances. The other half claimed to be prepared to support their customers upon request. In each case, the new module would be proposed without any additional cost with regard to the contract.

A cautious treasurer will, however, conduct its tests on unit transfers, and with a few banks first. Instant transfer is currently only operational with five banks in France and with some banks with international transfers from neighboring countries.

Finally, upstream, it will be necessary to negotiate the price of instant transfers with banks, as issuing these new transactions could soon become a significant cost item!

Read our new Payments Report – Shifting to faster payments

Redbridge’s 2020 Payment Report is a source for trends and insights into today’s dynamic payments environment. This second edition presents how various stakeholders position themselves in the payments industry and explores topics related to innovative payments, instant payments, e-commerce and fraud mitigation.

Contributions from treasury practitioners, bankers, payment service providers and vendors are coupled  with in-depth analysis from our treasury consultants.

Despite multiple payment innovations, the majority of transactions in Europe continue to be settled, for the most part, in cash, and mainly for low-amount purchases. At the end of 2017, the Eurosystem published a report entitled “Study on the Use of Cash by Households in the euro area”. It showed that cash was the most widely used payment instrument by individuals in the region, accounting for 79% of purchases made in-store and 54% of total payments. Bank cards were used in 19% of transactions, and accounted for 39% of the total value of payments.

Germans are among the most attached to using cash in Europe, with about 70% of their transactions settled using that means. At the other end of the spectrum, the Nordic countries have been seeing a trend toward a cashless society for several years. France has around 68% of transactions using cash, and has experienced a 5% decrease in the use of bank notes over the past five years.

Use of cash

Among the reasons behind the use of notes are the instantaneousness of the transaction, the absence of intermediaries, the notion of anonymity and the possibility for the most vulnerable among us to access means of payment.

In terms of the average shopping cart, the use of cash is being increasingly pigeonholed for very small payments following the arrival of contactless card payments and e-wallets such as Apple Pay and Google Pay, which make low-amount payments very easy.

Regulation

Sweden has just passed a law, which will come into force in 2021, to preserve cash as a means of payment. Banks with deposits of more than SEK 70 billion will be obliged to offer cash withdrawal services to consumers, and withdrawal and deposit services to businesses. Penalties will be applied for non-compliance with this rule.

The United Kingdom is also planning a law (with no specific date for it to come into force) to regulate the availability of cash. Away from Europe, New York has just banned retailers from refusing cash payments.

France is particularly demanding in relation to the acceptance of cash. It requires retailers to accept cash payments, which is the only mandatory payment method. The French insists that “refusing cash payments represents discrimination that deprives many people of access to essential products: these people include protected adults, people in a situation of economic vulnerability, such as the elderly, people who receive minimum social benefits, homeless people, or unaccompanied minors and asylum seekers without payment cards”.

Cash in online transactions

According to a poll, 96% of French people have made at least one purchase on the Internet. In addition, even if cards remain the preferred payment method, more than half of French people confirm that they would be interested in the possibility of paying for their online purchases in cash if this option was offered to them.

Spain and Italy are also very much in favor of this practice: 78% of Spaniards and 74% of Italians surveyed said they would like to use cash payments when making online purchases if the option was offered. Another sign of conviction with regard to payment in proximity is that 60% of Italians and 54% of Spaniards surveyed would be willing to pay their regular bills in cash at a local business near to their home or workplace. These figures compare with 42% in the UK and 36% in France.

One of the main reasons for using cash for transactions triggered online is the risk of fraud (50%) and having a payment by credit card refused (24%, of which 70% confirm that they have abandoned an online purchase due to a payment being refused). In addition, the current pandemic has significantly increased e-commerce figures for essential supplies. Purchases of such goods have increased by 48% since the start of the crisis, and this figure remained stable even after lockdown measures were eased (Source: Signifyd).

Although the practice is still relatively unknown in Europe, “phygital” payment is a very common practice in other regions, particularly in Africa and Latin America. In these regions, the low rates of use of the banking system, a historical attachment to cash and the many transactions made from abroad (payment of bills and money transfer in particular) make this payment method a must-have for online transactions.

Use cases

In Europe, several companies have already developed a strategy to integrate cash as a means of payment for transactions initiated online.

This is particularly the case with Amazon, one of the first companies to take into account its customers’ desire to use cash. In 2017, Amazon launched “Amazon Cash” in Europe. This service enables Amazon users to credit their cash account at a nearby point of sale. All users have to do is go to a partner point of sale and either have the retailer scan a barcode, or request a recharge code that is printed on a receipt and can be manually added to the Amazon account. Once the payment has been validated, the Amazon account is credited in real time, free of charge. The amount to be credited can be between €5–500 per recharge.

Uber has also just started offering two ways to pay in cash. The first is simply to offer consumers the opportunity to pay for their journey in cash in the car, as with traditional taxis. To do so, they need to select this payment method before booking the taxi as this service is only offered in certain cities and by certain drivers. The second option is to pay using the Uber Cash service. This service enables users to add funds to their Uber account before the journey. Among the main benefits of the latter approach, Uber highlights the fact that users are able to plan their expenses and be sure that they are able to pay at any time in the Uber ecosystem, without having to worry about problems such as expired cards, overspending on an authorized overdraft, or having insufficient funds.

Neobanks are among those that want to integrate proximity in the digital world. For example, N26 has launched an online-only service and now offers its customers the opportunity to recharge their current account in cash at local points.

A use case that enables most merchants to optimize the online sales journey, and thus generate additional income, consists of proposing proximity payment following the failure of a bank card payment. According to IFOP polling institute and numerous studies conducted by various PSPs and other experts in this field, more than one in two customers who encounter a payment failure during an online purchase do not renew the transaction and choose a competitor instead. With proximity payment as an alternative if unsuccessful, merchants can give customers another chance to pay in-store in cash or even by bank card. Moreover, this payment is guaranteed for the merchant because it is non-repudiable.

Billing services companies also have a strong interest in integrating cash into their strategy, regardless of the type of activity, such as energy providers, housing companies, public administration or telecommunications. Using a barcode or QR code on the invoice, customers can go directly to the point of sale and pay in cash or with any other payment method accepted by the merchant (such as a bank card). In this way, invoice clerks can significantly reduce the workload of their customer services department while improving the customer experience, especially given the number of points of sale available and their opening hours.

Finally, proximity payment increases the chance of obtaining payment from a customer. Indeed, offering proximity payment enables customers to pay even if they do not have money in their account or if they do not wish to use their bank card on the Internet. This can help not only to optimize recovery, but also to reduce the number of payments made by, for example, telephone, or sending a check.

Read our new Payments Report – Shifting to faster payments

Redbridge’s 2020 Payment Report is a source for trends and insights into today’s dynamic payments environment. This second edition presents how various stakeholders position themselves in the payments industry and explores topics related to innovative payments, instant payments, e-commerce and fraud mitigation.

Contributions from treasury practitioners, bankers, payment service providers and vendors are coupled  with in-depth analysis from our treasury consultants.

The factoring market experienced a historic decline in activity in the first half of 2020. In its semi-annual report, the French Association of Financial Companies (ASF) calculated the contraction in factor activity in France to be -10.2%. There were significant disparities between domestic invoicing (-13.4%) and export invoicing (-3.0%). It should be noted that these figures quantify the fall in invoice volumes sent to factors and not the amounts of financing.

Expectations of increased use of factoring to finance the resumption of activity after the summer did not pan out. The large factoring companies in France note that the number of new transactions has remained low, particularly in the micro-enterprise / SME customer segment. The explanation for this lies in the effectiveness of public measures to support the economy, at the forefront of which state-guaranteed loans have helped to cushion companies’ liquidity profiles, at least for a while. Another explanation can no doubt be found in the position of credit insurers, which have reduced their approvals quickly, and sometimes drastically, leading to reduced activity of the factor industry.

Improving leverage

However, the factoring market is receiving support from demand from mid-sized companies and large groups wishing to partially deconsolidate some of their trade receivables in order to manage their financial ratios.

As an example, let’s consider the following imaginary corporate, which has:

– a 2019 (pre-Covid) leverage ratio of 2x (net indebtedness of EUR 200m and EUR 100m of EBITDA)

– a 2020 (post-Covid) leverage ratio that rises to 2.7x (net indebtedness of EUR 230m and EUR 85m of EBITDA).

In such a situation a EUR 25m true sale of trade receivables held by such a company would see its leverage ratio fall from 2.7x to 2.4x (as net indebtedness would be reduced from EUR 230m to EUR 205m).

And, according to a Redbridge study, biggest firms using such deconsolidation transactions (under established and recurring factoring programs or “spot” transactions at the end of the fiscal year or half fiscal year) earn an average of at least 0.3x leverage.

The high proportion of requests for such one-off trade transfers of receivables for the half-year results in June and at the end of 2020 reflect the increased need among corporates to control their financial ratios for the fiscal year 2020. A borrower will often have an interest in improving its ratios by deconsolidating part of its receivables rather than soliciting a waiver from its lenders or bond investors, for whom accepting the request is far from automatic!

So-called “spot” transactions follow the same broad principles as recurring transactions (factoring programs) in the area of IFRS deconsolidation: almost all of the risks and benefits associated with these receivables must be transferred to the factor (which is then in the position of being the “transferee”) for the receivables to be taken out of the transferring company’s balance sheet. The transferee’s lack of recourse to the transferor is at the heart of the structure: credit risk is transferred to the credit insurer or, more rarely, directly borne by the transferee in its “own funds.” Transferees (such as factors and banks) guard against the risk of dilution (non-payments related to disputes, compensation, invoicing errors) by setting up a guarantee fund. The risk of holding a claim and late payment is dealt with by increasing the calculation time of the withheld financing fees (Days Sales Outstanding + security days).

From the perspective of a factor, a deconsolidation spot transfer in IFRS is more risky than a transfer in a recurring program. For example, the absence of an account dedicated to the receipt of transferred invoices (which is the rule for one-off transactions because the organization of cash management for a few weeks cannot be changed) creates a risk of commingling on the transferee; in addition, the inability to subsequently adjust the length of time to calculate the withheld interest increases the risk of late payment. As a result, factors’ appetite is reduced and concentrated on transferors with a strong credit profile. That’s because, despite the lack of recourse to the transferor, the transferee remains sensitive to the transferor’s credit quality.

The price is also higher: up to twice – all things being equal – that of a recurring factoring program. However, the savings on other financial instruments that such a transaction can facilitate puts its cost into perspective. The possibility of signing a spot transfer in a few weeks before a closure, despite the necessary validation of the package by the auditors, makes it a flexible tool for the transferor.

The current upsurge in deconsolidation operations, which is quite understandable in the face of the crisis, will lead auditors to strictly follow the IFRS constraints. This is certainly important to be bear in mind for transactions in late 2020 and 2021. In this context, a simple, legible documentary base (a spot transfer agreement or recurring factoring contract), well-paying transferred debtors and reasonable sought quantums are other key factors to bear in mind.

In the future, the majority of payment methods will be digital and mobile, based on QR codes or NFC technology, and will offer value-added services such as promotional offers, multi-currency cards, deposits or instantly approved loans.

The following overview of innovative payment solutions outlines a vision for the future of payments.

Mobile payments as an alternative to cards

Over the past decade, mobile payments have been developed using a variety of technologies, transforming our smartphones into payment methods, whether for in-store or online transactions. Digital wallets (e-wallets) have emerged to make contactless payments using different technologies: NFC for a large part of Europe and North America, or QR code reading, especially in China.

The number of digital wallet users across the world exceeded one billion in 2019. More than two-thirds of these people live in the Asia-Pacific region, with China alone accounting for almost 50%, using services such as Alipay and WeChat. In China, the digital wallet is the preferred national choice among the different payment solutions.

Most e-commerce and in-store transactions rely on these applications rather than cards, and they also offer a wide range of related services, such as promotional offers, investments, insurance and travel reservations. There’s a similar picture in neighboring countries such as Singapore and India.

Solutions developed in the US that can be used anywhere in the world, such as Apple Pay, Google Pay and Amazon Pay, now account for over 5% of card payments, with Apple Pay currently the leader. The outlook for Apple Pay’s development is impressive, with forecasts that it could account for up to 10% of card payments by 2024. This would be achieved through further penetration of the European and Asian markets.

In Europe, millions of people make mobile payments every day, using a wide range of options. In addition to international solutions, such as Apple Pay, Google Pay and Samsung Pay, there are a considerable number of local initiatives available in Europe, such as Payconiq (Germany, Belgium, the Netherlands), Bluecode (Germany), Paylib and Lyf Pay (France), Yoyo Wallet (United Kingdom) and Jiffy (Italy). In the Nordic countries, almost 50% of the population use a digital wallet, thanks in particular to MobilePay solutions launched by Danske Bank in Denmark, Vipps by DNB in Norwayand Swish, which has been developed through a joint effort by a number of Swedish banks. These solutions have thus managed to acquire 13 million users from among the 27 million inhabitants of the Nordic countries.

The success of these wallets in Asia and the Nordic countries is such that, gradually, they can be used beyond their borders. Good examples of this include Chinese giant Alipay, which has deployed its payment solution in 110 countries, and the iDEAL solution, which is used by more than half of the population in the Netherlands, where three major Asian merchants decided to try to attract more Dutch buyers to their e-commerce sites by offering iDEAL as a payment option. As a result, their orders from the Netherlands increased by almost 80% (source: Stripe’s report “The state of European checkouts in 2020”).

Obstacles to the development of e-wallets

As it stands, iPhone users cannot use their e-wallet to make payments in some European countries because the majority of national banks have not yet implemented Apple Pay. This is particularly the case in Belgium, where only one of the major financial institutions, BNP Paribas, Fortis, offers the service. In France, 90% of banks have an agreement with Apple.

Digital wallets supporting QR codes have a weakness when it comes to further penetrating the market in Europe: a lack of the appropriate equipment able to support this technology at points of sale. With  the exception of supermarket-type integrated POS system with barcode scanners that can read QR codes, the merchant must invest in a suitable device (POS terminal) to scan or generate a QR code. This equipment can be 20% more expensive than terminal models without this technology.

For contactless payment at the point of sale, the POS terminal must accept this feature. In France, this payment method is in high demand today. It accounted for 20% of purchases before the Covid-19 outbreak, but is only offered by 70% of local retailers, according to the Groupement des Cartes Bancaires.

Finally, only 70% of e-commerce sites are able to accept payments using these e-wallets. Not all merchants have flexible solutions that can onboard all payment solutions, so they need to review their partnerships with their payment gateway to enable the appropriate e-wallets to be accepted.

Changes in customer journeys

With the closure of many points of sale during the Covid-19 outbreak, and the ongoing issues surrounding in-store social distancing, consumption patterns have been profoundly disrupted. This set of circumstances will accelerate the evolution of the purchasing journey. Retailers and their providers have had to rethink experiences in order to cope with these constraints. E-commerce, drive-throughs, and click & collect were widely accepted, but these digital solutions were not the only ones to be popular with retailers.

With Paybylink, a store or a call center can simply create an online payment page after taking an order and automatically send the link by email, SMS or QR code for payment. The way in which products are made available will then vary, with either in-store pick-up or home delivery. Many stakeholders are positioning themselves on this topic. These include Adyen, Stripe, SSP, Paytweak, Worldline…

With the acceptance of cash becoming more limited, retailers have quickly equipped many of their outlets, or employees if they are making deliveries, with mobile points of sale (mPOS). These products have been growing in popularity rapidly over the past few years and are gradually moving toward technologies that accept the integration of an application on a mobile phone, enabling it to become a payment terminal (TapOnPhone). Many proofs of concept are pending until the PCI Security Standards Council releases its certification specifications.

Against this backdrop of research into innovations in online payments, the four credit card giants – Visa, Mastercard, American Express and Discover – joined together in 2019 to create a “click-to-pay” option for online shopping sites. The aim is to provide a more convenient way to pay for online purchases without having to enter payment card information, while securing the transaction. This system aims to reduce fraud in the e-commerce environment, like the EMV chip does at a physical point of sale. The experience is very similar to the PayPal payment process; the consumer only enters their details once via this system and can log into their payment account when the click-to-pay logo appears, and then choose their stored payment card.

What does the future hold for credit cards around the world?

Despite the significant breakthrough in digital wallets, cards remain the preferred payment method for most consumers. As a result, banking institutions are investing in the development of a new generation of cards.

The first to begin testing secure credit cards with biometrics, using fingerprint recognition, was NatWest last year. Thanks to a biometric sensor, the cardholder will be able to pay by validating their purchase with their digital fingerprint, and without any ceiling limit. The appetite for this technology was strong before the COVID-19 outbreak and it looks like it should be highly successful as soon as it is available on the market. In France, BNP Paribas, Crédit Agricole and Société Générale plan to launch biometric cards by the end of the year, having tested them with their employees in recent months. BNP Paribas is also planning a card with a fingerprint sensor for the end of 2020. It should reduce the risks of fraud for cardholders by using an “anti-contactless” system to reassure those who are the most resistant when it comes to contactless payment.

Requests for virtual cards are increasing for personal and professional uses: it is delivered instantaneously to customers remotely without any irksome administrative procedures. Such a card can be linked to both the local and international mobile wallets. In France, Société Générale has launched the Instant Digital Card – IDC, in partnership with Apple, with Android versions set to be made available by the end of the year. This totally virtual card enables any customer who has canceled their card to have a digitized version of their future card on their cell phone, which can be used immediately.

Banks are accelerating their process of digitization and are proposing more attractive offers by combining card and payment technologies with value-added services such as instant online loans, deposits and multi-currency transactions.

The number of cross-border transactions is growing significantly. In France, 61% of the leading sites now sell internationally and 27% have a presence in international markets, based on the latest statistics from the French Federation of E-commerce and Distance Selling (FEVAD). Offered primarily by online banks or neobanks, such as Revolut or N26, multi-currency cards enable their holders to make very large savings on overseas transactions. The principle is to link several accounts in different currencies to the same card. They are fed by money transfer. This product increases the transparency of cross-border payments by communicating the exchange rates applied at the time of payment to the cardholder. The bank derives its revenues from conversion of the currencies that it buys directly on the stock exchange or online through a partner.

Read our new Payments Report – Shifting to faster payments

Redbridge’s 2020 Payment Report is a source for trends and insights into today’s dynamic payments environment. This second edition presents how various stakeholders position themselves in the payments industry and explores topics related to innovative payments, instant payments, e-commerce and fraud mitigation.

Contributions from treasury practitioners, bankers, payment service providers and vendors are coupled  with in-depth analysis from our treasury consultants.

– Can you briefly describe the organization of, and issues with, electronic payment within the SMCP group?

– SMCP is a global leader in the accessible luxury market, with a portfolio of four unique Parisian brands: Sandro, Maje, Claudie Pierlot and De Fursac. Operating in 41 countries, SMCP is a high-growth group that crossed the billion-euro-turnover threshold in 2018, and our turnover rose to €1.14 billion in 2019. The group includes a network of more than 1500 stores across the world and a strong digital presence in all of its key markets. Sandro and Maje were founded in 1984 and 1998 respectively, while Claudie Pierlot and De Fursac were acquired in 2009 and 2019 respectively.

Electronic payment is an important topic for a distribution group such as SMCP, which operates and charges directly at the vast majority of its outlets and e-commerce sites. Card payments account for more than 84% of our sales in countries in which a cash culture is still prevalent, such as in Germany, and close to 100% in countries like China.

Within our Treasury department, two people are in charge of electronic payments. Building an offer of payment methods adapted to the expectations and practices of customers in many locations around the world requires a specialized but versatile approach. We have an interest in harmonizing our offer, for obvious reasons of cost, and striking a balance so that the customer journey remains fluid at the time of payment. For online sales in particular, the payment method offer is built with the twin aims of integrating solutions with our e-commerce and fraud platform while meeting the expectations of our customers wherever they’re from in the world and taking into account the currencies they use.

– What is your blueprint for payment methods in your bricks and mortar stores?

– SMCP’s choice has always been to adopt comprehensive service solutions provided by Payment Service Providers (PSPs). Our approach is to serve our customers and offer them the simplest and smoothest paths and experiences possible with multiple payment options.

What is distinctive about PSPs is that they don’t just take on the contractual aspects with buyers in all of the countries where we want to operate, but they also deal with the technical aspects. They provide the merchants with access to a platform to manage their entire environment, from creating merchant accounts and managing accounting and transactional reporting data, to managing the payment terminal fleet remotely.

Our provider was selected after a call for tenders. We met with global firms, and others who were more regional or even purely national. We needed at least a regional partner, able to easily interface its solution with our e-commerce platforms and accounting tools. We were also looking for time savings and simplification.

In view of our international growth, we quickly chose a centralized electronic payment architecture in “full service” mode three years ago. We have since deployed it in France, 14 other European countries, the United States and Canada, and have started rolling it out in Asia – in Singapore and, soon, Hong Kong. In 2021, we’ll be rolling out our solution in Malaysia.

Ultimately, the only countries where it won’t be deployed are those in which local regulation makes such cash architectures impossible. Mainland China is a good example at the moment. Through our platform, we have all the flexibility we need to remotely propose and activate the global or local payment methods that our customers expect.

Our payment method base is always focused on the major card networks. In Europe, the local card schemes, Visa, Mastercard, American Express, WeChat Pay and Alipay schemes are the basic elements. Most recently, the COVID-19 health crisis has accelerated the need to provide payment solutions such as Wallet or Pay By Link, which do not require contact between people.

– What does the payment scheme for online sales look like?

– The migration from our e-commerce platforms to a full-service PSP solution has consisted of assessing the ability of each operator to accompany us over time and be responsive to our demands, taking into account the geographies where SMCP was present and going to develop. As such, we had a precise idea of our needs in terms of payment methods. We have therefore dedicated our efforts to finding a back office interface that’s as intuitive as possible and enables us to drive online sales, which accounted for almost 15% of our turnover in 2019.

Once we selected the partner, the rollout was achieved quite quickly country by country. It’s easier to integrate an area directly into the platform by managing a single go-live than to switch from one platform to another. However, in e-commerce, migration from one solution to another is a complex operation that includes multiple strands and where the go-live has to be perfect from day one.

– How do you deal with the problem of fraud for in-store sales?

We implement proven in-store procedures: strong authentication with PIN code entry for card payments, identity checking if necessary, and systematic authorization requests.

– How do you deal with the potential for fraud in online sales?

– Online fraud is managed through the risk management engine of our PSP, which is constantly configured and adjusted by our teams. For example, we analyze various themes, including the behavior of our customers.

This can be in terms of the frequency of customer purchases, the place of purchase as reflected in the location of IP addresses and whether they tie in with the delivery locations, the knowledge we have of the customer as to the contents of their shopping cart, and the purchase amount. Depending on the products selected in the cart, we can also activate additional controls.

These different elements will make up a score that may or may not trigger strong 3-D Secure authentication.

– What are the KPIs that you regularly monitor to assess the performance of your payment methods?

– We look at several indicators, ranging from tracking fraud and chargebacks (claims for refunds once the goods have been received) to analyzing transactions through the use of payment methods. Chargebacks are an area we pay particular attention to as this remains one of the main sources of fraud. We also analyze the mix of payment methods in the different geographical areas. This analysis is relevant to the extent that the average cart remains very consistent from market to market.

Overall, we believe that automatic screening by our payment service providers works very well. It’s always possible that a payment does not go through due to our strict fraud management procedures, but in the vast majority of cases it’s because the protection barriers activated have proved effective.

– Have you started work on 3DS V2 and exemption requests? Do you think this will significantly improve the acceptance rate?

3-D Secure authentication is something that has made a huge contribution to the fight against fraud. I don’t think for one second that a customer will abandon a purchase because they don’t want to enter their 3DS code. If someone doesn’t have their credit card to hand, they will at least have their smartphone.

As early as 2019, SMCP adapted its e-commerce sites to the evolution of the DSP 2 standard and 3DS V2. We are ready to implement it at the start of 2021. Next year we will, however, be very vigilant about transaction incidents in order to correlate them with fraud monitoring and avoid an increase in false positives, by which we mean transactions that are refused to genuine customers.

– What other major payment projects are taking place at SMCP?

– We’ll continue to roll out our electronic payment platform and we’re currently moving forward on a split payment offering. This project raises organizational issues related to in-store process management and workflow management on our platform and back-office interfaces. Some fintechs have rightly positioned themselves in this market, which has not changed hugely for some time. Split payments are credit transactions that are fairly binding on merchants and customers, but since the legislation has evolved, fintechs are in a good position to present solutions that are quick and easy to implement.

More generally, we’re going to lay the foundations of our Unified Commerce platform. This will really facilitate our ability to meet the  demands from our customers.

Read our new Payments Report – Shifting to faster payments

Redbridge’s 2020 Payment Report is a source for trends and insights into today’s dynamic payments environment. This second edition presents how various stakeholders position themselves in the payments industry and explores topics related to innovative payments, instant payments, e-commerce and fraud mitigation.

Contributions from treasury practitioners, bankers, payment service providers and vendors are coupled  with in-depth analysis from our treasury consultants.

The introduction of IFRS 16 and the COVID-19 crisis have changed the debt profile of listed French companies

• The average credit profile of listed French companies, as illustrated by their nominal net debt/EBITDA ratios, fell from category A to category BBB in just 18 months.
• The average amount of leverage at the end of 2019, after the introduction of IFRS 16 on leases but before the COVID crisis, was at its highest level in the past ten years (2.0x versus 1.7x at the end of 2012).
• In 2019, credit ratios fell due to the introduction of IFRS 16, with net leverage falling by an average of 0.3x.
• The acceleration in the decline of corporate credit profiles over the first half of 2020 and the ongoing uncertainty about economic prospects are changing the relationship between companies and their lenders.

In the first half of 2020, the gross debt of listed French corporates jumped by 13%

Main financial metrics of non-financial SBF 120 companies as of the end of June 2020*

• When focusing on a sample of 84 corporates that published their half-year results before 7 September 2020, the drop in revenue at the end of June was 10.7% year-on-year.
• EBITDA also fell sharply: by 15%.
• The gross debt of the 84 companies increased by EUR 94 billion to EUR 829 billion (+12.7%) during the first half of 2020.
• Cash flow increased from EUR 283 billion at the end of 2019 to EUR 306 billion (+8.1%). This represents 37% of gross debt.
• Net debt increased by EUR 71 billion to EUR 523 billion (+15.6%).

(*) Analysis carried out on a panel of 84 corporates. The impacts
of IFRS 16 are taken into account for the years 2019 and 2020.

Corporate performance diverged significantly in the first half of the year, which is suggestive of a K-shaped economic recovery

• While there was a sharp increase in the average leverage of listed French companies in the first half of the year, three large groups of companies stand out in terms of the impact of the pandemic on business activity (see below).

The main priority for companies is strengthening liquidity

• 23% of the companies we surveyed have set up a state-guaranteed loan.
• Just over a quarter of respondents (26%) have renegotiated their covenants.
• 26% of companies have not adopted any measures in addition to their initial financing strategy.
• Accessing new sources of financing is the priority for almost a third (31%) of respondents.

According to corporates, banking relations remain good

• 71% of respondents felt that banks are open to discussion about new funding.
• However, 25% of the mid-size companies surveyed believe that their banks are currently stepping back.
• Likewise, just over a quarter (27%) of the mid-size companies surveyed believe their relationships with bond holders are under strain.

For corporates with a solid financing structure, access to financing for growth remains the top priority

Circumstances of respondents who have not adopted measures in addition to their initial financing structure

• The main priorities for companies that have not taken any additional post-crisis measures are to ensure they have access to finance in order to fund acquisitions (38%) and capex (25%).
• It is interesting to note that 19% of respondents who have not taken any measures in addition to their initial strategy believe that their banking relations are under strain at the moment.

At least 43% of respondents who have benefited from a state-guaranteed loan wish to repay it in the short term

Circumstances of respondents who have set up a state-guaranteed loan and/or other forms of finance subject to a guarantee by the state

• 29% of corporates who have opted for a state-guaranteed loan consider it harder to set up than traditional bank financing.
• 43% of respondents receiving state-guaranteed loans believe that their banking relations are currently strained.
• About 30% of respondents wish to extend their state-guaranteed loan.
• A quarter of state-guaranteed loan borrowers are yet to decide wether they will repay or extend their financing.

Central banks and governments will continue to play a key role in stabilizing bank credit markets

Banking market

• The sharp increase in the indebtedness of SBF 120 companies reflects that the health crisis has not resulted in a credit crunch.
• State-guaranteed loans
• Additional one- or two-year crisis liquidity lines
• Waivers / covenant holidays
• Even though cash flow support operations between March and this summer took place without undue strain on banks, fall was marked by a clear repricing of spreads, which could reach 50bps, particularly for the most highly “leveraged” companies.
• Despite the massive liquidity injections, the cost of refinancing banks has stabilized at around 15bps above its average pre-crisis level after soaring in March/April, while the cost of risk is skyrocketing.
• The sharp rise in deposits has also facilitated the development of credit.

Corporates have issued bond debt on a massive scale against a backdrop in which the over-supply of liquidity has led to risk premiums contracting

Bond market

• In addition to the banking market, companies have relied heavily on the bond markets to secure liquidity cushions.
• It has been another record year for the primary market (following on from 2019, which was in itself a record year). There has been EUR 380 billion of corporate issuance so far this year, around 20% above the 2019 level.
• There has been considerable investor appetite for these issues in the form of high oversubscription rates and low new issue premiums (NIPs).
• Despite the macroeconomic uncertainties, central bank policy should remain accommodative, stimulating the bond markets.
• How well will central banks support the financial markets against a backdrop of an overall increase in risks at the end of the year?

Some final thoughts

• The supply/demand balance in bank credit is changing, and it is becoming more expensive.
• For the most complicated credit profiles, the documentary framework is becoming stricter.
• When it comes to disintermediated debt, the private investments sector is not as attractive as public markets.

• The most fragile companies (those in complicated industries, with high leverage and liquidity problems) are being affected the most, but even investment-grade lines of credit are suffering from the uncertain macroeconomic outlook.
• State-guaranteed loan arbitration / other source of financing: companies that have benefited from a state-guaranteed loan should take into account the increasing cost of credit in their decision-making process when considering repaying the loan.
• Companies should not underestimate the flexibility provided by WCR solutions.

• In this particularly complicated environment, the advice we gave at the start of the crisis still stands: communicate openly about credit profiles, based on reliable and detailed information (in particular, cash flow projections in the event of a second wave of the virus); secure liquidity and extend maturities.

Paris, 28 October 2020 – Redbridge and Verteego announce today that they are to collaborate to increase the use of artificial intelligence in cash flow forecasting processes within businesses.

Both companies intend to use artificial intelligence technology to automate recurring cash flow processes and generate more reliable short- and medium-term forecasts. The potential benefits of doing so include increasing companies’ visibility about their liquidity position and improving their ability to determine a more proactive financial strategy.

Data Scientists Team Up With Treasury Experts

The collaboration between Redbridge and Verteego brings together two areas of expertise – finance and machine learning – and creates a unique capacity to implement a financial project around artificial intelligence.

• In-depth knowledge of cash flow forecasting models and key cash flow variables
• Project led by cash flow experts
• Ready-to-use and customizable technology
• Interoperability with company IT systems (Enterprise Ressource Planning, Treasury Management System, etc.)
• Automation of recurring tasks and honing (Automated Machine Learning) of forecasting models over time

Teams from Redbridge and Verteego are working in conjunction with the cash flow and IT teams of client companies that are using the solution. Following exploratory analysis of a company’s data, the solution is then tested in the company’s systems to ensure it delivers value. The technology developed by Verteego helps improve companies’ decision-making capabilities by providing short- and medium-term projections of a group’s liquidity position. It creates scenarios, notably modelled on sales and how they are likely to develop, taking into account normal conditions as well as the possible effects of exceptional events such as natural disasters and public health crises.

“The COVID-19 crisis clearly demonstrates the need for companies to quickly acquire reliable cash flow forecasts so they can anticipate their liquidity needs and determine their financing strategy. Finance and cash flow represent excellent areas for the application of artificial intelligence technology: this is only the tip of the iceberg for our partnership with Verteego,” says Guillaume Roudeau – Senior Director, Treasury Advisor and head of the AI solution at Redbridge.

“As soon as a company decides it wants better forecasts, it can improve its activity and profitability. Artificial intelligence meets companies’ and organizations’ expectations by being quick to implement (it takes just 2–3 months to deliver our solution). By working in collaboration with Redbridge, our tool will be able to make accurate predictions, anticipate strategic flows and provide decision-making support to companies. The tool really helps create value when it comes to cash flow forecasting” added Rupert Schiessl, CEO and co-founder of Verteego.

About Redbridge

Founded in 1999, Redbridge Debt & Treasury Advisory is a leading international financial management partner to corporations around the globe. Its teams in Paris, Geneva, London, New York and Houston have carried out more than 400 projects over the past decade to help companies optimize their finance and cash flow, from designing strategic solutions to implementing them on an operational level.

About Verteego

Founded in 2008, Verteego is an artificial intelligence solution editor helping organizations that want to improve the accuracy of their forecasts. Verteego specializes in data science, has developed a proprietary cloud-based platform and is dedicated to the use of artificial intelligence. It provides clients with a wide range of intelligent, ready-to-use business solutions, enabling them to transform their processes.

Working with companies across the retail, manufacturing, real estate and service industries, Verteego focuses on the value created by artificial intelligence and on producing societal, environmental and economic benefits.

Based in Paris and Nantes, 95% of Verteego’s 30 employees are data scientists, developers, project managers, UX experts, PhD holders or experienced scientific researchers.

www.verteego.com