– What challenges do cards and other electronic payments present within the Decathlon group?
– Decathlon is a sports and leisure item retailer with an annual global turnover of around €13 billion, achieved through its 1500 stores in 60 countries and online sales. Our payments are organized according to an omni-channel approach and our mission, at the treasury, is to provide payment components adapted to the way in which our customers buy our products.

Their needs are highly diverse. A single customer can follow completely different purchasing journeys at different times. For example, when buying an item of clothing in one of our stores, they might prefer to use a self-service checkout. On the other hand, if they’re making a major purchase, such as in the case of a family wanting to fully equip themselves with hiking gear for their next holiday, they might appreciate if at the checkout we propose a payment solution that involves three or four installments. Other customer journeys are considered from a transportation perspective, such as an order for heavy equipment – a weight bench or treadmill, maybe – that the customer may want to pick up in their vehicule without visiting the store.

In order to meet these needs, we are deploying an architecture and pooled payment solutions at a central level internationally. At the local level, our teams are involved in adapting our payment method offering to the needs of our stores and customers’ habits.

– How is the deployment of a group-wide payment solution decided?
– We are attentive to the value created by each payment solution. Does it respond to the needs of a customer who otherwise would not come to the store? Is the solution efficient, in terms of the payment behaviour or in economic terms(on-us transactions).

Our payment model targets future trends without imposing a managed customer journey. It is on this basis that we have worked on cross-border acquiring, and we conducted our first contactless payment tests ten years ago. Sometimes, we also get ideas from our store operations. For example, at the request of a running department manager who wanted an extra incentive to convince customers who were dubious about buying a pair of running shoes, we proposed a solution called Test Product, based on the functionalities of the mPOS. A simple card imprint enables the sale to be closed. If the customer is satisfied and does not return the product, they will be charged!

Our model also integrates solutions that streamline payment: self-service checkouts, RFID technology for instant checkout and mobile solutions.

We introduced RFID technology into our products ten years ago to enable each store to easily manage its inventories, with the help of an RFID reader. Its use within the context of payments took place gradually. We then created the bin that instantly calculates the cost of the cart. This solution has become widespread over the past year.

Finally, when it comes to mobile payments, our department specialists are equipped with tablets on which we have installed applications to simulate checkouts. This is a useful support for our Test Product offer.

– Have you reviewed your e-banking organization against the backdrop of the COVID-19 crisis?
The crisis has justified our e-banking choices. The way we are organized does not make distinctions between the web and our points of sale. We had already developed applications that proved useful for easy implementation of in-store collection of Internet orders. The payment was generated from a URL. In addition, our in-store checkouts are mobile so it has been easy to move them to comply with social distancing measures and let the customer pay for their purchases independently.

Finally, our centralized, fully hosted architecture has enabled us to benefit from the increase in the contactless payment ceiling since its first day.

– Do you intend to integrate instant payment?
– This is not an issue for us as we have not identified any need for the customer to pay immediately. However, the technology that enables the instant exchange of information without necessarily charging the customer is interesting.

– Have you considered offering payment in crypto currency?
– Technically, it would not be very complicated to do so but, ethically speaking, we are not ready. Tourists do not represent a significant client group for Decathlon, and we only deal with a few payments in foreign currency via dynamic currency conversion (DCC). We offer this option locally, especially in certain stores bordering Switzerland.

Bitcoin is a highly volatile currency and is used by a very targeted population, or people who do not want to be traced. For pure advertising purposes, at a store opening in Canada we offered a cashback program, the payment of which was in Bitcoin. But integrating cryptocurrencies into our range of payment methods is not on our agenda, even though, as with instant payment, blockchain technology is interesting.

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.

– How does SWIFT view the development of instant payment systems around the world?

– We are convinced that instantaneousness represents the future of payments. Our banking communication network already enables communications in a fraction of a second, but the advent of instantaneousness is far beyond the requirements set for each payment infrastructure. Systems should be accessible seven days a week, 24 hours a day.

We are participating in the construction of this world of instant payments in two ways. First, we are developing access ramps to real-time payment systems for banking users. And second, in the longer term, we aim to connect the various real-time payment systems around the world, through and for banking intermediaries.

To date, we have supported the creation of the instant payment system in Australia, developing, among other things, a customer interface that has been used on a daily basis for over a year. We have used this experience to develop a solution in Europe that enables banks to access the RT1 system operated by EBA Clearing and the Eurosystem clearing house, TIPS (target instant payment settlement).

After that, we sought to innovate by combining the advantages of the instant payment world with those of gpi payments. Remember that gpi is a global SWIFT initiative that aims to provide greater visibility into international transfers. Last year, we conducted a proof of concept on the routing of an Australian payment intercepted by a bank in France in the middle of the night before being redirected through the TIPS platform to a Spanish bank. The payment was instant.

Instant payment initiatives are essentially domestic or at a monetary-zone level.We seek to carry out instant cross-border payments.

– In the proof-of-concept, which system routed the instant cross-border transaction? The Australian new payments platform (NPP)?

– I gave Australia as an example, but we have also tested payments from Singapore and the United States. Each time, the first part of the transaction was routed through SWIFT’s FIN network, which is traditionally used for international transactions. The French bank then turned this transfer into an SCT Inst payment, and sent it back over the SWIFT network to TIPS, which triggered the order to the recipient’s Spanish bank. Without any manual or night intervention, the cross-border payment was processed in under a minute.

Similar tests were conducted with the instant payment platform in Australia and Singapore. We will be carrying out more very soon, especially with the Faster Payments system in the UK.

– What is the value of this proof of concept?

– The interest lies in demonstrating the ability to process payment orders at any time, on any day, even when traditional systems are closed. With regard to speed, we have gained a few seconds, but that is not the main consideration. In the long run, our ambition is to be able to connect instant systems around the world to each other. Now, we need to look at the needs and identify the complexities of the business. At this stage, we have demonstrated that, technically, it can work.

– Is the fact that not all instant payment systems use recent ISO 20022 message formats an obstacle to your ambition to connect them to each other?

– As part of our proof of concept, we have spent a lot of time on these aspects of interoperability between the FIN/MT formats and the standard version used by European instant payment platforms such as TIPS. We have created a working group responsible for defining the best market practice for use of the ISO 20022 standard applied to the world of instant cross-border payments.

– How did you integrate the exchange issue?

– One of the banks, which is a stakeholder in the transaction chain, will carry out the exchange transaction. At this stage, we have not dealt with the complexity of the exchange issue. The idea is to leave this functionality to banks, while providing systems that are more modern, faster and available for longer. The exchange transaction will remain within the scope of one of the banks involved in the payment chain.

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.

If you want to get a deal that fits your needs, you owe it to yourself to do your homework

When speaking to treasurers and CFOs about the renewal of their bank facilities, I often hear that they’re getting plenty of advice from their banks, so they do not see the need for external, unbiased opinions. I always point out several aspects of the market that they may not have considered, and I’d like to share them with you today.

It’s a cookie-cutter market, but you are not a cookie

The Loan Market Association (LMA) and the Loan Syndications and Trading Association (LSTA) have made significant strides in standardizing credit facility terms in the U.S. market. Their objective is to create standardization so that investors and banks can more easily trade in and out of their exposures to companies. This is great for liquidity in the markets but is not necessarily in your interest as a borrower.

The European market is much more diverse, with significant differences in pricing and terms between companies. While that can make loan trading more difficult, it also reduces the banks’ tendency to be there when you don’t need them and run when you do. While you may be afraid that your banks wouldn’t participate in this type of market, a quick look at the European league tables will show you that top tier U.S. banks are very active, despite these significant differences.

This begs the question: with all of the transparency in the U.S. markets, why is there so little difference in pricing and terms in the syndicated lending market for companies at the same public rating level while there is a significant difference in the borrowers’ characteristics (size, industry, bank rating, ancillary business, size and structure of the debt, etc.)?

Your banks aren’t cookies either

Your banking partners have internal risk assessment processes that significantly differ from one another. Here at Redbridge, we have seen banks internally rate the same credit facility two or more notches differently. The banks that are rating you lower need more ancillary revenue to generate the same returns. Make sure you know how each bank rates you internally. Try to work with banks that understand your business, give you appropriate benefit for their priority in your debt stack and any collateral you are providing, and will be there to support you through cycles.

Bilateral credit facilities allow you to take full advantage of the differences in how your banks view you, your business, and your collateral. Letters of credit (LCs) are a perfect example. While most syndicated credit facilities include the ability to issue letters of credit, it is usually significantly more expensive to do so under the credit facility than to work bilaterally with the banks to issue LCs. While many borrowers recognize this disparity and have separate LC facilities, bilateral revolving credit facilities are much less common in the U.S. Yet, the same truth holds: the best way to optimize your credit facilities is to negotiate them bilaterally and/or arrange the syndication yourself.

Your banks diversify their risk by syndicating their exposure, but they keep most of the benefits

The prime objective of syndicated lending is to distribute the risk of a borrower’s default across multiple lenders, including banks and institutional investors. Syndicated lending is a common way to handle loans that are too large for one bank alone to absorb the risk exposure. Since each lender’s exposure is lower, it should result in better, more efficient pricing for the borrowers. Unfortunately, that is often not the case.

The lead bank needs to structure and price a deal that can attract enough lenders to achieve the desired size. To ensure that it can distribute the risk and attract enough lenders, the lead bank structures the deal to appeal to the last bank in. This often results in significant oversubscription.

Oversubscription may seem like a good thing, but it isn’t necessarily a good thing for you – the borrower. While you need to close the deal, the terms and conditions shouldn’t be so generous that the deal is a ‘slam dunk.’ If your deal is significantly oversubscribed, it’s a sign that you’re either paying too much or that you’ve given away too much flexibility in your terms and conditions.

Your banks’ interests are fundamentally misaligned with yours

You may think that because your lead arrangers give you advice on sizing and structuring your credit facility, that they have your best interests in mind. That is not the case. By its very nature, the syndicated lending market pits your interests against those of your lead banks. The banks tell you as much in their documentation. Your credit facility will certainly have two paragraphs that, when translated from legalese to English, say, “we may sound like we are giving you advice, but we don’t have your best interests in mind.”

Why don’t we see more multilateral lending strategies that are common in other markets?

With all these negatives for borrowers in the syndicated market, there must be a reason we don’t see more multilateral lending strategies that are common in other markets, right? Let’s look at the pluses:

• Syndicated facilities save companies time and effort that may have been wasted in time-consuming individual negotiations with each bank for a bilateral deal. Negotiating with one bank can take several weeks; managing multiple bank facilities is an arduous and expensive task.
• Legal expenses can also be significantly lower for a single syndicated facility versus individual documentation for multiple bilateral facilities.
• If waivers or amendments are required, it may be easier to get 51% of lenders in a syndicated deal to agree to the necessary changes than to get 100% of bilateral lenders to each agree on changes to their agreement.

So, what should a borrower do?

With the help of an independent advisor, a self-syndicated deal can give you the best of both worlds: a syndicated facility that is easier to manage than bilateral deals, but is optimized to your credit profile, business needs, and the banks that best understand and can support your business. You first need to determine the flexibility that your business needs and the importance of the terms and conditions you will be negotiating. Once you have that, you can begin the syndication process, positioning your credit with the bank market.

To best position your risk profile, you need to know the following about every potential lender in the syndicate:

• How they view your risk profile and what credit rating (both probability of default and loss given default) they internally assign to your credit facility
• How they would price a loan on a stand-alone basis with the terms and conditions you need to provide the flexibility you want
• Which terms you are requesting might present problems for them and how much benefit (in terms of pricing or additional exposure) they would be able to provide if you modified the terms
• The minimum risk criteria they can accept
• The maximum commitment they could provide

Once you have that information about each bank, you can begin leveraging each of the factors, including:

• The size of each bank’s commitment
• The guarantees and covenants that give you the most flexibility for the price
• The optimal size and type of baskets to give you the most flexibility in your liquidity, financing, and industrial strategy
• The most effective type of pricing grid (ratings-based vs. leverage)
• The banks that best understand and price your credit

Having legal counsel is not enough

It can be tempting to believe that your lawyer has your company covered, but the lawyer’s job is to ensure that the legal language matches the business terms and doesn’t leave you exposed. Your attorney is not there to advise you on the business terms of the facility. An independent advisor can help you assess multiple business terms, including what size facility you need, what baskets you should have to give you the most flexibility, pluses and minuses of different margin grids, the tradeoffs between pricing/size and terms/covenants as well as other factors involved in the loan.

Our clients often overlook another key point: you need to ensure that your legal counsel has a strong corporate franchise. Many law firms in the syndicated lending market source most of their business from financial institutions. In addition to not having the expertise to negotiate the business terms, they may not be motivated to ‘bite the hand that feeds them’ and challenge the banks on terms.

Conclusion

Getting an effective, optimized credit facility that supports your business’ needs is time-consuming. You need to prepare, compare, and negotiate. Self-arranging a credit facility is no different from managing a request for proposal (RFP) on the value of the business you do with your banks and the costs of providing you credit. Taking the time to prepare your needs and negotiate with potential lenders can drive significant value in both pricing and flexibility. Using a truly independent advisor can help you drive the process, evaluate the alternatives, and implement a facility that best meets your needs.

On the agenda:

• How to design and manage a payment strategy that minimises costs, maximises sales and mitigates the risk of fraud in the wake of new consumption and payment habits?
• How to find your way through the jungle of payment service providers and choose the providers who can accompany you on your project?
• What are the cost items associated with changes in your card acceptance strategy and how to control them?

There will be a live Q&A session after the presentation.

Our webinar is open to all treasurers and chief payment officers. Experience shows that your questions enrich the discussions and we will be happy to answer them together!

When: Thursday, October 29, 2020

Start time: 10.30 AM London / 11.30 AM Berlin-Brussels-Geneva

Treasurers fear that efforts to negotiate bank fees might cause a punitive reaction from their banks. This story we tell ourselves isn’t true.

Imagine you are lost in a desert with only a compass to help you navigate. It’s an old compass, and you decided to head North without being totally sure that you are actually heading North. This uncomfortable situation is the best way to describe the hazards of managing a banking relationship.

You quantify your business the best you can, but you rely on your banking partners to tell you if your relationships are fair or not. Worse, you fear that if you’re not giving your banks enough business, there will be consequences.

When the time comes for negotiations, many corporate treasurers fear that efforts to lower or negotiate bank fees might cause a punitive reaction from their banks, even the loss of a capital source.

When talking specifically about cash management or, holistically-speaking, transaction banking, treasurers and CFOs tend to underestimate the value transaction banking provides to banks and the banks’ appetite for it.

The importance of transaction banking to banks

Bank billing is complex and confusing. Looking at the sheer volume of AFP Service Codes^©, we estimate there are approximately 2,500 ways to price transaction banking, creating a Gordian knot of costs almost impossible for treasurers to decipher and track. While a rise in an individual fee may be slight, total fees get higher each year – a financial equivalent of death by a thousand cuts.

Whenever the subject of bank fees arises between corporate treasurers and banks, bankers justify bank fees by the complexity of the billing system, the constant increase in regulation, the cost of payment factories, and the investments they represent. In discussions to lower fees, banks often claim that due to the high cost of the credit relationship, they need side or ancillary business to compensate for the cost of risk and – the biggest loss-maker – the credit facility. Sometimes, they imply that it might not be possible to maintain a credit relationship with a reduced rate.

Though the threat can be daunting to a corporate treasurer, it is most likely all bark and no bite.

In our experience from 20 years of negotiating bank fees and providing risk-adjusted return on capital (RAROC) analyses for global Fortune 500 companies, we’ve never seen an impact on the lending side because a corporation negotiated their bank fees domestically or globally. Never.

On the contrary, we’ve seen banks offer a “bank fee holiday” just to keep a client’s business. (A bank fee holiday is when the client doesn’t have to pay bank fees for a given period.) Why would banks offer this to their clients if bank fees weren’t attractive from a capital, liquidity ratio, day-to-day proximity with the client, and long-term recurring revenue standpoint?

The question is not, “Should I negotiate?” but, “How should I negotiate?” Being prepared and making negotiations a clear strategic project for your business is key.

On the other hand, banks might claim that transaction banking or payments and collections are barely breakeven on a cost-to-income ratio.

Every bank argument is right, and, at the same time, every bank argument is misleading and incomplete for several reasons:

1. Favored access
   Banks providing cash management services to a corporation have a natural advantage over their competitors through an existing relationship with the client – a day-to-day contact that is priceless for banks. (Not to mention that a conversation with the treasury team can also lead to a big M&A transaction.) From a treasurer’s perspective, a history of working together and long-standing banking relationships favor the in-place bank over the unknown qualities of a new banking relationship. But how much is the relationship worth?
2. Sustainable and growing income
   Unlike other types of revenue-generating side business – M&A, debt capital markets, equity capital markets – transaction banking and bank fees provide banks a growing, reliable and recurring source of low-risk and non-capital-consuming revenues.According to a 2019 report by McKinsey & Company, global payments returned to its “established pattern of steady yet strong performance,” with revenues totaling $1.9 trillion in 2018, a 6% increase from 2017 (Exhibit 1). Global transaction banking accounts for roughly 50% of global payments revenues, according to the report.North America is the second-largest region for bank fees in the world and one of the most profitable for banks. Just check how your bank account statements inflate every year. An efficient bank fee negotiation is a negotiation that locks in every single price point (there’s 280 on average per billing statement) in your account analysis statement for at least three years.

Exhibit 1

Source: McKinsey Global Payments Map

3. Increased profit margins
   Most of the bank’s transaction processing costs are fixed, i.e., facilities, equipment, staff, software, and network. As the volume of transactions processed by a bank grows, the per-unit cost of each transaction declines. After reaching breakeven, the difference between fees and marginal or direct processing costs is all profits.Accordingly, the loss of a large corporation’s transaction fees can significantly affect the bank’s financial position more than the loss of the direct fee revenue. Our research suggests that the intrinsic profitability of global transaction banking – letters of credit, payments, balances, short-term lending – is about a 25% return on equity.
4. Liquidity relief
   Concerns about the international banking system’s financial stability led to the establishment of the Committee on Banking Regulations and Supervisory Practices in Basel, Switzerland, in 1974. Since its establishment, the committee has adopted three different sets of regulations (Basel I in 1988, Basel II in 2004, and Basel III in 2010) to reduce excessive risk-taking by international banks.A constant and stable bank-client relationship can deleverage regulatory pressure on liquidity ratios. The liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) are two main liquidity ratios stressing bank balance sheets to an extreme. Corporations that have a stable, long-term relationship with their banks enable the latter to deleverage the pressure of these ratios. This is never factored into the pricing. It should.Corporate treasurers purposely omit transaction banking in negotiations with their banks because of a perceived link between fees and capital availability. Many corporates mistakenly associate their willingness to accept higher fees with increased liquidity and loans. In many cases, corporate teams do not know how much the relationship serves the bank. Our research shows the average return on equity in a relationship is about 15%, while banks need about 10% to cover the cost of equity. We have seen studies where corporations paid as high as a 40% return on the bank’s equity and thought they did a good job by negotiating everything but transaction fees.

Negotiating transaction services

Fair agreements result from complete knowledge and transparency. Most corporations are in the dark about the returns they provide to their banking partners. Banks are not obligated to supply the information, so it is up to the corporation to recognize the costs and adjust its negotiation strategy.

Whether or not a corporation elects to negotiate transaction fees should be a strategic decision that’s made when there is an understanding of the importance of each issue to the opposite party and its impact on company outcomes. Corporations spend millions of dollars each year to squeeze excess costs from their operations. Transaction fees are no different than any other operating cost.

Treasurers should not let the bankers’ crying and gnashing of teeth disguise the importance of transaction services to the institution. It has been and will remain an attractive business for banks, especially in the era of Basel II and III. We recommend corporate leaders treat bank services as they do all other vendors and suppliers to ensure their business is getting the right services at the right prices.

But as always, when the best strategies and tactics fail, it’s typically due to poor execution. Bank pricing is complicated on purpose. Think outside the box and negotiate your fees with process and methodology. And always remember, if you don’t ask, you don’t get.

While they are the preferred method of payment for European consumers, cards also involve the biggest challenges when it comes to security and fraud, especially when they are used for e-commerce transactions. In a 2018 report, the European Central Bank highlighted that 70% of total credit card fraud originated from remote payments (Card Not Present – CNP transactions)*.

There have been considerable efforts made over the years to make payments more secure, with issuers, retailers and businesses deploying cardholder authentication solutions such as 3D-Secure, as well as risk analysis and transaction scoring tools. These have paid off to a certain extent, but the fraud rate for online transactions is still 17 times higher than for face-to-face payments**. In July, Signifyd reported on changing purchasing habits in Europe, pointing to an increase in online sales since March that continued even after the lockdown ended. In fact, online sales are up 32% compared to the same period in 2019***.

In a bid to reduce fraud on online payments, the second Payment Services Directive (PSD2) will enforce the Strong Customer Authentication (SCA) for all CNP payments after 31^st December 2020 by default in the EEA, 31^st March in France and 14^th September in the UK and Switzerland. The issuing bank now has the last word on the application of exemptions, whereas previously the triggering of 3D-Secure authentication depended solely on the merchant and its acquiring bank. To streamline the customer experience, the directive will allow merchants to request for exemptions to the SCA when certain criteria are met. Therefore, it is essential for merchants to effectively analyze the risk of each transaction and send sufficient data to the issuing bank for it to accept the exemptions. Meanwhile, mobile payments require special attention with regard to the anti-fraud strategy. It is important that payments be made on native applications (software completely integrated to mobile operating systems) to minimize security breaches and to make the most of these devices’ data collection capabilities to optimize fraud management.

The main types of payment fraud

There are three main types of fraud linked to card payments: criminal fraud, social engineering fraud and fraud resulting from dishonest consumer behavior (commonly referred to as “friendly fraud”).

Criminal fraud involves using computers to retrieve card data for future use or access a customer’s account to give the trader the impression that a purchase is legitimate. Social engineering fraud involves enticing victims to disclose confidential information and part with their money. Friendly fraud is more difficult to analyze, because this category encompasses several different situations: customer error, chargeback abuse, trader error, excessive repayment time, or sharing a single card (for example within a family or business circle). According to the European Central Bank, friendly fraud involves amounts twice as large as social engineering fraud and four times as large as criminal fraud.

Fraud is a major source of hidden costs

Some of the direct costs of fraud include loss of merchandise, unpaid receivables costs, the cost of delivering goods, credit card network penalties, higher processing and acquisition costs, operating costs, and the risk of service termination in the event of excessive rates of disputes, based on the thresholds set by card networks.

But fraud also involves many, often less obvious, indirect costs that can have a significant impact on a company’s results. These include the time spent on fraud analysis or overcoming challenges linked to unpaid receivables, losses related to false positives (legitimate customers blocked by antifraud rules), losses resulting from anti-fraud rules that are too strict and the loss of existing customers when the payment path is too complicated.

Defining an anti-fraud strategy

The acquisition of new customers and the retention of existing customers are key issues for any company, justifying the allocation of a significant budget to these issues. On the other hand, less attention is generally paid to the conversion of payments and to analyzing the reasons for refusal.

Many studies conducted by payment service providers (PSPs) have shown that more than one in five customers who experience a refused payment are legitimate customers with enough money in their account to settle the transaction. And of those customers who have been refused (false positives) more than one in two leave for the competition.

This means that implementing an anti-fraud strategy that provides a smooth experience is a priority for all merchants. Defining this strategy requires thorough analysis of the different stages of the customer journey. Some of the most important considerations include reducing the time required to make the payment, reducing the number of clicks, automatically verifying the data entered in order to reduce errors and proposing a means of payment based on the location of the customer.

A key feature in optimizing the client experience is tokenization, by which we mean recording card information after making a payment with the 3D-Secure authentication system. The purpose of doing so is that the customer no longer has to re-enter their payment information for subsequent purchases. Classic tokenization, known as “PCI tokenization” (according to PCI-DSS – Payment Card Industry Data Security Standard) is managed at the PSP level. But it has two limitations: the CVV (Card Verification Value) must be entered for each payment in order for the merchant to obtain the liability shift, and the card data must be updated in the event of expiration or loss.

In order to overcome these limitations, Visa and Mastercard have developed “network tokenization”, which involves registering the credit card token directly at the scheme level, which enhances security and offers a smooth payment path, free of the barriers that traditional tokenization processes involve. According to Visa, network tokenization improves the acceptance rate (the proportion of successful payments out of the total of attempts) by an average of 300 basis points. This is not a negligible amount.

It is also important to propose alternatives to the consumer in the event of payment failure in order to maximize the chances of them finalizing their payment. These could include providing other means of payment, the option to pay in several installments, or face-to-face payment. The implementation of payment solutions based on the SCT Inst could greatly contribute to this objective thanks to the instantaneous and binding nature of this payment method.

Finally yet importantly, fraud management is key when defining a revenue-maximization strategy. It can be summarized in three main areas: preventing fraudulent transactions by blocking them before they are approved, identifying risky transactions before the issuing bank considers them as chargebacks, and representing and winning as many disputes as possible with effective procedures and tools in order to automate most of the tasks.

Gabriel Lucas

* Fifth report on card fraud, September 2018, European Central Bank
** Annual Report of the French Observatory for the Security of Payment Means – Fiscal Year 2018, Banque de France
*** Ecommerce continues to be a bright spot for retailers across Europe, July 01, 2020, Signifyd Blog

Last time we had such turmoil was after the Qingdao fraud cases but it seems that this time overall losses will be greater perhaps in the region of USD 1 billion to 2 billion.

There are already “voices of alarm” claiming, the end of commodity trade finance, with management and risk departments furiously calculating exposure to the sector and capital at risk.

Below I will try to offer my perspective on a few aspects and why I believe this is not the end of commodity trade finance, in fact, it may not be as bad as originally thought!

• The long term

Different banks have had different approaches towards the sector. The better ones took a holistic view developing dedicated risk models, dedicated risk management departments, specialised front office commodity trading desks and dedicated transaction and collateral monitoring systems. Some even took the view that occasional losses are part of the cost of being in such business. Others have taken a more opportunistic approach, believing they can easily replicate the success of established leaders and banking on the frequently mentioned trade finance gap (note: as per figures published by Asian Development Bank the global trade finance gap is app USD 1.5 trillion). The transactional finance approach (whereby a bank lends against individual transaction commodity assets or related receivables) seemed a no brainer: desktop due diligence and as long as there are (often copy) transactional documents all will be fine. With often the norm being limited understanding of pricing, hedging and trading positions and typically no risk audits. On top the joy of getting somewhat higher margins from all the mid-size traders.

When an accident happens those without seatbelts tend to suffer more and some may never drive again. It is the same with banks, the better protected ones will suffer less and they will be able to continue. My reasonable expectation is that most leading “usual suspects” will continue their support to the sector and will further implement changes and improvements from the lessons learned.

• The people

Those having “many miles on the clock” in this business, know it is a people business. Better said it is a specialist business.

What some banks failed to understand was the requirement to attract, train and develop the required resources, the highly skilled professionals that know how to navigate the sector’s risks and manage appropriate mitigation. The continued commodities super cycle of structurally high commodity prices and high working capital requirements of commodity traders, led to significant demand in bank employees, perhaps beyond what the system was able to reasonably train. The non-specialist approach and firing and hiring practices of some banks further exacerbated the problem. One can suspect a correlation between the lack of required expertise reaching senior management levels, and the failure of some of the banks to detect fraud and rogue behaviour. Again, those having the better professionals, with the relevant expertise in their front office, risk management and senior management teams will survive and win in the long run.

• The lending margins

Very low borrowing margins and cost of debt have enabled a limited number of large trading companies to grow their trading activities. Low margin unsecured RCFs and even lower margin transactional lines continue to be the norm.

One could argue that the concentration of power and breadth of operations with a handful of large trading companies has left the rest of the players in a riskier place: running the higher margin riskier trades leading the bank to lend at higher costs in term requiring the continuation of the same riskier trades to cover higher cost of debt. Food for thought.

Should the banks serving the sector also perform a review of their risk modelling to incorporate the new losses and related data? Absolutely. Ultimately, if a business is riskier the incumbents need to take that into account and price accordingly. What is the right loss given default (LGD), expected loss (EL) etc. for transactional finance and revolving credit facilities? In addition, should corporate risk ratings / probability of defaults (PDs) be revisited?

One thing that is certain is that the smaller the active lender group and its risk appetite, the less negotiation power it will have; and this is even more so the smaller the company in question. This is seen across products, even highly structured ones. Expect pricing to go up.

• The pandemic

Anticipating the increased pain for lenders some traders have proactively offered increased pricing for some of their deals. That is smart as it already anchors precedence at specific levels; and it is rather likely that banks would have asked for it anyhow. So the higher cost reality is already here and most likely to stay.

• Commodity prices

Although the pandemic turmoil and the incidents of fraud are fairly recent, it feels like it was a long time ago since WTI crude oil futures turned negative (on April 20^th ) and the oil price continues to be depressed. One can only remember 10 years ago the head of trading at one of the big 5 saying: “the world has run out of 80 Dollar oil”. Lower prices, and not only for oil, mean less financing for the same volumes. This may be good for banks trying to limit exposure but not so good for the top line. The current incidents of fraud may again be a blessing in disguise for some management teams that will explain that lower revenue is simply related to less risk being taken. When the appetite is there and commodity prices increase, very few bankers actually acknowledge the good impact on the top line. A reasonable expectation is that once the turmoil is over the surviving banks will continue to put pressure, already happening in fact, on their better clients for more business – unless the margin increases are able to compensate.

• Digitisation

In an article, earlier this year, at the inception of the pandemic I was referring to the acceleration of digitisation as a result of the overall decreased ability to handle physical trade (finance) documentation due to current remote work patterns. Current fraud cases will further accelerate the adoption of distributed ledger technology which will render impossible the financing of fake transactions or double financing. It seems that trade finance has been the victim of its own inability to advance from the technology perspective. It is now down to the senior management of banks and traders to accelerate adoption.

To conclude lots of challenges and changes ahead for sector players both lenders and traders; but beyond all the bad news, losses and people losing their jobs, the industry will continue to evolve, refine practices and hopefully learn how to further mitigate risks; and technology should be the leading enabler. Just imagine all transactional finance on distributed ledger (blockchain)!

Redbridge and FIS held a round-table discussion on Thursday 25th June 2020 with:

Alessandro Mauro, MKS
Mihai Andreoiu, Redbridge
Roger Frost and Alex Hofmann, FIS

To listen the complete recording on Webex, please click on the link below :

Webinar Redbridge-FIS on hedging and financing commodities

Password: Redbridge1

The world has changed as a result of Covid-19 in ways which we do not yet fully comprehend. This round-table discussion focused on commodity-intensive corporates and the challenges they face in a volatile market. It may be worth defining what we mean by a commodity-intensive corporate: these are typically companies which purchase large quantities of commodities and transform them into finished products although many of the strategies which we will discuss apply equally to producers and traders.

Lockdown has resulted in the greatest global economic downturn since the great depression and the global economy is forecasted to contract by 5.2%. In this webinar, we will focus on the areas of commodity risk management which have been most affected by changes to the business environment caused by the Covid-19 pandemic and these include:

• Hedging strategies for coping with fluctuating sales forecasts
• Automation of trade execution
• Strategies for coping with Increased price volatility and rapidly changing order-books
• Changes in trade finance, supply chain financing and credit lines
• Accelerating trend towards SaaS in treasury and commodity management systems
• Measuring commodity exposure across a diversified product line

Question 1. The importance of pre-trade analysis

FIS provides commodity trading risk management (CTRM) systems to a large number of corporates, but on the whole our systems are not used extensively for pre-trade analysis. What would you recommend that risk managers do to make better use of their systems pre-trade as opposed to after the hedges have been booked?

Pre-trade analysis is fundamental to a successful hedging strategy: without doing advanced scenario analysis based on changes in FX, interest rates and forward prices, you are taking on substantially increased risk and you may not even be aware that you are taking this risk.

Pre-trade analysis requires a lot of data and new data is becoming available all the time, but not all of it is useful. Data providers have an incentive to sell their data, but this data is not always very useful in pre-trade analysis. A competitive advantage comes from non-standard sources of data, while low quality data can be worse than having no data at all. If you have non-standard data, whether it is ‘big data’ or non-time series data, you must be able to drilldown into the data for any given task.

In order to interpret how your non-standard data is likely to affect your commodity exposure, you need to build additional price curves including eg physical premiums to see the cash impact on your portfolio. You need to consider price and volume changes when building your curves: you need the cash to be available as well as agreed credit facilities.

Question 2. The trend towards automated hedge execution

Has the current crisis accelerated the trend towards automated hedge execution of FX and commodity trades?

Automatic hedge execution is more important than ever before because we are seeing more and bigger price shocks than in the past. For example, in April 2020, the price of the CME WTI future turned negative on the day before expiry of the May contract after losing $55 per barrel in a single day, caused by a shortage of storage facilities. In the gold business, at the end of March 2020, the spread on the EFP trade (the EFP in gold is an Exchange For Physical comparing the future price traded on the CME vs the spot price traded in London); jumped from a few dollars to $70. When you have price shocks of this magnitude, you need to automate your hedge execution strategy, in particular if you are a commodity buyer which can not continuously monitor market conditions is real-time. In this context, technology is a crucial enabler.

It is important to highlight that we are talking about automating hedging transactions using financial derivatives. (The possibility with physical transactions is much more limited, especially for non-centralised non-electronic markets).

From an IT standpoint, hedge execution is already possible in FX and commodities: you need to have quality forecast production data, merge that with existing hedges to calculate current exposures, AND combine that with company’s hedging policies. AND you need automated integration with exchange platforms, FX platforms or Bloomberg.

Queston 3.  Monitor & Control

What is the best measure of risk for a corporate treasurer? Is it VaR, CfaR or hedge ratios?

Before you start thinking about using VaR or CfaR, it is essential that you identify all of your risks forensically. Successful hedging policies based on VaR or CfaR models are not implemented overnight. If you have already have a VaR model up and running, then this is an excellent starting point. Having said that, managing the additional adoption of a CfaR is a good idea because it will enable you to attach probabilities to future cashflows.

In our experience, most corporates have simpler ways of measuring risk and they still use hedge ratios to control their risk. A hedge ratio shows how much of your forecast consumption has already been covered with hedges and the hedging team must hit these ratios at different points in the production lifecycle (the ratios are likely to rise as you get closer to delivery).

Some of our more advanced clients have started creating multi-dimensional VaR reports which include FX and commodities; these reports are then broken out by different sections of risk. For example, VaR limits can be applied geographically, by operating unit or by trader and limits are set according to these siloes of risk. VaR models have the obvious benefit of taking into account historical market behaviours, making it easier for the risk manager to control their exposure based on the recent past. You can go far with VaR!

Question 4. Business benefits

What are the tangible benefits of implementing a technological solution to managing commodity price risk?

At Redbridge, we see clients embarking on two types of journey:

1. Corporates which do not yet have a formal company-wide hedging policy come to us to help them to define their policy in terms of identifying, quantifying and managing their hedging policy. We continue to meet with many corporates which do not hedge today: they take things as they come.
2. For corporates which are already hedging, we help with operational transformation and change management. For example, we helped a large Geneva-based metals company to instigate structural change to their systems as they were split off from their parent company. We helped them to create the Target Operating Model for their TMS and FX platforms and we helped them to integrate these with the rest of their IT systems. And we managed the negotiation with the vendors, all in a short timeframe.

At FIS, we have helped many corporates with simple challenges, such as removing the manual creation and maintenance of reports in Excel; this frees up staff time to analyse and act upon the data. Removing manual processes and speeding up month-end reporting improves companies’ control of risk allowing them to get a better view of core business. Strong hedging policies which have been well implemented allow you to remove noise caused by market price fluctuations.

Question 4. Risk Management Strategy

With increasing market volatility and the chance that commodity prices could fall again if we face a second wave of Covid-19, is there a place for options in a corporate hedging strategy?

From a purely theoretical point of view, options sizeably enhance the number of payoffs available to investors and, in this way, they “complete the market”. From an operational point of view, a static option strategy can allow you to efficiently enter or exist strategies at pre-selected price level. It is rather simple to put this in place and this can be attractive to commodity end-users. Many customers are worried about making an upfront payment at the start of the contract (the premium), but for many corporates, it makes a lot of sense to use a simple option strategy.

If your business is trading commodities, (rather than transforming them into an end product), then you will need a more advanced strategy to monitor in real-time the price and volatility of the underlying, the Greeks, etc. It is a much more specialized job, which requires subject matter experts and proper IT systems.

If we look at the fall in the price of oil and refined products, if you are a consumer of these products, either as an airline or a logistics company, then purchasing outright call options would have offered far better value than futures in the case of a dramatic fall in prices. No-one would have priced in current levels of volatility into the premium last year when they would have bought the options, so the option premium cost would have been manageable.

One reason why corporates don’t often use options is because the option premium must be paid upfront and this will impact the balance sheet with no guaranteed return (and shareholders don’t like that!) That’s why airlines and logistics companies tend to trade swaps using zero cost collars but if you expect volatility to rise, then spending money upfront on an option premium will almost always be money well spent.

Question 5. Trends in supply chain finance

What trends are you seeing in trade finance and supply chain finance in light of the current crisis? Have credit lines been affected and is credit insurance in greater demand?

For Redbridge, trade finance is a discipline and supply chain finance is a sub-section of that. Cheap bank or capital markets finance is not always easy to access, so debt financing which is backed by receivables and inventories can be very attractive to many corporates and to the banks which provide the finance, especially if they are covered by credit insurance. Structuring the finance agreement plays the most important role: the better structure, the lower the pricing. However, there will be upward pressure on pricing (with potential higher regulatory capital requirements) and more stringent structuring requirements.

With some recent defaults in the Asian energy space, structuring has become even more important and certain banks have closed for new business and only manage their current exposure. Corporates seeking supply chain finance solutions need to better understand the risk perception that banks have of the credit risk and structure risk: in the case of suppliers, finance for their own company, in the case of receivables, finance for their off-takers / clients. Credit allocation for supply chain finance is often also a political decision within banks as direct relationship lending is often preferred.

Credit insurance is often added as further risk mitigation. Corporates must try and understand the risk appetites of their banks. Those who do trade finance or supply chain finance may not be at the head of the queue! Corporate treasurers should assess the right mix of risky unsecured lending vs risk-mitigated lending based on working capital finance using payables, receivables and inventories). Lower commodity prices will also mean less revenue for the same physical volumes hence banks will return hungrier than before. However, they will come back.

Supply chain finance i.e. supplier finance and receivables finance will continue to develop with the help of alternative lenders, dedicated providers and technology advancement. An effective TMS will show you the use of facilities which can be allocated against specific trades or groups of trades, to help you manage your financing.

Question 6. Measuring the commodity content of items in the supply chain:

How can commodity-intensive corporates measure their commodity exposure if their commodities are tied up in SKUs in a factory ERP system?

Getting production forecast data into your CTRM system is vital. We have seen a trend for CPG (Consumer Packaging Group) companies to merge their commodity procurement analysis into their CTRM system. This provides detailed analysis of their procurement performance and links this data directly to the commodity forecasting used by Treasury to hedge their exposure.

By giving the system a breakdown of every Stock Keeping Unit or SKU, it can automatically create the commodity forecasts. This means that the forecasts are updated immediately when a change in demand is seen by procurement at the factory rather than on a monthly or quarterly basis.

What is cash management invoicing like in the US?

Obscure, complex and revised upwards by the banks every single year!

Although this is nothing new, the fact is that invoicing arrangements for cash management services in the United States are much more complex than in Europe. Monthly invoices have an average of more than 250 billing lines. Banks use specific codes and terminology to bill for each service. This terminology varies among banks. Given the large number of billing lines, cash management invoices are difficult to read and comprehend, and even more difficult to check!

Amid this hazy atmosphere, US banks usually raise the prices for their services each year. Companies’ cash management bills are increasing dramatically, not to mention the potential billing errors that could range on average up to 7% to 10% of bank charges.

The cost of US cash management services is expected to increase in the coming months.

ECR and netting of cash management costs impacted by the fall in Federal Reserve rates.

The Earnings Credit Rate (ECR) is the rate that US banks use to reward corporates for demand deposit account balances, provided that such reward only compensates, in whole or in part, for cash management service costs.

The ECR usually tracks the Federal Reserve Funds (FED) rate, even though determining the ECR granted to each client is at each bank’s discretion.

For example, in September 2019, although the FED rate was set at 1.75%, the average rate of ECR on demand deposit account balances for our clients operating in the US was 50 bps!

On March 15, the Federal Reserve made the decision to reduce its FED rate to zero in response to the COVID-19 crisis. As a result, ECR for demand deposit accounts will almost certainly disappear.

Companies will no longer be able to benefit from cash management netting through the ECR and will need to be prepared for fairly significant increases in their bank charges.

We advise you to be vigilant, since banks are under no obligation to notify clients of this change in ECR.

Electronic transactions — an unprecedented change in the structure of card transactions, affecting both B2C and B2B companies.

The major international networks (Visa, Mastercard and Discover) publish quarterly changes to their programs and rates. Historically, the April and October editions of the quarterly announcements contained the biggest changes. Due to the COVID-19 crisis, changes originally planned for April 2020 were postponed to July 2020 for Mastercard and April 2021 for Visa. These new card rates feature unprecedented changes—the most far-reaching in over a decade—with additions, deletions and changes to transaction tariffs in the major networks. For example, Visa is removing some charges, but adding new categories that represent a potential net increase of 85 bps, depending on the payment method used and how the data is processed.

The degree of the impact may vary, depending on the payment method and the type of card used. With the new card rates and the increasing use of bank cards, corporates will almost certainly notice an increase in US charges for this payment method. In our view, there is not much room to apply pressure to change or vary these new transaction rates, but it is nevertheless possible to manage certain key factors to limit their impact as well as check that transaction fee rates are correctly applied using the right tools, processes, systems and technical knowledge.

Evidently card payment methods are within the B2C sphere, but B2B payments represent considerable volumes and levels of costs that increase on a yearly basis. Bank cards are becoming an essential payment method for many B2B companies in the US, which can account for between 5% and 20% of payment receipts. This is so for various reasons such as not to lose sales or to provide a serious alternative to cheques which continue to be a major institution in the US.

To find out how to respond to these new challenges, don’t miss out on our publications and webinars on these topics in the coming weeks.

For any further information, please do not hesitate to contact your Redbridge advisor.

– What challenges do merchants face with acquiring and processing American Express (AMEX) card transactions?

The cost of managing cash for large retailers generally runs into the millions of euros and, on average, 70% of these relate to card acquiring and processing. Historically, banks in France were key players in merchant card processing. However, in the last 10 years, their hegemony has been challenged by the emergence of non-bank providers in charge of terminal maintenance, the provision of acceptance platforms, not to mention FinTechs and Payment Service Providers (PSP), who have invested heavily in the world of electronic banking. The list is not exhaustive, but companies such as Adyen, Ingenico, Hipay, Stripe or Worldline are driving changes in the merchant card acquiring market today.

Furthermore, AMEX Cards, who are one of the leaders in consumer card issuance, are of interest to merchants wishing to attract new customers or retain segments whose purchasing power is generally higher than average. The payments industry has recently developed solutions to facilitate the acceptance of AMEX cards on terminals to meet a wider demand from the large retailers and niche players.

In Germany, Switzerland, as well as the United Kingdom, AMEX and PSPs are key players in the card acquiring chain. In France, they represent an increasing share of the total overall cost of merchant payments.

Whereas in times of crisis, the natural instinct of companies is to preserve the relationship with their banks who commit their balance sheet by providing financing, this does not apply to either AMEX or PSPs. Challenging these providers, therefore, represents a tantalizing route to generate savings.

– What is the added-value of these non-bank providers?

– The new payment service providers, led by Adyen and Stripe, have developed propositions that meet more than just the needs of the finance team. These providers offer agile solutions combining innovative customer journeys, speed of execution and a wider range of accepted payment methods. In addition, they meet the needs of major retailers seeking unique payment solutions on an international scale.

Banks largely cater to the domestic acquiring needs of their customers and do not offer much by way of international solutions. Even banks represented across Europe cannot provide a single unique solution as each local affiliate has its own technical capability and discretion.

Furthermore, in a world where consumer payment habits are evolving fast, banks are struggling to drive the digitalization of payments, preferring, instead, to invest in young start-ups, such as PayPlug and Dalenys, who were acquired by BPCE Group in France between 2016 and 2018.

In companies today, digitalization or marketing teams lead the decisions of innovative payment methods and solutions, with input from the finance team to ensure the profitability of the project, as well as compliance with payment security standards and regulations.

The finance team is, therefore, not the only decision maker in the choice of payment service provider. Nevertheless, for those thinking of selecting a non-bank service provider, there are areas that need to be considered;

From a financial point of view, they can be between 30% and 50% more expensive than those of banks.

The solutions from non-bank providers are frequently integrated from the cash register system right through to the credit on your account. It is therefore very complicated to “back out” and change providers after the implementation of such solutions.

– What is the added-value of Amex?

– Accepting AMEX cards does not have the same importance depending on the sector of the company’s activities. Indispensable in the hotel industry, air transport and the luxury goods sector, its’ wider acceptance is driven more by a desire not to stand in the way of a purchase or to attract new customers for large retailers or specialized outlets.

The pricing schedule of AMEX incorporates many subtleties (inbound fees, wholesale vs retail rates, etc.) which are not always easy for the merchant to comprehend. The central element of this grid is a commission rate, which is unique in that it is never the same from one country to another (AMEX speaks of the market), not from one sector to another. The different commission rates according to economic sectors and countries is justified by the fact that the AMEX network brings a different added-value depending on the type and location of the merchant.

This pricing model makes it possible to apply high rates to merchants in the luxury and hotel sectors. Conversely, when AMEX wants to set up in a sector where its added-value is less compelling, it does not hesitate in offering competitive prices, similar to the grid prevailing in the mass retailers. Depending on the industry, the AMEX commission rate varies from simple to three times, or even more.

– How to optimize the non-bank service providers along the processing chain?

– Competition between non-bank service providers is increasing every year, with the appearance of new entrants offering services across the value chain. To optimize your relationship, it is essential to identify the services required so as not to have an inferior offer or have to asses a wide panel of providers. Often, PSPs propose an all-encompassing offer, where any service gives rise to a transaction fee or subscription; acquisition, processing, fraud prevention … This grid is negotiable for those who compete.

– And what about Amex?

With no real equivalent, AMEX is a provider relatively closed to negotiation. Their reluctance is based on the pricing integrity rule, according to which the network guarantees to apply a single commission rate within the same sector.

This “a sector equals a price” rule is more a matter of commercial policy than reality. Experience has shown that within the same sector, there are price differences in the range of 33% to 50% depending on merchants.

The fact is that, in today’s world, AMEX needs to gain market share amongst new merchants and at the same time acquire a maximum of “physical” customers using their consumer cards to legitimize their potential to merchants. This situation leads AMEX to rebalance its relationship with merchants and makes it possible to open an effective negotiation, which can yield significant savings, when accompanied by precise and formal analysis.

Achieving the conditions of a most favored client is not easy and requires:

– Solid arguments

– An extensive knowledge of the internal organization of AMEX and its decision-making process

– A precise and exhaustive analysis of the situation (volumes currently processed, evolution of volumes over the last years versus evolutions of total turnover and acquiring turnover, type of end customers, breakdown of goods purchased from the merchant by AMEX card holders, average transaction amount, …)

– An extensive experience to conduct a quick and efficient negotiation.

Author: Emmanuel Léchère and Mélina Le Sauze

Between 22 April and 4 May, Redbridge surveyed 104 French, Swiss, Belgian, British and Dutch companies to better understand how the finance and treasury functions had redeployed to remote working, what were the main difficulties encountered and, finally, what are the priorities to the end of the year. The full results, as well as our analysis, of the survey are available here.

Business continuity plans, which were activated as an emergency, have proven to be effective and ensured that cash has continued to flow.

Cash flow forecasting and management of working capital requirements were at the heart of the difficulties encountered to ensure liquidity.

Certain courses of action are required to preserve or improve upon WC management.

In respect of credit insurance and factoring partners, clients has to respond to greater scrutiny and fluctuating conditions.

The liquidity crisis stimulated companies to push the boundaries of cash pooling even further.

Although seven out of ten finance departments will launch savings plans, these need to be mindful of core bank relationships.

The COVID-19 pandemic has forced corporate treasuries to manage liquidity and ensure the continuity of service while employees work from home. To get a sense of how treasury management system (TMS) providers are helping their customers address this unprecedented situation, Redbridge spoke to 15 European and U.S. treasury software providers between April 3 and April 10. We asked them how they are adapting their services and offerings to address current challenges and about what they anticipate the short- and medium-term consequences of this crisis would be on treasury operations.

Our survey highlighted the resilience of hosted TMS solutions, even though providers have had to quickly adapt and strengthen their service levels to help clients manage their liquidity and risk. Providers revealed that they have adopted a range of measures to support companies in a variety of ways since the start of the confinement. New practices include offering access to TMS versions with reduced functionality free of charge, discounts on implementation fees, and billing deferrals.

Activating business continuity plans

When the pandemic struck, companies activated their business continuity plans (BCPs). The sudden upheaval had a major impact on cash flow, the essential lifeblood of a company’s operations. “Fortunately, today’s technologies and solutions allow most treasurers to continue their activities, even when they are confined to their homes,” said Jérémy Cocqueel, director of channel sales Europe at FIS. Guillaume Douarre, senior account executive at Serrala, added, “companies that were best prepared are those that have embarked on projects to optimize and digitize their processes. This has allowed them to maintain a constant rate of activity despite the absence of certain staff.”

For Jérôme Brun, VP of strategic advisory at Kyriba, the difficulties encountered have been concentrated on companies “less well connected, who may have experienced a slowdown, or even halt, in systems availability due to insufficient bandwidth.” This is particularly the case for companies hosting their treasury systems on-site and, as Thierry Miskaoui, VP of strategy and operations at TreasuryXpress, observed “whose technical architecture does not allow remote access due to the absence of VPN, servers that may have been overloaded, slower connectivity, etc.”

Jérôme Brun also noted that cloud and SaaS cash management solutions seem to have passed the test of remote working because “clients with cloud solutions have been able to function normally.” For David Freulon, sales director at 3V Finance, TMS solutions “allow for remote access and are therefore conducive to the teleworking imposed by the crisis.” Alexandre Bromberg, sales director at Diapason, added that TMS services are “already based on secure and remote infrastructures, accessible outside corporate networks.” However, the suitability of their solutions did not prevent some providers from “reinforcing certain SaaS infrastructure to meet the demand,” as José Teixeira, senior market manager at Sage, noted. Sage had to “speed up its processes and show flexibility to enable its clients to migrate quickly to the cloud environment.”

An employee at 3V Finance reported, “Some of our clients have taken advantage of the crisis to use the web versions of our SaaS offering or accelerate the migration from their on-premises infrastructure to our private cloud.”

TMS providers are definitely well prepared to respond to this type of situation

Like the majority of companies in Europe and the U.S., TMS providers have had to adapt to the difficult situation to maintain the availability of their systems, customer support, and associated services at satisfactory levels. “We also had to activate our BCP to cope with the measures introduced by the government to combat the spread of COVID-19,” said Olivier Bastin, sales director at ACA. He added that his company’s “level of service is identical to that before they triggered the BCP.”

Jérôme Brun indicated that work-from-home mandates have had a limited impact because “teleworking is a common practice at Kyriba, whatever the function.” For Benjamin Knierim, sales director EMEA at Bellin, “the crisis has demonstrated that many services can be provided remotely.” This is particularly true for consulting services and the implementation of treasury systems, which have been carried out almost entirely remotely in recent weeks.

Managing liquidity

Managing liquidity is the highest priority for treasurers. As a result, Olivier Rathouis, executive sales manager at Finance Active, has seen an increased level of treasury systems use since mid-March, “particularly in terms of accessing market data, but also in the use of the numerous simulation tools such as, for example, on drawdowns of confirmed credit lines, stress tests, and the impact of banks activating covenants.” Alexandre Bromberg, chief product officer at Act Trader Technologies, emphasized that some clients, “aware of the strategic challenges associated with managing liquidity, are currently requesting us to implement the medium- and long-term cash forecasting modules.”

Some providers have had to adapt their solutions to meet new requests from their clients. Regarding the extension of debt maturities that banks have proposed to companies, Rathouis shared that Finance Active was “canvassed widely on the technicalities of putting this in place and of integrating the capabilities into our debt management modules” and has “initiated the necessary developments” to meet the need.

At the service of companies

The vast majority of the providers we spoke with indicated they have reinforced their support measures since the start of the crisis by extending opening hours, expanding and enhancing third-party maintenance contracts, broadening consulting services, expanding helplines, and making similar adjustments.

These measures often complement such commercial gestures as selling certain services at cost. Some providers even made their platforms available free of charge for a limited period – often for three to six months. These offers are mainly related to basic systems, where only certain functionalities are accessible (cash management, cash forecasting, financial instruments, etc.). They are also more prevalent among cloud solution providers, whose business model is more conducive to this type of commercial approach.

Lastly, some system providers are offering more flexibility on contractual commitments, such as delaying invoicing, providing financing options, or reducing contract lengths to one year or a few months (compared to the typical three years for cloud-based applications).

– What is your perception of the current functioning of the NEU CP market?

– Our perception changes from one week to the next, fortunately in a positive way! The freeze in the NEU CP market has generated a lot of stress within treasury teams. The announcement of the European Central Bank’s (ECB’s) intervention to unblock the situation on March 18^th raised hopes for a rapid resolution of the crisis, but the implementation of a programme of repurchase of Commercial Papers (CPs) by the Eurosystem is not trivial.

The question of eligibility was clarified within a week. Primary market buybacks apply to investment grade issuers that are 100% privately owned. Agencies such as Acoss do not have access to the scheme and companies with government participation are only eligible for buybacks in the secondary market. These rules are virtually identical to those of the 2016 corporate bond buyback programme.

FNB’s initial actions to support the NEU CP market were initiated on 27^th March. These operations rapidly brought the outstanding NEU CP amounts issued by non-financial corporations back to pre-crisis levels and beyond. In the first few weeks, the buybacks involved huge tickets with maturities ranging from six to twelve months.

After the initial ramp-up phase, FNB adapted to the way treasurers prefer to issue negotiable debt securities. From the treasurers’ point of view, it is less risky to regularly renew small tickets rather than concentrating on a single large issue. FNB still intervenes on large tickets (mostly over EUR 100 million) but we have seen some issuances that are more in line with the practices of this market i.e. worth EUR 50-60 million. The smallest repurchase observed to date was for EUR 30 million.

Finally, with regards to prices, the interventions concentrated on long maturities and have restored a certain degree of confidence in the market. Investors seem to be coming back. While they still favour short maturities, from a few weeks to a month, they are now more open to longer dated issuances.

As a result, we have now covered most spectrums of the yield curve. Prices have slightly shifted upwards, reflecting the pressure on crisis-related liquidity, but the market is still there.

– What is the situation for non-rated issuers?

– The situation is very different from one issuer to another. Higher quality issuers do not have issues in finding investors although for them, the market has not yet completely normalised. They still have to roll over every two to three weeks, which means extra work and stress for the treasury teams. However, the situation is clearing up. The current momentum looks promising in returning to favour lower credit quality issuers, whose outstanding NEU CP balances have declined significantly in last few weeks.

We also need to take into account the fact that the few financial investors who used to buy NEU CPs for their own account are no longer active in this market. Money market funds managers, for their part, will come back when they have cash to invest. However, their inflows depend on the overall cash position of companies, which has been undermined by the crisis…

– How would you compare the effectiveness of the actions of the Eurosystem compared to those of the Bank of England and the Federal Reserve?

– In April, the market for NEU CP stabilised and now outstanding issuances are rebounding. The FNB’s intervention methods do not yet seem to be very effective in the secondary market, but we note that efforts are made to find a solution. In this crisis, the FNB is demonstrating its commitment to the market participants by trying to make the best possible progress in compliance with the European treaties and the rules of the wider Eurosystem.

The Bank of England and the Federal Reserve publish the prices they offer to buy back each type of paper. This is a pragmatic approach which, in the light of the prices charged – higher than the market rates – seems, above all, suitable for issuers facing an urgent need for liquidity. The objective pursued by the Eurosystem seems to stem from a different philosophy, which consists in ensuring that the market holds and resumes.

Since Bpifrance’s announcements, and the publication on 23^rd March of Supplementary Budget Act, as well as the Decree governing the Loan Guaranteed by the State (PGE), a race against time has begun to provide massive loans to all French companies who need them. The COVID-19 special financing measures are to be widely available. As, failing this, there is a risk that some companies who could benefit from the measures, might fail due to difficulties experienced by their customers and suppliers, who would not have the chance to receive the aid in time.

Our initial feedback seems to indicate that the €30m maximum limit applied to Bpifrance’s ‘Atout Loan’ is only in theory (very few companies have received an Atout Loan of more than €15m, or even €10m), although the process is moving forward.

The rules of the PGE are gradually being clarified

Among the four special financing measures, the total amount allocated by the State to the PGE scheme is a comfortable €300bn, equivalent to one year’s bank lending in France. Issues relating to companies’ eligibility, and the operation of this scheme, have been clarified. Eligibility criteria; rules applied to the calculation of the maximum loan amount (tax implications, multiple legal structures, no intra-group re-statement, etc.); criteria relating to granting the guarantee (automatic vs. an individual decision by the Treasury); form of the loan (either bilateral or a syndicated credit).

Some issues are still open. Those concerning how companies in financial difficulty should be treated; the Amending Budget Bill (PLFR) presented on 15 April provides that companies that were not under court protection, receivership or compulsory liquidation as at 31 December 2019, will be eligible for the PGE scheme. “The precise application of the criteria for a company in difficulty as at 31 December 2019 within the meaning of European Union law is necessary and this will require an amendment to the decree of 23 March 2020 on the specifics and the granting of the State guarantee”, explains the Government.

Reluctance on the part of banks

Working on the PGE, banks have expressed reservations about the measures on several fronts;

• The legal form of the guarantee. With a two-month deferment period, it is not an on-demand guarantee (GAPD) that is callable on the first default of the borrower. Closer to a surety in its form, the guarantee creates uncertainty in the event of a possible default by the borrower or, at the very least, regarding the time it takes to recover the funds. Consequently, the banks do not know what Loss Given Default (LGD) ratio to use, which has an impact on the capital to apply to the asset. The situation promises to resolve itself favourably in the coming days. In the new PLFR, the government is planning an adjustment to the form of the guarantee, which, according to our sources, will be closer to an on-demand guarantee after publication of an amended order or a series of FAQs.
• The non-guaranteed portion of the loan, which can be as high as 30%, whereas in Germany, for example, there is talk of a 100% guarantee;
• The interest rate ‘at cost’ for the first year, i.e. at the lender’s cost of funds, without any margin. After some vagueness, a consensus among banks is said to have been reached on using Euribor (i.e. a zero floor) as the cost of funds. Combined with the residual exposure, this lack of margin and, in many cases, the application of fees, still generates a negative RAROCs, which is leading banks to prioritise granting loans to higher credit quality clients, who can offer additional business; and this in the context of stress appearing in the Euro liquidity markets for the first time.
• The option to extend the loan for up to six years at the borrower’s discretion creates additional exposure that banks may not want. This option places lenders at refinancing risk and may create a temporary subordination with respect to other important loans.
• The fact that eligibility applies to some firms in difficulty (e.g. under an ad hoc protection).

Money does not fall from heaven

Despite these concerns, the banks are volunteering and encouraging their sales teams to process their clients’ loan applications on an accelerated basis. However, they are still exercising their due diligence in the same way as they would for a traditional credit application.

Faced with the threat of ‘indigestion’ at the banks’, as well as on the Bpifrance Treasury platform, the companies who are the most efficient will be the ones served first. Consequently, applications must demonstrate, as well as document, the impact of the slowdown on business caused by the pandemic. Every treasury team is therefore obliged to produce cash flow forecasts, with impact scenarios on a 3, 6 and 12-month horizon. It is also necessary to show how strategically the company intends to bounce back after the lock-down period and, if necessary, how its products and services will evolve.

In the end, it is clear that the COVID-19 special financing measures are not “helicopter money” and it is worth recalling their primary objective: to provide a source of widely available and affordable liquidity to companies to support them in the first months of the crisis and help them bounce back.

The PGE is a financing measure that, after one year, will attract an applicable margin grid (which the banks logically do not want to determine in advance), to which needs to be added the price of the guarantee. This increases to 100 bps per year for years 2 and 3 for medium and large sized enterprises and to 200 bps per year for years 4 to 6. Therefore, the PGE should be seen as a “bridge”. On leaving the lock-down, each company will have to reassess its debt in order to find an optimal structure in the context of an uncertain recovery. The challenge will be to determine its necessary liquidity in a very different environment.

These operations have been put in place with a speed that contrasts sharply with the time taken to access financing covered by state guarantees. They mainly apply to a section of companies who obtain financing through Bonds and Commercial Paper (CP), who are generally equipped with 5-year Revolving Credit Facility (RCF) to back-stop a possible closure of the CP markets, and who can represent important side-business for the ECM, DCM and Derivatives desks of banks.

For the treasury teams of these large international groups, as soon as the crisis emerged, the aim was to quickly find a global solution for securing additional liquidity. In the interests of speed, the banks immediately responded to this need by offering their best corporate clients the commitment to underwrite the additional financing, with a view to syndicating the transactions at a later stage. On these “jumbo” deals, with amounts ranging from €1 to €15 billion, the banks nevertheless applied margin grids that were significantly higher than those of a traditional pre-crisis RCF, given the higher drawdown risk and the new constrained nature of their balance sheets caused by the crisis. Typically, for a short bridge financing of one year, with a two-year extension option, the ratio between the margin for the new line to be put in place and the margin for the classic RCF, is up to four times greater… on a maturity two and a half times shorter!

Whilst the option for a simple drawdown of an existing RCF was a possibility, companies were convinced by the gravity of the situation, they needed to ensure their banks would continue to stand by them should the crisis worsen. And even with a four-fold increase in margins, such financings remain attractive to those borrowers with a good risk profile. They are also attractive for banks that play on the arbitrage between different opportunities and ensure a juicy flow of side business. Had they opted for a French state-guaranteed loan, the price of the guarantee (50 bps in the first year and 100 bps in the second) would, in most cases, have been higher than the margin of the new financing. Due to its country specific idiosyncrasis, the restrictions imposed on the amount (25 % of French turnover), its higher overall price, not to mention the uncertainties and slowness of implementation, the state-guaranteed loan was not the preferred option for large international companies.