In today’s depository industry, one open-ended question companies face is which method they should use to process deposits. This especially holds true for companies that take in high volumes of cash and coin, as currency remains ever-present. As banks’ internal costs increase and brick and mortar locations decrease, alternative cash depository methods are on the rise for corporates, in lieu of going to the teller window. Along with offering convenience, these newer methods may be priced more competitively, thus enticing businesses to give them stronger consideration.

Before we jump into the depository methods gaining popularity, let’s look at the two primary traditional methods companies are using today: the teller window and night depository box.

Depositing at a teller window

When depositing at a teller window, some banks offer both an immediate verification and a post-verification option.

Immediate verification

With immediate verification, deposits are verified on the spot, and the customer is given a receipt. Any necessary adjustments are completed when the deposit is verified. Some companies do not prefer this method as it takes more time to process and can keep employees away from the store longer. The immediate verification method is also typically priced higher than the post-verification method, as banks typically prefer deposits be processed at a later time to provide a quicker turnaround time at the teller window.

Post-verification

Under the post-verification method, employees deliver a dual-pouch deposit bag to the teller window; however, the deposit’s contents are verified at a later time. The employee is given a receipt indicating the amount listed on the deposit slip, and any necessary adjustments are completed once the deposit is verified. Since post-verification enables customer lines to remain shorter, customers experience shorter average wait times, a component banks are continuously trying to improve. Thus, this option can be seen as a win-win for companies and banks.

One reason companies prefer the post-verification method is it allows the employee to return to their place of business quicker and spend less time away from their duties. Another benefit of the post-verification method is its competitive pricing when compared to the immediate verification method.

It should also be noted that not all banks offer a post-verification option.

Nightdrop boxes

Nightdrop boxes are another depository method where bank customers are able to make deposits during or after regular business hours in a depository chute located outside of the branch. The primary benefit of nightdrop boxes is their convenience as they are accessible 24 hours a day. Additionally, customers do not have to wait in line at the teller window. Instead, they simply drop the deposit bag into the chute and go on their way. Another benefit is that banks may also elect to price nightdrop deposits lower than deposits processed at a teller window since they are not immediately verified, similar to the post-verification method previously discussed.

ATM deposits

One method gaining popularity is the automated teller machine (ATM). With this method, customers are issued a designated ATM card for their place of business and use this card to make deposits through the machine. Customers can also request more than one card per location. Bills and checks are inserted into the ATM and a total is calculated for the customer. Bill and check capacity vary by bank and ATM models.

A key benefit this method delivers is lower deposit processing fees. Some banks may charge a fee for deposits processed or a fee for currency deposited, but not always both. Customers save on deposit supply fees since bags and deposit slips are not required for ATM deposits. Furthermore, deposit adjustments are also potentially reduced since the ATM verifies all items at the time the deposit is made. Lastly, banks may offer a later deposit cutoff time with this method.

As new ways to deposit emerge, the ATM method seems to be gaining more popularity.

Deposit by mail

One other deposit method on the horizon involves banks partnering with a courier such as the United States Postal Service or United Parcel Service (UPS). With this option, customers send deposits to a cash vault for processing with a courier instead of an armored car company. The fees for using a courier may be less than using an armored car company; however, cash vault fees for deposit processing may still apply.

Smart safes and armored car services

Finally, standard armored car services and smart safes continue to be a crowd favorite among corporate clients. With smart safes, bank customers insert daily deposits into a safe and the company receives provisional credit prior to the safe contents being retrieved by the armored courier. The provisional credit enables companies to proceed with cash positioning and may result in lower borrowing requirements. Smart safe contents are typically retrieved by the armored courier only a couple of times a week. Initially, smart safes were intended for companies that take in high volumes of cash and coin; however, with various models now available, there are different smart safe options for all types of companies and cash intake volumes.

Employee safety and security are the primary reasons companies engage with couriers and armored carriers for deposit processing.

Even though consumers today are depending more on credit cards and smartphones as payment options, cash is still a very popular payment method. Banks are trying their best to offer various options that suit businesses of all deposit habits and volumes. As some banks signal that they do not have the same historic level of interest to service companies that take in high amounts of cash, it is important that they find other ways to accommodate their customers.

Payment card processing fees are the third largest expense that businesses have after rent and payroll, and Visa, Mastercard, and Discover historically make changes to their interchange fee schedules (the fees paid by merchants for processing credit and debit card transactions) twice a year in April and October. The plan was to increase fees in April of this year as well, but when COVID-19 happened, both Visa and Mastercard stated that they would postpone these changes until July 2020 in the hopes that the world will return to “normal.”

Complexity of the payment card industry

The payment card processing environment is confusing enough with only the regular card brand changes, but when you add in all the parties involved, it becomes exponentially more complex. For example, you have the acquirer/processor/bank, the gateway to get the transaction from the point-of-sale equipment that you use to process the transaction to your processor/acquirer/bank and potentially the middleware that provides the detail level information that determines how the transaction will clear with the card brands.

Visa, Mastercard, American Express and Discover have their own proprietary standards that determines how a transaction will clear their systems resulting in how much the business will pay for that particular transaction. Then there are the individual contracts with each party involved and the statements received each month that are multiple pages long, with line item details of each transaction that you processed for each customer, how the transaction cleared with the appropriate network, the interchange qualification levels and the type of cards that consumers and businesses use when paying. It is no wonder businesses are confused.

Below is a diagram of the potential parties involved in the transaction and remember, each of the parties have a fee that the business will be charged for their part in the process.

An action plan is necessary in order to take control of your payment card processing expenses

To manage cost effectively, it is vital that your business has visibility into the process:

• Review the pricing in your agreement from your card processor/acquirer/bank, your gateway, and any middleware you use.
• Make sure you receive detailed statements so you can see how the fees are charged and if they are in line with your agreements.
• Review your interchange fees, network fees, and assessment fees.

Reviewing this information monthly to make sure that the fees your acquirer, gateway, and middleware are charging the correct fees based on your contract and your card mix can help you control one of the largest expenses your business has.

HawkeyeCard, a software solution to monitor, manage and reduce card fees, is all about visibility into your payment card process and your fees, accessibility to be able see what is going on and negotiate your fees, and accountability to hold your processor/acquirer/bank/gateway/middleware accountable to the fees they quoted in the agreement and going forward. (For more information about HawkeyeCard, please contact Judy Desomma at jdesomma@redbridgedta.com.)

It is important to understand and manage these relationships and fees. If you are not sure where to start, contact us to start a conversation.

On April 6th the International Chamber of Commerce issued an urgent memo to governments and central banks on essential steps to safeguard trade finance operations. The memo’s main point is a call on all governments to void, as a temporary measure, any legal requirements for trade documentation to be in hard copy; and adopt meanwhile the UNCITRAL Model Law on Electronic Transferrable Records.

Governments are being encouraged to implement the 2017 United Nations Commission on International Trade Law Model Law on Electronic Transferable 3 Records (MLETR), which provides the clarity necessary for widespread adoption of digitalized trade and trade finance instruments.

The ICC further stated: “Despite extensive negotiation and unanimous adoption of the instrument by the United Nations General Assembly—and associated discussions in the World Trade Organization —adoption of the MLETR has been low. Now is the time for its widespread adoption of to ensure trade finance can be conducted in a paperless manner with a workforce working-from-home.”

Whilst this measure is presented as temporary given the current extraordinary health crisis, it does have, however, a high potential to become permanent.

The ICC’s memo follows two major revisions of the legal framework supporting international trade, in an effort to assist banks and corporates to accelerate adoption of paperless trade: the revised Electronic Uniform Customs and Practice for Documentary Credits (eUCP Version 2.0) and its first-ever supplement of the Uniform Rules for Collections URC 522 (eURC Version 1.0).

This move comes as part of the ICC’s Banking commission on-going work, focusing on three main pillars: eCompliance, eLegal and eStandards. According to the ICC website, eUCP Version 2.0 supplements the ICC’s UCP No. 600 (2007 Revision) “in order to accommodate presentation of electronic records alone or in combination with paper documents […] where the credit indicates that it is subject to the eUCP”, while eURC Version 1.0 supplements the ICC’s URC 522 (1995 Revision) to similarly accommodate for electronic presentation or mixed electronic and paper document presentation “where a collection instruction indicates that it is subject to the eURC”.

With its memo, the ICC urges governments to act in favor of digitalization of trade finance. This reflects the global and industry-wide consensus towards advancing trade processes and rules and making them fit for the digital era.

With the advances in technology, numerous parties in the global trade and entrepreneurs have recognized the huge opportunity afforded by taking trade related communication to the next level. Too many solutions on the market, however, are focused on a particular niche or technology. Some are proposing to replace paper documents with e-documents, others are dealing with digitizing all aspects of trade execution whilst many others are focused on communication aspects surrounding trade finance processes. Some of these consist of innovative platforms, whilst others are leveraging on new technology such as blockchain. Some solutions are aimed at the agricultural and food sector only, whilst others cover the energy players.

In 2018, with the media flooded with blockchain proof of concept news, we were asking a central question: what is the value proposition, e.g. what will drive exporters, traders and importers together with their financiers adopt a certain solution?

To answer this question, we have identified some key benefits primarily for the corporate sector: producers / exporters, trading companies and importers / consumers.

The adoption of digitized trade solutions can have significant positive impacts in several interlinked areas:

1. Operational: faster document processes including creation, signature, amendment, storage and traceability; automation of certain manual tasks all the way to robotic process automation; faster communication with process relevant parties; potential for automated invoicing with data availability related delay elimination; electronic certificates speeding up processing.
2. Financial: reduced processing costs, reduced specific trade and trade finance costs (e.g. demurrage, confirmation), improved days sales outstanding meaning reduced working capital need and related cost; lower cost of borrowing stemming from improvement in pledged asset / security monitoring.
3. Risk: lower operational risk, lower fraud risk, lower compliance and credit risk with full asset traceability.

We believe the world of trade finance, and corporate treasuries, will be quick to embrace the optimization potential offered by a digitized trade world.

We look forward to hearing your views and supporting your company with identifying and implementing relevant solutions to turbo-charge your trade.

The changes you can expect and how you can prepare

Update: Due to the economic slowdown linked to the COVID-19 pandemic, Visa, Mastercard and Discover have postponed their fee modifications from April until July 2020. The information in this article has therefore been modified accordingly.

It is hard to believe but April is just around the corner. For those familiar with payments, we know that April also marks the start of the spring card brand release. The card brands release programming and fee modifications on a quarterly basis, but the spring (April) and fall (October) releases historically carry the more significant changes.

What can organizations expect this year?

In short, we will be faced with the most sweeping and transformative changes in more than a decade. While these changes have been touted by the brands to alleviate the cost of acceptance in certain sectors, most organizations can expect to see increases in cost along with a myriad of modifications. The sole intent appears to be to further obfuscate what is already a complex web of interchange rates, network fees and qualification criteria.

The increased cost and opaque nature of these changes could not come at a worse time as most organizations are already struggling just to keep afloat in a tide of COVID-19 related disruption and devastation. As merchants struggle with simply maintaining their business, they will also need to begin thinking about the card brand changes and the impact on their payment acceptance environments.

This year all of the brands will introduce changes, but the most significant impact appears to be delivered by Visa. These changes are not limited to the rates themselves but also the structure as a whole.

Some of the more significant changes we expect to see are:

• Visa
  • Elimination of Electronic Interchange Reimbursement Fee (EIRF) rates
  • Elimination of several Standard rate categories
  • Introduction of Non-qualified categories to replace EIRF and Standard rate categories; new rates are as much as 85 basis points (bps) higher than historical rates
  • Elimination of the interchange benefits associated with many of its B2B Merchant Category Code (MCC) designations
  • Visa is doing away with its legacy custom payment service (CPS) categories and replacing them with Product 1 and Product 2 designations
  • Modification and expansion of Visa’s supermarket interchange tiers

• Mastercard
  • Introduction of a Transaction Integrity Classification (TIC) which will become an interchange qualification requirement
  • Introduction of a new day care consumer credit interchange category
  • Introduction of a cap for real estate Merit I interchange
  • Consumer credit purchase refund rate modifications
• Discover, Mastercard, and Visa will require an authorization approval code for processing purchase return (refund) transactions
• Discover, Mastercard and Visa are all updating their Stored Credential Transaction requirements
• Discover is also introducing small ticket pricing for transactions less than $5

What do organizations need to do to effectively navigate these changes and mitigate avoidable cost increases?

The good news is that organizations can take steps to proactively manage the impact. To stave off cost increases, organizations will have to be vigilant in understanding the new complexities of the April 2020 interchange and card brand fee structures.

A successful outcome will require, at a minimum, that the following key components be addressed thoroughly:

• Data – Accessibility is key. Data must be normalized across channels and providers in order to draw meaningful and timely conclusions about the current acceptance environment and associated fees.
• Infrastructure – It is crucial that the organization has the necessary processes and systems in place, whether it be homegrown applications or third-party solutions, to effectively review and track your payments data.
  • Establishing key performance indicators (KPIs) and managing those KPIs is critical
  • Understanding where the organization is in relation to its current interchange qualification efficiency ratios
  • Establishing target ratios
  • Ensuring there is a system and process reconcile fees to ensure accuracy
• Execution – Organizations must have a well-defined plan including the right resources, tools and technology to transition from its current state to the desired future state.
  • Technology must be able to support the current business needs, while satisfying new card brand requirements
  • Vendors must be assessed to ensure they are able to provide the necessary level of technology and support
  • Account hierarchy and architecture must be closely reviewed to ensure it is yielding the most optimal outcome
  • Fraud and risk exposure and acceptable tolerance thresholds must be constantly evaluated

In short, what the card brands are doing is simple. They are seeking to take what is already a complex and convoluted web of fees and further obscure the structure to make it more difficult for organizations to proactively manage their costs. It is up to the organization to fight back by taking control and closely managing its payments strategy and continuing to evolve the strategy to stay current with best practices.

An effective approach is one that is robust, holistic and multi-faceted. This includes:

• Evaluating and aligning payment methods across payment channels
• Reviewing merchant account structures and leveraging merchant category classifications
• Staying ahead of the data and timeliness requirements
• Ensuring that the organization adheres to best practices in its payment collection and return processes

Effectively managed, an organization can expect to contain its costs and prevent superfluous increases. The right tools, processes, systems and knowledge base is key in winning this fight.

For more information or questions on how to take action, please contact your Redbridge advisor.

We initially published our article on key considerations for renewing your revolving credit facility to help clients take the proper steps to ensure they get the best possible terms in what was a very robust credit market. But things have changed!

COVID-19 has dramatically increased the need to prepare and challenge your banks to optimize your financing. This article reuses the headlines from our previous article to highlight the increased importance of each area as well as additional recommendations for managing the current uncertain environment.

The key is to understand your business profile and needs for the next 12 months

This is becoming the most important step if you want or need to secure new bank financing.

It is now critical to understand your business and its cash flow profile at a very granular level, including the best, base, and worst cases over the next 6 to 12 months. Yes, scenario planning is difficult in this rapidly-changing environment, but you must put together forecasts and assumptions to prepare a picture for your banks as well as the rating agencies. Senior management must validate the forecasts to ensure clear, consistent communication during this crisis.

You also need to analyze in detail all potential liquidity challenges that your crisis scenarios would entail: What is your covenant headroom? Do you have sufficient confirmed liquidity to withstand all your scenarios? What would the impact of a downgrade be?

It is more important than ever that you examine each term and condition of any potential deal and evaluate its impact on your liquidity and flexibility. Negotiate each term, basket and covenant. Look for areas of flexibility like receivables sales/securitizations.

Know your bank credit rating

Your rating is still at the heart of the bank’s business case, but current market uncertainties make it even more crucial. The rating agencies are doing broad portfolio reviews and significant downgrades are likely. Each bank will have a different reaction to the current market: some will still base their credit judgment on public ratings, some will be more conservative and some more aggressive. Some banks will have to make broad portfolio decisions that will impact you regardless of the realities of your own business and credit profile. The normal differences in banks’ ratings of the same company are even more pronounced in this market.

You must talk to as many banks as possible and really understand their risk view in order to optimize your financing. Your lead banks will offer advice, but they will not know what you can achieve until they start marketing your credit. Doing a bottom-up broad market sounding is the only way for you to truly get the best possible deal, and doing it yourself will give you an unbiased view without information being filtered through your lead bank’s own lens.

Craft your lenders’ group

You already know who understands your business in normal times, now it’s time to find out who will stick with you through turbulent times.

Hopefully you have been taking meetings with banks, as we suggested in our previous article, but now is the time to expand your net. Get real term sheets from as many banks as possible and use all your leverage to optimize the outcome. Don’t take offers from banks that require you to give them all your side business without first sounding the broader market.

If you must proceed in these market conditions, consider drawing down your current facility partially or fully. Note: Review all the terms and covenants in your entire debt portfolio to ensure you don’t trigger any covenants.

A final factor to consider

While non-traditional lenders are still an option to consider, you should also include other alternative sources of liquidity. Investors from other asset classes have begun to look at corporate credit as a relative value in this market. Ensure that you are exploring all possibilities, including government initiatives that could allow you to secure relatively cheap funding (but be mindful of potentially stringent requirements).

Conclusion

This may not be an ideal time to refinance your credit facility; you may be wishing you had taken advantage of the markets a month ago, or maybe you started early but now you have to adapt. The key is still to be proactive and thorough in your analysis.

It is a lot of work, and you may be operating with limited staff and resources in a remote work environment, but you must challenge your banks. With more factors than ever to consider (including their own balance sheets and credit constraints), your banks may not have your best interest in mind.

Questions?

Help is available. Firms like Redbridge that normally operate in a remote environment can bring resources to help you ensure that you get the best possible outcome. Contact our experts to learn more.

In current circumstances the markets seem well supplied with liquidity. This is also amplified by the recent commodity prices lows, especially on the oil side. But how rescue liquidity works its way through the systems has numerous operational challenges only amplified by a very volatile market sentiment. Looking also forward to echoes on the results of EBRD’s and IFC’s pledges to support global trade and its financing.

We already see in the capital markets that not all corporates are equal in front of QE measures. This is is even more exacerbated by potentially hasty actions taken by some rating agencies. The world of non-rated and typically privately owned commodity traders is even more opaque. The bigger players have understood the system limitations and opportunities and having as well the capacity means engaged in a quest for structuring, implementing and generally relying on more diversified funding structures. Some have taken the game even further and supplementing the banks’ offering are playing an active lender role in producing countries.

Smaller players are often brushed off by banks for various reasons like having too little equity cushion, the mood swings in the risk management chain contingent on the latest fraud case, lack of comfort vis-à-vis their business model or risk practices.

Hence below questions are addressing the smaller and especially mid-size trading firms:

• What is the risk of running only uncommitted transactional financing lines?
• What is the trigger to actively consider and implement other sources of liquidity especially committed ones?
• From what business size do you believe a trading company can attract committed and / or unsecured financing?
• What hurdles do you envisage in diversifying your sources of liquidity?
• What instrument would you give priority?

Looking forward to exchanging views. Stay safe!

In the space of just one month, S&P reviewed* almost 20% of the corporates in its European and US portfolios. Practically, S&P downgraded the credit ratings of 35% of them, whilst a further 40% were placed on a negative watch. By contrast, Moody’s and Fitch have published far fewer negative reviews (by a factor of 3), and half as many downgrades, for a broadly similar exercise.

Acting with urgency

The rating agencies do not want to repeat their mistakes from the 2008 financial crisis. Too slow to spot the increasing risks in the debt markets, they intervened too late and distributed downgrades of several notches en masse, which plunged the financial system into deep distress. Heavily criticized at the time for this destabilizing effect, it resulted in them being regulated, especially in Europe.

In the context of the current macroeconomic shock of unprecedented magnitude, the speed with which S&P has acted does raise questions. The Debt Advisory team at Redbridge noticed that, in its eagerness to act, S&P had a large number of rating committees re-examine the situation, whilst acknowledging that most companies will have neither the time to finalise their own analysis of the situation, nor provide them with precise information on the short-to-medium-term impact of the coronavirus crisis on their business or their liquidity position. Agencies such as Moody’s and Fitch, appear to take a much more cautious approach to their analysis and are first trying to refine their views on the sectoral impacts of the crisis. S&P, on the other hand, has taken the decision to rule very quickly on the specific ratings of many issuers across multiple sectors.

Unless S&P knows much more than the rest of the market, their decisions seem premature. The situation is changing from day to day and there are a number of important elements to consider to form an accurate analysis.

A sophisticated analysis needs to be undertaken

Our view is that it should be possible to evaluate the credit risks for the most impacted issuers, whose financial position is clearly under pressure. But for the vast majority, multiple external parameters will be decisive in exiting the crisis: the possibility of resorting to furlough, an economic rescue plan aimed at stimulating consumption in the post-crisis period, actions by central banks to provide companies with all the necessary liquidity, concerted actions by oil-producing countries to restore calm to the markets, nationalisation of companies or buyouts by protection funds, intervention by shareholders to reinject capital into distressed companies, etc All these factors will play a role.

In the face of all these complexities, it is legitimate to question the value of hastily handed down judgments by agencies. What do they bring to investors that they do not already know? That the hotel industry and airlines will be some of the sectors most heavily impacted by the health crisis? The markets seem to have already factored in these risks.

Adverse threshold effects

On the other hand, a rating decision that is too hasty can have damaging consequences for a company’s liquidity. There are detrimental threshold effects all along the rating scale. For the strongest issuers, losing their short-term A2/P2 rating will make it more difficult for them to obtain financing on the debt markets (bonds, commercial paper) as their debt will no longer be eligible for the ECB’s repurchase programme. Going below a long-term BBB- rating means the defensive bond funds and life insurers will be forced to eject the paper from their portfolios. Finally, losing a B- rating means an exit from CDO/CLO conduits and places the issuer’s debt in the hands of so-called vulture funds.

CFOs – What should be done in this context?

How should the finance teams react once they have been approached by their rating agency?  The situation is delicate. Giving too much information, too early, without having detailed answers from the executive board, could lead to a premature downgrading of their credit rating. At the same time, not responding to the requests could equally have a similar impact.

In this context, it is essential for the finance team to be transparent about the full range of measures taken by management in response to the crisis in order to avoid a potentially damaging impact on the company’s access to financing. At the same time, the financial communication should not be dictated to by the agencies.

In this situation, our best advice is to work on cash flow forecasts for various scenarios and only communicate this type of information to the agencies only once it has been extensively validated by the executive management team.

For the most credit worthy issuers, who currently issue unrated securities, it might be pragmatic to consider obtaining a rating in order to preserve their access to the market; the sales teams of some agencies have already identified this.

*Scope of the study : Analysis of rating decisions based on the portfolios of 2,610 companies (S&P – Capital IQ) and 1,935 companies (Moody’s) respectively in France, Italy, Luxembourg, Switzerland, the United Kingdom and the United States, all sectors combined, between 21 February 2020 and 25 March 2020. The analysis of Fitch Ratings’ rating actions is based on data published by the agency on 27 March 2020 and covering a portfolio of 1,171 companies in EMEA, the United States

Not only will this affect how treasury departments invest for the foreseeable future, but also how they allocate cash among their various constituent banking partners. Finally, it highlights the need to review how we conduct business and how we audit that business within treasury

Moving forward – an action plan for treasurers

A well-thought-out action plan will make all the difference when managing treasury during uncertain times. Getting control of your bank fee spend should be on your list of action items and can potentially free up excess cash. So, with our dear ECR credits all but gone, here are some actionable items that you can take ownership of during this calendar year to manage your bank fee spend.

1. Simplify the process

Now more than ever, we need to streamline the process, save time and reduce costs when it comes to our bank fees. Some questions we need to ask include:

• While AFP codes and their proper alignment between banks are a necessary component of bank fee analysis, you have to ask yourself two questions: Who handles the updating of codes? And, how do I align them between banks? Time is critical, and if you have to do this function yourself, it most likely will not get done. Is your current vendor handling the initial mapping, and then making those changes for you as the bank’s AFP codes evolve? AFP codes need to be harmonized and deconflicted throughout the year – it is not a one and done exercise.
• If you do not have a straightforward process for communicating audit errors back to your bank, now is the time to put one in place. A monthly report should be sent to your bank, highlighting any errors against contract pricing or a set baseline. This will help maintain the cycle and ensure timely credits are applied back to your account.
• While spreadsheets serve a purpose (more on that later), how is your data visualization within bank fees? Again, we need a quick review of data in order to identify trends and outliers. Easily constructed charts and graphs can aid in this effort.
• Once you have data visualization in place, how deep can you go with your data? Can you run reports bank versus bank? Can you break out various product families to review trends and costs in a timely manner? Can you go granular and look at individual line items country by country, bank by bank, and account by account?

2. Make it portable

Along with your ERP, TMS, etc., all treasury functions need to have the option to run in a location-agnostic manner, including bank fee analysis. The current global environment forces treasurers to review their vendors to ensure they are a true SaaS-based solution with back-ups and disaster recovery programs, along with a SOC II Type 2 audit in place. This will help guarantee your treasury operations and monthly cycles are adhered to, regardless of circumstance or location.

3. Get a global view

With the reduction in ECR, cash management fees will affect your bottom-line even more. In the past, you could ignore many of your non-U.S. fees as they would be nominal at best, hidden away in a rolled-up view of global fees with U.S. based ECR credits or allocated out to other cost centers. While ECR does not apply to non-U.S. services, as it drops in the U.S., it only exposes our need to analyze all our bank costs holistically. Make sure your bank fee analysis method or software can easily handle currency conversions and all the line items associated with global AFP codes that can be contained on non-U.S. statements.

Summary

Your cost of doing business with your banking partners has gone up, and this will hit the budget of treasury teams. The lack of ECR offset, combined with the banks’ error rate of 7% to 10%, drives the need for action. As your corporate management team rolls out new cost initiatives, auditing and controlling your bank fees in this new environment can reap quick wins for your treasury team and help to contain and lower costs in these uncertain times.

If you have any questions, please contact your Redbridge advisor. We are always here to help.

1. Ensure the availability of financing

Make sure that credit facilities negotiated with your funding partners are available. Consider drawing on your facilities for extended borrowing. Give preference to long drawdowns. For those who are currently in negotiations, finalize the arrangement as soon as possible.

2. Assess the impact of the crisis and communicate with your lenders

Deteriorating economic conditions mean that you must revise your budget. Communicate proactively with lenders on how you evaluate and manage the impacts of the coronavirus crisis, the oil markets and the rising economic uncertainties.

3. Anticipate the potential deterioration of your financial ratios

Verify the covenants in each of your facilities and run scenarios to assess potential breaches. If potential scenarios might lead to a breach, begin the discussion with your banks and credit providers now.

4. Manage your counterparty risk

Bank credit default swaps (CDS), which are a proxy for banks’ funding costs, tripled over the last few days. Review the group’s exposure to each banking counterparty and assess the ability of each funding partner to support your business through any potential stress scenarios.

5. Keep abreast of debt market developments on a daily basis

Watch the market for liquidity (e.g. LIBOR-OIS spreads, repo markets). Anticipate liquidity squeezes for banks, especially banks whose primary funding comes from a different market. While the regulatory changes implemented since the last crisis were meant to address the lessons learned, expect issues to arise from unanticipated areas. Keep in mind that a flight-to-quality can also prove beneficial for the best-rated borrowers.

6. “Cash is king” – Optimize your treasury management

Accelerate the implementation and conclusion of projects that will enable the company to better concentrate cash (cash pooling), improve cash generation (WCR optimization) and increase visibility on available cash (cash forecasts).

If you have any questions, please contact our debt advisory team. As always, we are here to help.

This will almost certainly impact the earnings credit rate (ECR) you receive on balances you hold with your banks. We will likely see earnings credits near zero, or even negative, starting with our next account analysis statements.

Stay calm and consider the following:

1. Anticipate higher but more transparent bank fees
   Unless your company is among the happy few that operate on a true zero balance basis or has mastered the art of cash forecasting, chances are your organization has been keeping a certain amount of operating balances. As the fed funds rate steadily increased over the last decade, your bank fees started steadily disappearing, thanks to the magical concept of earnings credit. But Sunday, March 15, 2020, was a wake-up call: with the fed funds rate now nearing zero, the spotlight is back on your bank fees. No more gross fees versus net fees. No more offset. You are now facing the truth of exactly how much you are paying in bank fees. Depending on how much balances you maintain historically and how competitive your ECR was before the rate cut, you might see millions in bank fees resurfacing overnight.
2. Get your house in order and hold your banks accountable
   More than ever, it is time to be smart about your bank fees. Start with the simple and the obvious: look out for the next ECR cut, try to anticipate and negotiate ahead of time with your banks, and keep them accountable for notifying you of any major changes. But it is also a good time to pay close attention to your account analysis statements. Look for the unjustified reserve requirement fees that some regional banks are still slipping under the rug. Watch your float and ledger balance to keep your insurance recovery fees at bay. And, if you have the time, resources, and stomach for it, dig deeper into your service line items and challenge your entire suite of services.
3. Refocus on your core bank relationships
   We are now most likely facing the next big recession, so it is time to refocus on the bank relationships that matter the most to your organization: the ones that will provide the support, credit and liquidity that you might need in the coming months. Bank fees are often considered a side product, but we like to think of them as a reward product. So, it is time to carefully rethink and reallocate some of your business to your key partners in a structured and strategic way, taking into consideration the aspirations of both parties.
4. Seek long-term commitment
   In this uncertain environment, securing long-term commitment will eventually benefit banks and corporations. Banks will secure long-term revenue and recurring business, while corporations will secure locked-in pricing. But you shouldn’t blindly enter into any long-term commitment. Take time to assess your options, compare services and cost across banks, consider share of wallet, assess the overall relationship, and then make an educated decision.
5. Protect your company’s bottom line
   At the end of the tunnel, the vast majority of companies will still face long-term impacts on their revenues and profitability. Every department will be required and asked to reduce costs even more. So think about how treasury can participate in the collective effort and where your main sources of savings are located. We think bank fees are a good place to start.

If you have any questions, please contact your Redbridge advisor. As always, we are here to help.

In today’s digital environment, we take thousands of pictures in a month, or even a day, without any consideration to cost. It is free to take a selfie and send it to anyone you want. This same imaging technology has revolutionized the check clearing process and created numerous opportunities to improve the treasurer’s daily process of deposit processing, check reconciliation, research, and archival of payment and collection data.

Sending digital images instead of the physical original or copies has saved the commercial banking industry millions annually in transportation and physical storage costs and has drastically reduced float. Even with all of these initial savings and benefits, treasurers should be warned that the cost of imaging services is increasing along with their growing dependency on them.

Whether you are looking at a check image through an online banking portal, image file, DDA statement, or CD-ROM, there is a cost for each image, and the dollar amount may surprise you.

We queried our database to dive into the costs of imaging services and reviewed services from 22 of the largest banks in the U.S. Excluding the 933 imaging services related to lockbox, we found 157 services that large corporations were charged for in 2019 related to imaging services for paid checks, positive pay, and deposits (Exhibit 1). The bigger the bank, the larger the number of imaging services charged overall. Bank of America tops the list but provides six different options in length for image archive services – anywhere from 180 days to 10 years.

Exhibit 1

Lockbox images

Most corporate treasurers do not factor imaging costs into their cost per item analysis for checks versus other collection options. In one recent engagement, our client was paying $33,646 annually just for the delivery of the images from their lockboxes. In this case, the client was receiving the same image three times: via their online banking portal, image transmission file, and CD-ROMs (Exhibit 2).

Receiving an image transmission file that can be stored and archived locally in a shared drive allows your team to perform the research they need without the additional costs of online user access, per item image accessed fees, and any CD-ROMs that new computers cannot read anyway.

Exhibit 2

Paid check images

For years, banks have charged a fee to image a check your organization writes, so check image capture costs are nothing new. What has evolved is the fee for distributing those images.

In the past, the bank would return your physical check, or you could request a photocopy of the check. You can still request a photocopy of a paid check with typically a 24- to 48-hour turnaround time. Paying to access all images online provides treasurers with instant access to all of their checks paid images, but in this digital age of instant gratification, that comes with a price.

Exhibit 3 below shows the average price for monthly maintenance, per item capture, reporting, retrieval, and media services specifically related to imaging. Many treasurers are surprised that even with the monthly maintenance charges and per item capture charges, they can many times be charged per click when they actually select an image online to view it.

Exhibit 3
Average Price of Imaging Services

Multi-product image portals

Rather than maintaining and charging separately for lockbox image portals, paid check imaging portals, remote deposit imaging portals, etc., the growing trend is for banks to charge a per account fee to access all of your company’s images, regardless of type. If you paid separately, one might find it easier to turn off access to certain portals and simply receive an imaging file. With ‘all or none’ options, 99.9% of companies will choose ‘all’ for the convenience, regardless of the cost.

Image statements

I take for granted the ability to receive images of deposited and paid items on my DDA statement monthly. As with most things in the commercial banking arena, this option also comes at a cost. The monthly fee per account to receive a DDA statement with images is anywhere from $0.50 to $25.00, with the median falling at $3.30.

Conclusion

Next time you look at a picture of any type of payment online, file a CD in a drawer, or receive an image file, think about doing an exercise to evaluate the costs of imaging services, and contact us if you have any questions.

– Can you describe what Verteego does?

– Verteego forecasts sales using artificial intelligence technology directly inspired by the human brain. We have developed different blocks, which conceptually correspond to the lobes of the human brain. One block is used to predict, process and store data. Another understands and generates natural language, which is particularly important in modeling the sales of new products by including labels and descriptions. Another is used to recognise images or to visually compare different items, for example. And the last block coordinates all of the other blocks.

Our goal is to provide more accurate forecasts than those achieved by traditional methods and to become even more reliable than machine learning algorithms. Our team of 30 professionals includes 10 people with PhDs in computer science, mathematics, biology and chemistry.

We provide our customers with three dimensions: technology, a team of skilled professionals to integrate our technology into the company’s systems, and a willingness to conduct research with experts across all industries.

– What can you bring to corporate finance?

– In finance, we can provide more detailed forecasts. We replace or complement linear statistical systems or management rules, or a combination of both, with self-learning systems based on machine learning. Our approach should, in most cases, lead to more accurate forecasts. What’s more, once a company improves its predictions, it can improve its management, its turnover and its profitability.

We try to predict flows of all types. We work a lot on sales or store traffic forecasts. A lot of things result from sales. Corporate cash flows are just one of them. By using historical data coupled with artificial intelligence, it’s possible to predict just about anything. For example, we have developed models to predict employee turnover.

– How do you incorporate artificial intelligence into forecasts?

– Our projects generally begin with data exploration and analysis. Next, we run the solution we’ve developed with a restricted scope to check if it creates value. If the test is conclusive, we will calculate the solution’s return on investment for the intended scope, based in particular on comparisons between historical data and the previous forecasting system. Finally, launch involves connecting the customer’s upstream and downstream systems. This last step is very important because it is necessary to set – and enforce – standards for the quality of the data provided by the company’s entities or departments.

Sales data is generally rather clean and well managed, and therefore usable. Our clients often receive support from their teams as they present their project. To succeed in cash flow forecasting, we have chosen to combine our technological expertise with Redbridge’s business expertise. This partnership makes it possible for us to better respond to the problems and needs of each client and to provide an operational and value-creating solution more quickly.

– How long does it take to improve cash flow forecasts with Verteego and Redbridge?

– Our work is agile and fast-paced, and we work on a relatively tight schedule. It takes between two to three months to deliver an operational solution. To be successful, the customer must entrust all their problems to us so that we can design a tool to solve them. We need to measure the added value of our solution. Our business model is based on a very low start-up cost, coupled with a subscription model that depends technologically on the number of models running (per store, per business unit, etc.). We like to propose fee scales based on the success of and value created by our solutions. That would make each of our projects even more motivating!

Why does cash flow forecasting usually rank among corporate treasurers’ top priorities?

– Ferdinand Jahnel, Marsh & McLennan Companies: All of that is tied to liquidity management. Within a large organisation, corporate treasurers are responsible for the cash profile of the company. That means having a good understanding of the low points and high points in cash generation. It also means finding ways to bridge any gaps by issuing short-term debt or by relying on some type of committed bank line base. Moreover, when cash needs exceed the annual trends, treasurers need to have a broader understanding of how to manage the firm’s capital structure and what the long-term debt-to-equity mix should be.

In what ways have you used treasury forecasting in your current and past roles?

– I worked for several companies before joining Marsh & McLennan, the world’s leading professional services firm in strategy, risk, and people. For instance, I worked for a healthcare distribution organisation, a software company and a manufacturing firm. I found across each of these industries that the best cash flow forecasts are generated from treasury, not from FP&A (financial planning and analysis) controllership or the people in the field. Treasurers have access to the best (historical) data on how cash flows typically trend within a company.

How do you prepare your cash forecasting?

– There is a very idiosyncratic seasonality in every business. For example, at Marsh & McLennan, we know that we have a low cash point in the first quarter. During the rest of the year, cash rolls in almost like clockwork. Therefore, the way we ultimately develop our forecasts is by taking historical data on a daily basis and trending it with growth expectations. This methodology works well for us since renewals of annual insurance consulting contracts are fairly repetitive year after year.

Which method of cash flow forecasting do you prefer?

– The indirect method is not going to help you with planning flows in treasury. It starts with net income and makes all sorts of adjustments, and that’s a somewhat abstract mechanism to reconcile a beginning and an ending cash balance on a balance sheet.

With the direct method, we can truly see which cash inflows relate to specific customer receipts or businesses and which relate to specific activities on the disbursement side, like payroll, tax, and so forth.

Are you seeing any disruptive technologies that could improve the process of cash forecasting?

– We are trying to find applications for AI or machine learning where we hopefully see some ability to automate a process that I have described before as somewhat archaic. It is still manual. We still run a huge spreadsheet that we update and roll over into a new year quite manually.

Again, using that data makes a lot of sense for us because of the predictability of these cash flows. I would assume that especially repetitive patterns either on the cash in or outflow side could be something that machine learning or AI could do for us in renewing and updating these cash flows on a rolling basis going forward. I think these applications will eventually come to fruition, especially in businesses that have these somewhat plannable cash flows.

– What are the latest developments in the digitization of trade finance operations?

– The new development for 2020 involves bank guarantees for contracts. SWIFT has long been preparing to reform the messaging for guarantee processing and these new standards will be released in November. Initially planned for 2019, this redesign will facilitate the processing of international guarantees, speed up processes, and reduce paper mailings. Major global banks have worked hard to adapt their back office systems to process these new message formats.

– Why are international guarantees so far behind in the digitization process?

– Given their flexibility, not to mention their complexity, international guarantees have lagged behind in the move to digitize trade finance transactions. International guarantees are contractual. In addition, they are mostly issued indirectly; that is, they are issued by a local bank in the country of the beneficiary and covered by a counter-guarantee from one of the banks of the instructing party. This makes it complicated for the instructing party to track all of its liabilities.

In fact, in their current version, SWIFT messages dedicated to international trade transactions do not incorporate the full complexity of guarantees, unlike messages for processing documentary credits.

Specific fields are missing some information. It is not possible to add extension messages or to monitor local guarantees. These are all major disadvantages for the use of guarantee messages, even in the context of interbank communication.

For example, as no satisfactory electronic solution currently exists for instructing the issuance of guarantees, they are still frequently sent by mail. This involves several disadvantages, including wasted resources, risk of loss or delay, and tedious manual processing.

– What is going to change in November?

– New messages will complement the SWIFT range and enable all types of cases to be processed. As a result, instructions to extend a guarantee have been enhanced by a message format that captures more content. The response to an amendment request is also taken into account now, as is the refusal of payment and extension. It will therefore be possible to communicate simply via structured messages adapted to the process automation.

In addition, SWIFT will change the structure of several existing messages (see box below) with the same goal in mind. The receipt of guarantees will also benefit from the redesign, with several messages added, enabling more communications to be processed.

These new, more structured, messages will finally enable importers, exporters and trading firms to communicate with all of their banks in a common ‘language’ that is recognized by all stakeholders. There is no doubt that these changes will accelerate processes and result in reduced costs. In addition, direct communication via MT 798 messages has the advantage of limiting errors and misunderstandings between partners. Finally, if the processing is carried out using multi-bank software, the instructing party’s consolidated visibility of their liabilities, in relation to their direct  and indirect banks, will certainly be greatly improved.

– How can corporates prepare to deal with paperless international guarantees?

– The issuer must either adapt its IT system to the new standards or use software that processes all SWIFT MT 798 messages. As a software vendor, we emphasize the benefits of a multi-bank solution that is dedicated to processing and monitoring trade finance transactions. As data analysis becomes critical in optimizing risk management, businesses need a tool that provides a consolidated view of all of their trade obligations. To this end, we have worked to ensure that our solution integrates the automatic cancellation of guarantees that have reached their expiry date, in accordance with the Uniform Rules for Demand Guarantees (URDG 758).

The process of digitizing contract documents should lead to a reduction in transaction time and processing costs due to the integration and extension of different trades. In the long run, better systems integration and the increased use of dedicated tools should encourage product standardization and process automation. For businesses, this evolution appears to be a key element in the unification of data management processes, which is essential for managing risks and liabilities.

SWIFT improves the functionality of its guarantee processing messages

The issuance guarantee application message (MT 760) will soon be followed by seven extension messages containing all the terms of the guarantee, making any additional order to issue a guarantee unnecessary. In addition, while messages were previously made up mostly of empty fields, they will now adopt a new structure. The index message will mainly be used to integrate structured information (such as amount, parties and expiry details), while the body of the message will be divided into two parts and will provide information on the terms of the liability of the instructing bank and the conditions for the possible liability of the issusing bank. It will therefore be possible to monitor the liability of a local issuing bank via SWIFT messages, in the same way as for the liability of the instructing party’s bank. This will result in greater visibility on liabilities, which are often opaque and not suitable for automated processing. Amendment messages are also enhanced to incorporate changes relating to the local bank’s liability. There are other changes that focus on multiple messages, including a field referring to a file transferred by another channel (such as FileAct) and the addition of special characters for long fields.

This new threshold will help corporate users improve their cash flow, offering alternative options for cash concentration as well as disbursement by giving users the ability to pay larger amounts, such as payments for federal taxes. While this update is supposed to address users’ main pain points, the low dollar amount may still not be enough for all of corporates’ end-users.

While the ACH system remained mostly unchanged for decades, in 2016, NACHA (National Automated Clearing House Association) deployed its faster payment plan with the launch of Same Day ACH payments. Since the release of Same Day ACH for credit and debit payments, improvements have been made to speed up these payments.

Last year, NACHA announced that 1.1 million Same Day ACH payments were made daily in September 2019, a 54% jump from the previous year. This trend is expected to continue with the application of the last two steps of the Moving Payments Faster plan, which should promote the extension and growth of the ACH network.

Rule 1: Providing faster funds availability

The first rule, rolled out in 2018, increased the speed of funds availability.

Rule 2: Increasing limit threshold

As previously mentioned, the second rule, which will go into effect March 20, 2020, will increase the Same Day ACH per-transaction dollar limit to $100,000. Currently, the per-transaction dollar limit is $25,000.

Rule 3: Expanding access to Same Day ACH with a new processing window

The third and final rule, which is expected to take effect March 19, 2021, will expand the settlement window for same-day ACH transactions. Currently, ACH payments are processed in four settlement windows each day; two out of the four settlement windows include Same Day ACH, which are required to be cleared that day. The second clearing of Same Day ACH payments is processed during the third settlement window, meaning that the latest time a Same Day ACH can be submitted will be 4:45 p.m. ET, rather than the current 2:45 p.m. ET cutoff.

This additional window will give East and West Coast banks more opportunities to settle payments within a day. However, smaller banks may have difficulty running a third batch of transactions for same-day settlement. While international ACH transactions cannot be processed in this new window, all returns and notifications of change will be eligible for processing, giving corporates more flexibility.

If you have any questions about these changes, please contact your Redbridge advisor. As always, we are here to assist with navigating this payment landscape.