What is ‘Buy now, pay later’?

BNPL is a service offered by various companies that allow consumers to online shop and divide purchases into multiple equal payment options.

Typically, the first installment is due at purchase, but most BNPL providers allow customers to pay in a weekly, bi-weekly, or monthly installment. This allows consumers to receive their purchase right away, while giving a flexible alternative to credit cards.

In the U.S. and across the globe, companies like Klarna, Sezzle, and Afterpay have dominated the BNPL landscape partnering up with large scale retailers like Walmart, Target, and Amazon to offer their services.

Key players in the BNPL field

Recently flooded with new players, only a few major players have dominated in the past year. These include: Afterpay, Affirm, Klarna, Zip (previously QuadPay), Sezzle, and now PayPal’s ‘Pay in 4’.

What are the benefits of retailers offering BNPL services?

Not only does BNPL offer consumers the benefit of financial flexibility and increasing purchasing power while making purchases online, but retailers offering this service have also seen significant benefits this past year. As Forbes notes, an estimated $99.4 billion in retail purchases will be made by consumers using BNPL programs in 2021, this is up from $24 billion made in 2020.

Many retailers currently offering BNPL payment options see similar benefits at the end of the day:

1. Lowering cart abandonment and sticker shock

Sticker shock is one of the main reasons consumers abandon their carts. The reality is, for large-ticket items in particular, many consumers simply cannot afford to spend a large sum of money in one transaction. This is where BNPL options provide some relief for consumers.

2. Increase sales and average order value

Retailers know the impact of abandoned carts have on the overall bottom line. This is why it is important to take measures to limit the number of abandoned carts in order to convert these customers.

Businesses who offer and prominently message alternative payment methods, like BNPL, to consumers see the immediate benefit: the BORN Group notes an increase in average order value of more than 30%, meaning that installment payments encourage larger basket sizes and higher-priced sales.

3. Building a larger consumer base

By providing additional, more flexible payment options, retailers – and truly any merchant – have the ability to expand their consumer base to a wider range of demographics. A BNPL option might attract customers who were previously hesitant to buy products because the price was out of their budget.

4. All while still receiving the Full upfront payment

With third-party BNPL providers, businesses don’t have to be wary of the potential risks of managing fraud cases, non-payment, or other related issues. BNPL providers will manage the automated billing, repayment, and fraud cases.

Why BNPL might not be the best solution for all retailers and consumers?

Although offering BNPL solutions can offer a variety of benefits for retailers and consumers, the merchants themselves pay the price for this consumer-friendly financing alternative. Buy Now Pay Later firms charge retailers significantly more than traditional card acceptance.

BNPL players charge consumers’ cards, or bank accounts, themselves, rather than the retailer, and pass on the cost as part of a bundled fee to retailers for different services provided.

According to Tom Richardson, of Financial Review, a typical Visa processing fee in the US is 3%, he says. A BNPL provider, like Sezzle for example, charges retailers fees around 6% plus 30 cents per transaction, with the pitch that this includes the 3% card fee. In most cases though, a 3% processing fee may be well above the actual cost of acquisition. The rate that BNPL companies charge retailers depend on different factors:

• Type of product or service
• Length of time the store has been in business
• What item is purchased

On the consumer end, BNPL can prove to become a slippery slope for a segment of users. BNPL services are often criticized for encouraging consumers to take on debt they might not be able afford.

In addition to these concerns, the BNPL payment option does come at a hefty price. One downside can be from missing scheduled payments that can result in late fees of up to 25% of the past-due amount, depending on the provider you use. Consumers may also mistake that the merchant assess the late fees, potentially damaging their reputation.

Additionally, if you don’t repay the balance amount in due time, you can be reported to the credit bureaus as delinquent.

Regulatory issues

The staggering growth of the Buy Now Pay Later industry is expected to attract the attention of financial regulators. Right now, “buy now, pay later” is not regulated in the way that credit cards are.

In the U.S., BNPL services are covered under the Dodd-Frank Act, which are enforced by the Consumer Financial Protection Bureau, but the federal “Truth in Lending Act” doesn’t apply to many BNPL provider services offered because it only covers credit products that involve at least five payments. This is why the ‘Pay in 4’ model has become so popular across most of the BNPL providers. That means there are no standards for disclosures on fees, amounts owed, credit reporting and payments.

California’s regulators are among the few U.S. watchdogs that have taken substantive actions against the services. Even though most “pay-in-four” products are exempt from those federal rules, California has classified some pay-later products as loans.

The future for BNPL

With COVID-19, there has been a shift in retail shopping and created a new normal. More and more consumers are more apt to making purchases online. According to IBIS World, industry revenue is forecasted to grow at an annualized 9.8% over five years through 2024-25, to $1.1 billion.

This industry expansion and growth has led other non-BNPL specialized fin-tech companies and providers, like PayPay, to offer similar ‘Pay in 4’ services. As a payment gateway service that most merchants already offer, PayPal clearly has, despite its late entrance into the game, a natural advantage.

In late September, Mastercard announced their first step towards offering a BNPL program in the U.S., Australia, and the UK. Their program announced is called “Mastercard Installments,” which allows Mastercard to act as a middle man by enabling banks and fintechs to utilize this installment program to offer loans directly.

Citibank, American Express, JPMorgan Chase, and Goldman Sachs (in partnership with Apple) have also announced future plans to offer ‘post-transaction’ financing options at much more affordable fees.

As we continue to see the growth of BNPL in the retail industry, we will see the expansion of major players in the merchant card and banking industry make a late but large wave in this future trend.

Hector Galvan & Gabriel Lucas

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

At the MAG mid-year conference earlier this February, a panel of key stakeholders in the payments ecosystem gathered to discuss the latest in payments technology. Here are the practical insights from panelists at Nordstrom, Elavon, MasterCard, and Redbridge.

Angie Grunte, Managing Director at Redbridge says, “Having a well-established yet flexible payment strategy is key to being able to effectively adopt new payment types and methods. However you must first determine which options will truly create the best experience for your customers and value for the organization.”

“For us, it came down to looking at what platforms were available,” says Daniel Crisologo, Director of Payments at Nordstrom. “There were a lot of criteria that we needed to look at.” These criteria included the number of new customers coming into the sales funnel, a virtual card versus API integration and the cost differential compared to the ease of use for the consumer. “At Nordstrom, we always focus on the user experience first,” says Crisologo. “Obviously, cost is a factor, but the user experience is paramount.”

Joe Myers, President, Elavon North America, a global payment processor, notes that there several critical points for merchants to consider. “The integration path, how it all comes together. The experience for consumers and how easy it is for them to adopt and use.” Ultimately, he notes, it’s about expanding the options for consumers to be able to purchase goods, either in-store or online.

Referring to his company’s involvement with acquirers and merchants, Pablo Cohan, Senior Vice President of Digital Solutions at MasterCard, says, “There are a lot of options out there, so we need to take a step back and understand the (merchant’s) pain points.” He notes that MasterCard is focused on giving lenders the ability to attract consumers to the platform and providing those consumers with purchasing power.

What to consider during implementation

There can be challenges during the implementation of any new channel and this is also true for buy now, pay later.

Nordstrom’s Crisologo, noting the biggest challenges the retailer faced during the implementation of its buy now, pay later program, says “Having an effective testing platform is important. As is understanding the success metrics and making sure you can measure these effectively.”

In addition to metrics, there is also the question of the type of implementation. Says Crisologo: “You have to decide whether you want quick and easy, which is a virtual card and API integration, or a hybrid of the two.” Whatever type of implementation a merchant chooses, it is important to try the product before using them. “If I had the opportunity to go back, I would use the product a lot more to make sure some of the gaps in servicing were resolved.” Another important aspect to consider is the amount of time for integration. How long will it take for the program to be up and running so the merchant can take advantage of the channel? In Crisologo’s experience, it doesn’t necessarily have to be that long. “They’re very good at rolling these out. It’s literally a tap and go transaction. It’s super easy.”

There is significant involvement from all key players during the implementation phase. MasterCard’s Cohan notes that his company is “very involved” with its acquirers and merchants during the implementation phase. “We’re highly engaged to make sure everyone’s ready for that first transaction to work without a problem. This is a turnkey solution with a low investment and if it drives volume and value, then great.”

Following up: data and privacy are paramount

The evaluation of the program doesn’t stop once it has been implemented, though. There may be some difficult situations that arise for merchants and consumers. This includes fallout, for example. Myers notes that this can be a problem: “If there’s a consumer in the store looking to get approval and expecting to get approved and they don’t, that causes frustration.”

While there may be some difficulties, for merchants like Nordstrom, the benefits clearly outweigh any negative factors. Notes Myers, “Giving that choice across payment methods and driving activity and, ultimately, sales and revenue” are some of the key benefits. Nordstrom’s Crisologo agrees: “We want our customers to be able to choose the platform that they use.” And the company has seen significant growth in customer acquisition and incremental sales as a result. Once the channel has been implemented, it needs to be tracked and measured. And that requires a basic infrastructure to gauge the success of the program. “Data is 100% a key part of that,” says Crisologo. “You want to be able quickly learn and evolve.”

As with everything, privacy is also a major concern. The data that is generated needs “to be used only for the purpose for which it is intended,” as Cohan says. “Anything else without consumer consent is not okay.” Merchants need to spend a lot of time talking with their legal and security teams about this topic. Merchants also need to think about the breakeven point for accepting buy now, pay later transactions to make sure it’s a sustainable channel in the long term. “Where incrementality is helping to offset the costs, when does the funnel dry out?” asks Crisologo.

An evolving channel – with lots of promise

What is the future of buy now, pay later? How will it evolve? While there are still questions about how buy now, pay later will change over time, the channel is off to a good start, with acceptance among both consumers and merchants increasing and transaction volumes rising.

Redbridge’s Grunte remarks that “As the buy now, pay later space continues to evolve, it is important to be selective in choosing the right partners and being prepared to deal with dynamic changes as the market continues to develop and face regulatory scrutiny.”

Before and after GPI

Cross-border payments are renowned for their pain points, hidden costs and opacity. Historically, neither the sender nor the beneficiary had any details on the location or date of arrival for payments. As a response to these issues, SWIFT introduced a new and improved service, SWIFT Global Payments Innovation (GPI) in 2016 and has continued to make improvements to this service over the years. SWIFT gpi is based on a multilateral Service Level Agreement (SLA) across banks to implement common processing standards that improve speed, transparency, and tracking mechanisms of international payments.

Since its launch, adoption has been slow but steady. Today, 78% of all cross border MT103 messages are now being sent via gpi, this equates to nearly $438 billion daily. Including both financial institutions and corporates, there are over 1,800 live gpi clients. According to Kalyani Bhatia, SWIFT’s Global Head of Payments, banks and corporates are seeing the benefits of using gpi. She explains that banks are seeing less inquiries and investigations since clients have access to real-time information, saving client’s time and money. Additionally, cross-border payments through gpi are considerably faster than before. Around 44% of payments are credited within five minutes, 70% under 30 minutes, and nearly 100% under 24 hours.

Source | iBanFirst

The GPI initiative

Overall, SWIFT has three main goals with GPI:

1. Empowering customers and smaller banks
2. Modernizing and digitizing global payments to meet new standards
3. Accelerating embedded finance

In order to achieve these goals, banks and other financial institutions have invested a significant amount of time and resources on improving and adopting SWIFT gpi. A complete list of banks that are members of the SWIFT gpi community are included here. According to a major American bank, SWIFT gpi can be leveraged in different solutions. The bank does this by offering multiple gpi solutions to its customers. First, clients can use online banking module to visually track and trace outgoing payments in real-time and see any charges that have been deducted along the way. In addition the bank offers an online portal which is publicly accessible. Clients can leverage this tool by providing a URL to their payees who can then keep track of the payments made to them in real time. The bank also provides solutions enabling clients to integrate gpi data with their TMS or ERP systems through APIs. Using these APIs clients can integrate outgoing and incoming transactions enabling optimized use of intraday liquidity and forecasts.

Advantages

According to a global firm in the commodities industry, the main advantage of SWIFT gpi is traceability. Users can now track and trace international payments through a unique tracking number called a UETR (unique end-to-end transaction reference). In North America, clients can choose their own UETR. This new functionality is very important because before gpi, each bank had the ability to change the tracking number throughout the process, making it very difficult for clients to track payments. The tracking number enables users to check the status of payments as well as the fees paid each step of the way. The latter is a key advantage for this firm as they are now able to tell their beneficiaries the status of payment, which contributes to building stronger partnerships with suppliers and avoid long and costly investigations. Additionally, transactions that go through gpi are significantly faster, which enables liquidity efficiencies. Transactions that used to take days now take a matter of minutes for most companies.

Drawbacks

However, corporates still encounter issues with gpi. SWIFT gpi’s capabilities can vary from bank to bank. While larger banks offer gpi data with a considerably high level of detail, this is not always the case for medium-to-smaller banks. For instance, while some banks allow their clients to access SWIFT gpi’s tracking system directly through their internet portals or APIs, others require corporates to pass through the bank’s customer service. Overall, corporates need to keep pushing their financial partners to adopt the latest services available to fully benefit from SWIFT gpi’s advantages.

Future of GPI & alternatives to SWIFT GPI

The rise of new technologies such as blockchain and crypto currencies is now challenging SWIFT’s dominance on the cross-border payment industry. Several fintechs are developing innovative solutions that intend to improve the services offered by the rigid traditional players in the financial industry. One that stands out on the cross-payment market is Ripple. Branded as the “internet of value”, Ripple is a global decentralized network that connects payment providers around the globe. Ripple promises to solve most of the issues related to cross-border payments such as payment speed, fees, and transparency. This is achieved by the use of a decentralized consensus model in which a set of computers determine which transactions sent by the network are valid. In addition, Ripple’s cryptocurrency, XPR, uses the power of the blockchain to confirm transactions in seconds with a very small cost. Below is a step-by-step guide to transactions on the Ripple network.

Their three main products, xCurrent, xRapid, and xVia enable members of the Ripple network to process real-time payments, lower the costs of processing and settlement, and minimize liquidity costs. Over one hundred banks and other financial institutions, such as Santander Bank, American Express, and MoneyGram, have joined the Ripple Network. The table below summarizes and compares the Ripple Network and SWIFT gpi.

Source | Ripple

Updates and Improvements

SWIFT and its members are constantly listening to the marketplace in order to make updates and improvements to current and new gpi features. Two other gpi products that SWIFT offers are Pre-validation and SWIFT Go. The pre-validation feature enables the sender to validate the beneficiary’s account prior to sending the payment. This enables the payment process to be faster and smoother allowing financial institutions to catch problem areas at the beginning, 75 banks have already signed up for this service. SWIFT Go specifically targets consumer low value retail payments. The normal SWIFT gpi SLA is 24 hours, for SWIFT Go they have reduced the SLA to four hours. Ten customers are live on this service and 100 more are in the implementation process.

SWIFT is updating the gpi platform in November 2022 with features to bring ISO20022 to all of its members. By 2025 all financial institutions have to switch from MT messages to ISO. SWIFT understands that all banks will transition at different times and the new platform will allow its members to switch at their own pace. The ISO format provides more information than MT messages and SWIFT wants to ensure corporates do not lose any valuable information during this transition to ISO. To do so, the new SWIFT platform will keep all of the information along the payment process on its own platform to ensure the integrity and security of data.

SWIFT is still the principal network used for cross-border payments, with over $100 trillion USD being transferred through the SWIFT gpi network. A considerable number of financial institutions and corporates across the globe have adopted the SWIFT network and several of their underlying products such as SWIFT gpi. However, an increasing number of new solutions for B2B cross-border payments are being developed. When making cross-border transactions, corporates should seek to understand and evaluate their options, taking into account the pros and cons of each solution.

Ashley Krause & Pedro Hernandez

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

Brick and mortar retail proves to be resilient

With the in-store shopping experience evolving and more blossoming years ahead, payment terminals and their capabilities are also evolving; however, payment terminal selection and management tend to be overlooked by many treasurers – especially in the USA, where acquirers remain the primary distributors. Yet, treasurers and other key stakeholders need to consider terminals and their broader functionalities as part of their payment strategy. This is especially important as terminal technology and its touch on the customer continue to evolve.

Trends to consider when choosing a payment terminal

New Consumer Behaviors

The pandemic has caused a great disruption in the way people do things. It changed the way people work with work-from-home, most countries and cities had lockdowns. It is not surprising that it also shifted consumer behaviors. One form of behavior change is how consumers make payment. Contactless payments defined as the ability to pay by tapping a physical card, wearable, or smartphone enabled by RFID or NFC technologies over a card reader, it was already on the verge of widespread global adoption. However, usage accelerated quickly due to the pandemic since safety was a key driver of payment adoption in 2020. However, convenience and simplicity will continue to drive further consumer acceptance in 2021.
Around the world, consumers are choosing to shop with businesses that offer contactless at the point of sale. “Contactless payments have become a driving differentiator: If all other factors were equal (price, selection and location), nearly two-thirds (63%) of consumers would switch to a new business that installed contactless payment options,” according to The Visa Back to Business Study.

In the US, American Express found that 70% of merchants reported customers are requesting the option of contactless tap-and-go or mobile app payments. Cashless payments adoption in Asia Pacific has also been on the rise as it is growing 2.5x faster in the region.

According to a 2020 survey by Visa Inc., the adoption rate of cashless in Singapore accounted for 98%, followed by Malaysia (96%), Indonesia (93%), Vietnam (89%), Philippines (89%), and Thailand (87%).

The use of debit and credit cards in point-of-sale payments is also a factor that is driving the need for POS terminals. Worldpay, in 2020, digital or mobile wallets accounted for the largest share of point-of-sale payment methods in the Asia-Pacific region, with over 40% of payments. This was followed by card payments (debit and credit), which accounted for 33.6% of the payments, and cash (19.2%).

Other trends that have been on the uptick since the start of the pandemic that will continue to grow are curbside pickup, virtual consults, social commerce (social media marketplace). These trends will drive businesses to change or update their POS payment terminal rapidly. The need for the terminals to be able to accept contactless payments whether it is card or mobile is crucial. Terminals should also be more mobile, accessible and the software needs to be seamless and secure.

A focus on the Android ecosystem

Allowing the Android ecosystem on to the payment terminal unlocks all sorts of new possibilities. Acquirers and value-added providers can develop their own applications, bringing new ideas to banks and acquirers. Front-office apps could be in the form of store applications, loyalty, click & collect and ticketing. Back-office apps can deliver reporting, staff management and much more. This will help banks and acquirers to improve their customer retention. With devices being able to do more, depending on the context, it might reduce the need for multiple devices in store. Another important point is the ability to accept alternative payment methods, leveraging extended device capabilities, such as cameras, scanning and NFC. Android also unlocks the ability to port new applications, including QR codes and digital wallets – on top of traditional payment methods.

Merchants are receiving more and more mobile terminals with SIM cards. A smartPOS based on Android offers more than the legacy portable terminals and mPos dongles. The shortage of semiconductor and other components might slow the manufacturing of these terminals since they are used in almost all electronic devices.

A focus on new pos devices

Many new devices have launched recently from updates to the traditional fixed kiosks to more innovative mobile solutions. Samsung Electronics released the Samsung Kiosk, an all-in-one solution that offers contactless ordering and payment capabilities in June 2021. Providing customers with easy install options and a protective coating, the Kiosk is now available in 12 countries worldwide, including the United States, Canada, the United Kingdom, Ireland, France, Sweden, the Netherlands, Belgium, Spain, Austria, Australia, and Singapore.

Samsung Kiosks (Source | Samsung)

PAX Technology announced the European launch of the M30 & M50 Android PayPhones in September 2021. The M-series PayPhones are the first ever smartphones with inbuilt point of sale technology. It combines the benefits of a secure EMV & PCI 6 certified payment terminal within an Android smartphone ecosystem. These new devices bring an interesting proposition for acquiring banks and payment service providers looking to better partnerships with telecoms or to provide an additional new option to merchants. These devices enable companies and entrepreneurs to operate an E-Commerce business on the run. All major global payment methods can be accepted.

PAX MSO (Source | PAX Technology)

Features to consider when choosing a payment terminal

Different models of terminals for different use cases

Sales depend on the means of payment, what a merchant can accept in store heavily depends on the hardware they have in store. Merchants can enhance customer experience (hence boosting their sales) by selecting a terminal relevant to their activity and client profile. There are a few key features to keep in mind when selecting the right payment terminal including the trends listed.

Some industries require their vendors or employees to move around the store/station/restaurant/etc. and to be able to accept payment at any moment anywhere on the premises. In this case, a mobile terminal or mPOS (i.e. a credit card reader attached to a smartphone or tablet) would be relevant.

Connectivity

The main connections available are Wi-Fi, Bluetooth, Telephone line, Ethernet, and GPRS/4G and there is no one-size-fits-all solution. However, the safest option would be to choose combine connections to prevent any interruptions at the checkout. For example, a fixed terminal connected to Ethernet with a SIM card to have a 4G Back-up.

Standalone vs integrated

Standalone terminals do not connect to the electronic cash register (ECR), requiring the cashier to manually key payment amounts into the terminal. On the other hand, integrated terminals automate this process offering a faster checkout while reducing the risk of human error. While advantages of integrated solution are obvious, it usually costs a lot more and installing it might take longer.
When it comes to integration, you can choose to fully or semi-integrate your terminals. In the first option, card data is going back and forth from your terminal to your payment processor through your ECR. In this case, the merchant’s system must comply with higher PCI DSS requirements (because cardholder data are transiting through the merchant’s system). The second option is usually the preferred method, where the data goes directly to the processor for payment authorization (without passing through the merchant’s ECR), and allowing merchants to reduce their PCI DSS scope.

Software

Proprietary operating systems were the conventional choice for terminals. However, the trend is to shift to Android-powered terminals that allow merchants to run all kind of Android applications and to benefit from new functionalities.

Beside traditional VISA and MasterCard, Merchant can install many more payment applications such as local schemes, gift cards, DCC, contactless, etc.

Security

Security should be given great consideration when choosing a terminal. As devices become more interconnected, security threats could also come from different sources. Day to day business can be disrupted if a business was hacked.

2021 saw a large number of high-profile hacks like Colonial Pipeline, SolarWinds, Twitch, CNA and many more. While these headline hacks might not have been through POS terminals, POS devices remain a desirable target to cybercriminals.

Environmental impact

As ESG adoption and concern grows, more consideration is given to producing and disposing of these terminals and devices. Device producers could have sustainability as part of their goals when producing new terminals. The result might be a more eco-friendly terminal produced with recycled materials or super low power consumption. On the other side, disposal or recycling old terminals might prove to be more of a challenge, most of these devices are considered e-waste. Traditional waste management companies might not be equipped or able to dispose or recycle these items.

Samuel Tong & Pauline Lion

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

What is the first thing that usually surprises a European treasurer starting a US operation?

Sarah Gundle: There are three fundamental differences between cash management in the US and in Europe. The first is certainly the bank fees statement, which is easily accessible but more difficult to decipher across the Atlantic. The second is the concept of the earning credit rate or ECR that must be mastered to reduce the cash management costs. Finally, the check collection chain, a means of payment that is still very present, involves different players than in Europe, which can be puzzling.

What is so different with the US bank fee statements?

– In the US, cash management banks tend to break their billing statements into a lot more service fees than in Europe. If it is common to see around 50 items charged in Europe, this number easily reaches 250 in the US. So, while it’s generally easier to get bank billing statements – it’s even mandatory for a US bank to send a recap for all the services charged, it is difficult to wade through all the information.

Didn’t the Association for Financial Professionals work intensively twenty years ago to standardize bank fee statements?

– They did and they continue to work on that standardization. There are new revisions every five years to the AFP Service Codes Set (to find out more on the last code set update, please read our article), but its use is not mandatory.

Even when larger banks and regional banks tend to structure their billing statements according to the AFP service code set, they still break things down in different ways. One might have a service that’s only one line item, when another might split that out into several line items. Regular mapping is necessary to understand which service each item relates to since service names can change, as well. Depending on the number of accounts, it can take an entire week every month to a treasury analyst to harmonize the statements before being able to analyze them!

How do European banks that have local subsidiaries in the US behave?

– European banks operating in the US tend to structure their bank billing statements in a simpler way. This is partly because they are just not as set up to handle the complexities and with all of the different services that US companies are looking for.

Do you feel that complexity of banking statements in the US is justified?

– It could be simpler. The complexity of bank billing statements in the US has gotten to a point where it often serves more to confuse and make it more difficult for clients to challenge them.

Why are checks still play an important role in the US?

– Americans love their checks and there’s are a couple major reasons that this mean of payment will not go away any time soon. The country has major sections that are rural, with no necessarily good internet, nor good access to banks. In the meantime, the US Postal Service is required to deliver and pick up mail from every address every day provides an easy and convenient way for people to pay at home. Also, paying online implies a steep learning curve for older people used to checks.

Can you briefly explain how the checks are processed?

– It depends on the number of checks you get each month. A company getting only a hundred checks or so a month can process them easily either with a bank deposit or a remote scanner. For companies accepting a large volume of checks every month, the easiest way to collect them is through the lockboxes. A lockbox is kind of an outsourced AR resource. Your bank or your lockbox provider will give you a special address – a post office box – with a specific reference number which will be used by your clients to mail in their checks along with the coupons and the remittance.

The lockbox facility has people to open your mail, scan and cash in the checks. If there are any errors, they’ll follow a decision process designed with you. At the end of the day, the company receives a batch with all the accounts that have collected money, any errors, any special considerations… That way, the treasury team isn’t spending too much time on checks and can run a leaner team. Lockboxes are a huge value for insurance companies, utility companies, any company that’s going to have large recurring volumes and also has that requirement to accept any form of payment.

Do all lockboxes look the same?

– No, there are definitely superstar providers. Some lockbox providers can’t handle all of the volume and tend to specialize on B2B businesses, leaving retail and wholetail clients to larger providers. Some banks also have gotten out of the game, but since this service is required by their clients, they’re white labeling another company’s product.

Why is the earnings credit rate a key concept when dealing with cash management in the US?

-The earning credit rate started as another way to attract customers after Regulation Q prohibited banks from offering interest in an effort to curb speculation. It’s almost like an interest rate because you’re paid a certain amount to keep your balance at the bank. But instead of giving you that money, it’s like an allowance that you can use on your bank fees.

Is there a formula which sets the earning credit rate and does it vary with the Fed Fund rate?

– The ECR results from a negotiation with the bank and will be related to where the Fed Funds rate is at the time of negotiation. Most banks offer flat fees, which means that regardless of what the fed funds rate is, the company will be earning the same amount. I’m not a big fan of that because when the Fed Fund rate goes up, the bank is not compelled to increase the ECR. Generally, a couple months can go by before the banks increase the ECR, but there’s no requirement to do so.

It is important to set up some rules regarding the ECR when crafting a contract with its bank. For instance, we advise clients to institute an ECR floor and say it will never drop below a certain point and to calculate your net rate whenever possible. When the company is also paying insurance recovery fees, its net rate could be negative, which means it pays the bank to hold the balance. That’s why we always try to ask about that to protect our clients.

How can cash management fees and services in the US be improved?

– A full bank fee statement monitoring, if done manually, might not be possible every month. We would love to see our clients doing this, see them with software that can help make it happen. But if the treasury department does it manually, we advise to stick to the 80/20 rule to review the bulk of the fees, and then to perform a quarterly review of all fees just to check since the company typically only has 90 days to report errors to the bank.

On top of statement monitoring, treasurers should have an annual review with each banker. The discussion should encompass the relationship as a whole, not just cash management, but also any lines of credit and anything they have coming that may benefit to the treasury department. They’re going to come prepared to that review with all kinds of recommendations. The treasurer must also come prepared to the discussion, with a detail review of contracts and statements, and a list of questions to make sure that the bank share the same vision for your company moving forward.

Looking at the banking and banking services industries, digital capabilities have now become a vital need for both individual consumers and for corporates. Having to now handle day-to-day business activities virtually, the need for banking’s digital transformation has become a necessity.

The digital transformation

With the recent increase of many companies adopting the latest digital trends, there has been a boom in the ecommerce space. Ecommerce has been on the rise over the last decade, but the pandemic has contributed even more to the success of online shopping with physical shops being forced to close indefinitely. Corporates without an online/ecommerce presence have rushed to join those who already invested in the infrastructure.

What exactly is digital banking?

Digital banking refers to the use of both online and/or mobile tools to access various financial services and activities that were historically only available through physical bank branches. Driven largely by individual consumers (mobile banking apps, personalized financial planning, contactless payments, voice banking or on-demand loans), banks have expanded their digital offering to corporates both large and small(cash flow forecast, working capital, artificial intelligence – AI). Even though the needs for consumers and corporations are not exactly the same, they both have one thing in common that is now the new normal for our society: the need for real time digital banking.

Contributing even more to the ongoing ecommerce boom, the acceptance of digital wallets by corporates and the use of digital wallets by consumers grew rapidly in 2020 where they were used in “44.5% of the e-commerce transaction volume, up 6.5% from 2019” according to FIS from their annual global payment report. Even though there has been a rise in the use of digital wallets, it does not mean every region is on the same level. Some regions clearly had a higher usage of digital wallets when compared to others. However, all regions have seen an overall increase in the usage of digital payments in general. As more and more consumers switch to different forms of digital banking, one payment method suffers greatly. In today’s digital age, consumers and corporates have accelerated their transition away from holding, accepting, and paying in physical cash.

According to FIS’ Global Payments report, cash sales at the POS fell from 32.1% in 2019 to 20.5% in 2020 and have no sign of gaining back any market share lost to the other digital payment methods.

The treasury teams within most global corporations are no strangers to the digital transformation within their business function. However, the outside pressure of Covid-19 has expedited their need for innovation. (See graph below)

How has the pandemic impacted the digital transformation of your treasury

(Question asked to corporations with more than $2bn in revenues)

In this current environment, treasurers and their teams are focused on improving current processes around developing new key API’s, cash flow forecasting, and their liquidity and cash management. Identifying new data points and improving the teams overall data capabilities with more accurate forecasting, even with uncertainty ahead, is critical for the company’s survival. According to JPMorgan “40% of companies are exploring initiatives to enhance their data capabilities in treasury” A further one-third have already invested significantly in these” which is a clear indicator of what direction treasury is moving towards.

Where do banks stand in the race for digital?

Banks invest to improve and digitalize both their internal processes and their customer offers. Even so, there are still huge differences among them, as all banks did not start this race at the same point and do not move at the same speed.

Indeed, some of the oldest banks (especially the international ones) have a heavy legacy that might slow their evolution down and make it more difficult to innovate. Their 25-year-old banking platforms are not compatible with today’s varying needs. Sometimes, they even have to deal with layers of different platforms depending on the banks they have as acquirers over the past years.

What is a neobank?

A neobank is a bank fully digital, operating entirely online without a single physical branch.

Banks are now facing the fierce competition of neobanks and fintechs, which are more flexible, agile, and innovative. Neobanks such as, Nubank, founded in 2013, in Sao Paulo, Brazil offer a more streamlined approach to banking. Claiming 3 million clients in 2018 and now up to 48 million clients as of September 2021, this neobank has been seeing tremendous success. They are planning to raise up to 3,000 million dollars (2,590 million euros) and reach a valuation of 50,000 million dollars after its introduction into Wall Street. Nubank will likely soon be more valuable than the main Brazilian bank iItau Unibanc. Yet, Nubank is not the only one seeing success, they are followed by Chime in the US, N26 in Germany, and many others.

It is no surprise as to why neobanks are so successful. These fintechs focus on client needs and are agile enough to adjust their solutions based on what people are looking for. Nubank has specifically targeted people that traditional banks have neglected for years, offering bank accounts and credit cards for free to the unbanked. This offer along with the sweet promise of a simplified service accessible on a smartphone has captured many new customers.

In the past, banks used to predominantly focus on being compliant with the many heavy regulations placed upon them, but today they have changed their strategy. In order to keep up with this fourth industrial revolution, they have become more client oriented and are embracing relevant digital trends (while continuing to comply with regulations; if we had to specify).

To keep up with the industry, some banks have chosen to collaborate with fintechs, while others have decided to internalize their developments and innovation strategy.
Generally speaking, small or local banks tend to build partnerships with fintech. For example, ING has recently concluded a partnership with the fintech Minna Technologies. The objective is to launch a new digital banking service: an online subscription to new services or products. ING’s customers will be able to directly manage their subscription in the banks digital channel without being redirected to another environment. Customers will have a clear view on all the services or products they have subscribed to and they will be able to cancel or upgrade them.

Other banks combine self-developed innovations and partnerships with fintechs such as the US bank JP Morgan: “We have an annual technology budget of $12 billion and in the last 18 months have added over a hundred new team members focused on treasury innovation, exposed dozens of treasury services APIs, engaged several hundred clients on corporate treasury innovation & co-creation, and engaged over a hundred FinTechs in this space.”

Navigating the digital banking landscape

In recent years, we have seen a race for innovation in which companies seek to be the first in launching a new product or service that will address a customer’s (new or growing) needs. For example, since the Covid crisis, the need to improve cash forecasting processes and the desire for more accuracy are more important than ever (as we can see in the graphics below).

With innovation in mind, banks will try to address the needs of their clients, whether they are large corporates or everyday consumers. Their goal will focus on becoming the first player in that market and if they are not able to achieve this, then they will try to differentiate their solutions above the others. Nevertheless, all of these services are relatively new and we cannot truly determine their effectiveness or efficiency for the future.

The main risk corporates will face, and are currently facing, is the uncertainty of investing in a service and its infrastructure that may not fully answer their needs. Now more than ever, consumers face increased risk, such as fraud, due to the rise of digital banking. Consumers are not alone in their concerns, as fraud prevention and management is always a large topic for corporates. That is why it is very important to always spend time in assessing your core needs and doing an RFP to assess the quality of the offer. Regardless of if you are just a consumer or a large corporate, due diligence should always be done when it comes to decisions around banking digitally.

Read our new special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

The importance of cashflow forecasting

According to a survey by Redbridge conducted in 2019, 94% of companies perform some form of cashflow forecasting. Most of the survey respondents noted that there are two key success factors to ensure high-quality and accurate cashflow forecasts:

Data quality

The importance of data quality is clear; without good data, a company will not be able to produce accurate cashflow forecasts that meet their needs.

Communication among contributors

The other key success factor may be less obvious, but communication among the various stakeholders in the company is just as critical for predicting future cashflows accurately. This work can become difficult and less productive if there are competing visions among departments, impacting the quality of the forecasts. It is therefore essential to get buy-in from all key parties in the process, or to automatically interface the cash forecasting production tool with the group’s various systems (e.g., CRM, EPR, credit management tool).

Despite the importance of cashflow forecasting for a company’s investment and financing decisions, a majority of companies still rely on a single technology – Excel spreadsheets – for this important task. However, spreadsheets have severe technological limitations and require a lot of manual effort. They are also susceptible to errors. The Covid-19 pandemic, and now the current political both highlight the need for companies to be able to produce different forecast simulations quickly. For this reason, treasury departments need to consider automating the cashflow forecasting process using more sophisticated tools and systems. However, automation remains a real challenge for many treasury departments, as this requires the selection of the systems and .

Overview of the main cashflow forecasting tools

In general, companies with an advanced solution use either a treasury management system (TMS) or a specialized cashflow tool to prepare their forecasts. Each has its own distinct advantages and disadvantages. For example, a TMS enables data centralization and saves times while improving the company’s cash culture. However, such systems might have limited reporting and analysis capabilities. They also require dedicated training to ensure optimal use.

A specialized cashflow tool provides advanced consolidation methods as well as advanced reporting. This can allow for a more extensive analysis and greater detail. It can also improve the company’s cash culture and optimizes internal processes. However, these tools also require an interface with the TMS or ERP and .

With the capability of more in-depth analyses, specialized tools parallel scenario management. For this reason, some companies, especially large conglomerates with a lot of subsidiaries, may choose this .

The impact of AI on forecasting

Artificial intelligence (AI) is becoming increasingly important in a number of fields, and cashflow forecasting is no exception. Both TMS and specialized cashflow forecasting tools are increasingly integrating AI into solutions. However, it is important to emphasize that AI is not intended to replace humans. Rather, it complements the work they do. Combining the power of AI with the critical vision that people provide results in cashflow forecasting modeling .

Artificial intelligence requires a lot of historical data to work well, both internal and exogenous. The data also needs to be very good quality, which involves cleaning it before it can be used and can be a time-consuming process. In addition, AI is not always transparent, which is another reason that can lead to hesitation when it comes to adopting AI. However, there have been great strides in terms of the tools that integrate AI.

Cashflow tools that use AI

On the TMS side, there are already several systems available on the market that use AI to forecast cashflows. These include Diapason, Kyriba, and Integrity, which add AI capabilities and algorithms to trending and modeling.

Another company offering AI-assisted tools is Coupa, which acquired Llamasoft and now offers machine learning solutions. These are based on an analysis of historical transactions, which are imported into the Coupa TMS and have been developed both for fraud management and to improve .

There are many more examples of TMS solutions using AI. However, a number of specialized forecasting tools involve artificial intelligence as well. These include:

• Agicap, which has developed a machine learning system for SMEs that enables daily cashflow forecasts based on actual cashflows
• Verteego, which applies AI to sales forecasts based on historical ERP data and then adds external data
• CashForce also provides an AI solution that involves machine learning
• TipCo is a European company that specializes in treasury reporting. They also offer a predictive analytics solution for automating cashflow

How to choose the right cashflow forecasting system & tools

Currently, a large number of companies rely on simple spreadsheets to determine their future cashflows. While Excel is cheap and easy to use with minimal user training, often there is only one person at the company who knows the file macros. This can lead to risks if that person isn’t there (because they are on vacation, or they’ve left the company).

If senior management wants weekly or bimonthly updates, automating the process to save time, reduce manual effort, and improve accuracy often results in the best cost-benefit ratio. Next, based on your particular environment, the quality of the data available within the group, and your reporting needs, you need to assess which methodology and tools provide you with the best return on investment.

Overall, finding the right solution or method depends primarily on your company’s size and . Each option should be assessed thoroughly from a cost benefit perspective to allow you to choose the best one. If nothing on its own seems like a good fit, using a blend of different solutions or methodologies to create something specifically tailored to your company would be a necessity, as author Iris Rousselière points out in another article about cashflow forecasting. While best market practices are an ideal many strive for, you might need to complete a data management project first before you are able to fully unlock the true power of the cash forecast .

What is the benefit of outsourcing the strategic oversight of a payment card acceptance program to Redbridge?

Chelsey Kukuk: We have found that most organizations do not have the time, resources, tools or technology to effectively stay on top of managing their payment acceptance strategy because this is an ever-evolving space. There are constantly new rules from brands and the regulatory environment continues to evolve.

Outsourcing the entire payment strategy to a third-party firm is common in certain industries, such as in the college and university space, waste management, utilities, etc. Handing it over to a third party can be a great solution for organizations who do not want to deal with payments at all, but it’s not what we offer at Redbridge.

We believe that businesses should keep ownership of their card payments, particularly to be able to choose the innovations that best suit their customers’ needs, but also to prevent any costs drift.

To help each company manage its payment card acceptance program, Redbridge has created “PACE”, which stands for Payment Advisory and Cost Management Experts. PACE is a dedicated team of payment industry experts that helps organizations create efficiencies within their own payment acceptance environment, specifically focusing on helping to improve the user experience while minimizing the total cost of accepting these payments.

Many of us previously worked at Vizant, a boutique consulting firm focused on the payment space, acquired by Redbridge about three years ago, which has allowed us to grow and scale our solution to serve a larger audience.

What type of company is your service aimed at?

CK: We have roughly 60 clients in our portfolio today, representing about 3.5-4 billion in payments volume annually.

Since our solution is customized, it creates value for any organization of any size and in any industry. We can help robust teams focus on cutting-edge solutions and we can also work as an extension of teams who have minimal time and resources, effectively providing them extra arms and legs to tackle their payment acceptance strategy.

Our team has a proven track record of adding value in any of those scenarios. We have a good concentration of clients in the insurance space and in the B2B or business services space. Healthcare is another large and growing space for us, and we’ve also been very successful in the higher education, non-profit, e-commerce, and even retail spaces.

What are some examples of cutting-edge payment acceptance management solutions that companies need to consider today?

CK: There are no “one size fits all” solutions to improve your payment card acceptance environment.

For some organizations, the improvement will come from getting a handle on the data, being able to normalize it, to draw insights and have conversations that may not have taken place before with acquirers, card brands, gateways. Here, getting to know the incentives to introduce or grow card brand solutions, marketing approaches, payment types or channels is at stake.

For other clients, the improvement will come from solutions like pinless debit or debit routing, when the organization simply hasn’t yet had the opportunity to introduce them because the ROI wasn’t worth it so far.

In the retail space, the trendy topic is “Buy Now, Pay Later” and how it can not only improve the user experience, but also be implemented to attract new customers and increase repetition with customers as well as grow the average basket size.

Another big challenge in the B2B space is getting very granular on interchange optimization and third-party solutions to help organizations better optimize the interchange moving forward. These are just a couple of examples of where Redbridge can help add value.

How does Redbridge work with its clients?

CK: We are sensitive to the fact that our clients don’t have a lot of time, so we’ve designed the process with that in mind.

Part of the help we provide is assisting them in getting a handle on their current state and then being able to draw some conclusions on what the available solutions are to create additional efficiencies and reduce costs. What do those cost saving levels look like?

We provide support from the very beginning to help them collect the data and information that we need to be successful with this process. We help them with collecting that data and information. We then take that data and information in-house and do a very intensive audit or deep dive into their existing environment to identify areas of opportunity, specifically where we can introduce and create efficiencies as well as where we can derive cost savings. We then present this information to our client along with actionable recommendations and solutions on how to achieve these results.

Timing is the essence. We move with a sense of urgency knowing that acceptance costs are continuing to increase. Depending on the client’s involvement and the accessibility of the data, we can deliver findings to the client about 6-8 weeks after we receive the data in-house.

After we deliver our findings, we work in a very hands-on fashion. Each month, our team takes the lead to help each client implement our recommendations. They’re receiving reporting and insights, as well as industry updates, and we’re working together to validate the levels of cost savings achieved.

Could you describe the advising and technology that are offered as part of this service?

CK: They go hand-in-hand. We have tools and technology that help us in getting timely information to our clients and give them great insight into their acceptance environment. Then our dedicated team of experts, who have been working in the payment card industry for well over ten years on average, add an additional level on top of that. They’re here to help with the real-world applications and navigating some of the challenges that organizations face when they’re looking to execute their optimization strategies.

What is the return on investment for clients?

CK: The ROI is typically quite significant and we help clients to assess that. The investment upfront from their perspective is very minimal. It’s really an involvement from a data collection perspective, and we’ve even automated and taken over that to a great extent. So, there’s very small investments as far as time and resources.

Once we get into the implementation itself, the solution varies for each client, but we work with them to identify ROI for each solution and then track performance over time. But what our clients see in general is that there is a significant reduction in their cost of acceptance, and over time we are able to maintain these reductions.

We talk in terms of effective rate, which is a unit of measurement in the industry that looks at fees divided by volume. You can track effective rates for a multitude of things. When you look at overall effective cost in terms of the effective rate, we are able to demonstrate to our clients, significant decreases in the effective rate and then sustained effective rates over time that outperform the market.

Reduce costs, boost revenue, and minimize fraud

LEARN MORE ABOUT PACE

A few months ago, I was writing about “From Bust to Boom” and trading companies needing to pay increased attention to their liquidity in a rising commodity prices environment.

Four months later, and we have now witnessed unprecedented almost black swan like events. Past the luxury of accordion features, commodity trading houses had to arrange emergency extra liquidity (underwritten in a matter of days) not to entertain additional business, but to simply keep the existing business’ hedge positions in place. Not a “nice to have” line increase on profits, but a “must have” to ensure the appropriate risk management, vital for such companies’ business and even survival.

Banks are stepping up

With banks stepping up and deploying liquidity to metal traders affected by the unseen circumstances in the LME, they have earned substantial additional fees while lending and reinforcing their commitment to their favorite clients.

Overall, the current conflict in Ukraine has triggered strict reviews and monitoring of banks’ exposure to Russia and Ukraine. While the sanctions, so far, have had a moderate impact on the commodity flows, the bank market stance is more than cautious. Both traders’ and banks’ side compliance and credit teams have come under stress to make sure the situation is well mastered.

The trouble is far from over

At a time of already increased commodity prices in a no longer transitory, but now inflationary environment, such shock increased volatility across the board and drove the market to a mere head-line reaction state. The implications have been broad, in the very short run, and the trouble is far from over, but both commodity houses and their banks seem to have weathered the initial storm. Even the hedging model came under stress as well with brokers demanding higher initial margins for their contracts.

Some of the older questions re-surfaced: can commodity traders keep relying mainly on bank (mainly uncommitted) lending? Can the same volume of physical business be maintained at these price levels with increased volatility and changing broker and exchange practices? Will the profitability of trading businesses remain attractive with the increased cost of borrowing? Is there certain trading business that deserve more capital? Will the banks’ “flight to quality”, better said flight to large balance sheets, be permanent with smaller players having an even harder time obtaining the needed financing?

What’s next?

While “this too shall pass” is applicable to a substantial part of the current developments, other aspects are here to stay. The free money party is coming to an end with the bill being paid by producers, traders, and end users. However, if properly managing their credit book, and not being affected too much by conflict related exposures and loss of business in Russia, banks’ financing commodity trading firms should very likely be headed for a strong year, especially with credit lines at historic high utilization levels. Something to keep in mind when deals come up for renewal!

What is a QR code?

QR codes store more than 4,000 characters or 7,000 numbers and are ten times faster to read than a traditional barcode. Most QR codes can be read even if they are partially damaged or incomplete because the data can be split across multiple segments that reconstruct the original content when scanned. Their square shape gives them the ability to be scanned and read either vertically or horizontally.

When did QR codes become mainstream?

Invented in the 1990s by a Japanese auto parts manufacturer to simplify inventory tasks, QR codes hold large amounts of data avoiding the need to use multiple bar codes. The codes evolved quickly to include uses geared toward business and marketing. Since the information held in QR codes can contain links to websites and store large volumes of data, marketers quickly recognized potential applications for using this technology.

Why did they fade in popularity?

As simple as it seems from the user perspective, the technology was a bit ahead of its time for mainstream adoption. Even in the early 2000s, when handheld mobile technology evolved quickly, people didn’t find it particularly easy to incorporate QR codes into their daily lives. It may not seem like it now, but there was a time not too long ago that even smartphones didn’t have the capabilities to quickly process the codes. A user would have to download or open a separate QR code reader app to scan them. Now our phones come equipped with necessary technology from the factory, which has created the perfect environment for the re-emergence of this seemingly simple technology.

Why are QR codes relevant again?

The QR code has reemerged in recent years. Smartphone technology has seamlessly incorporated QR readers into the base camera apps, and quick launch buttons make it easy for people to scan codes. But it wasn’t until the contactless revolution in the midst of a global pandemic that made QR codes became a household commodity.

What are their current uses?

QR code technology is currently experiencing a tremendous boom. Consumers and businesses throughout the world are creating new uses within a variety of industries, including marketing, accounting, logistics, tourism, IT, T&E and even banking. Because of the newly promoted ease of access, daily use applications — including touch-free payments, website links, and displaying multimedia — are propelling QR popularity to new levels. Nearly 3 decades later, the original developer, Hara Masahiro has spoken out, observing:

“I hadn’t imagined a situation where ordinary people would use it this much … [or] thought the QR Code design would be used as a fashion statement in clothes and accessories, or that you would be able to buy goods using QR Codes.” (Aug 8, 2019)

Is global adoption of QR codes the future for payments?

The benefits of using QR codes for e-commerce may seem less obvious. However, the security and cost advantages of scanning QR codes for payments could reduce the need for internal card data collection and retention. With QR code payments, the entire process takes place on the customer’s device and any data transferred is encrypted.

On top of the security aspect, businesses can use this contactless revolution as a way of collecting valuable customer information by attaching surveys or other forms to the code. In the days of gathering data and strengthening the KYC process through acquired information, businesses are amassing customer databases through QR codes to provide a more seamless customer experience.

For these reasons and others, QR codes may be the future of contactless payments. Many countries around the world are already adopting and standardizing QR code payments. For example, the Central Bank in Brazil announced a new national QR code standard to make mobile payments more universal during the pandemic. India is reducing the amount of cash circulating in its economy by implementing QR code payments.

The growing adoption of QR code payments and increasing demand for digitalized payments across emerging countries will create many opportunities in the next few years. Adoption of QR code payments among merchants will steer market growth and require fast, hassle-free transaction services among customers.

Where are they the most popular?

Convenient-to-use QR code generator tools are becoming more popular every day around the world. As the popularity continues to increase, more companies and consumers are taking advantage of the benefits that QR code technology offers.

Different countries are taking different approaches to integrate QR codes into everyday tasks. China has become a leader in QR code usage. QR code payment has been the long-standing norm in the country. Payment terminals do not exist, and more than half of the population in China use QR codes in their lives. In the US, businesses are experiencing a significant increase in contactless payments, and QR codes are definitely becoming increasingly popular in Europe. For example, Northern Ireland is implementing its own unique twist for contactless shopping in convenience stores. Through partnerships with frontline organizations, Malaysia and the Philippines are supporting QR code scanning as a standard procedure for donations.

Are there downsides to QR codes?

A large number of smartphone owners simply are not using QR codes. For example, a QR code on a poster that people routinely pass by could quickly take them to a website or registration page for an event upon scanning. However, even with such an easily accessible QR code available on the poster, few people are likely to stop and interact with it.

So let’s not overestimate the importance of QR codes. It’s just one way of encoding information. The downsides, in the public eye, come from the possible tracking capabilities of the website destinations connected to some QR codes. Many consumers do not enjoy the fact that when a QR code takes them to a website, they can be bombarded with privacy policies and take on the risk of third-party tracking when all they want is a drink menu. One solution to this issue is to use an anti-tracking browser, but that adds an inconvenience.

Security attacks are another risk. Malicious QR codes can initiate phishing scams on unsuspecting scanners. So let this be a warning — just like the ones from your work IT department on email links — do not haphazardly scan every code you encounter.

How long will their popularity last?

The longevity of QR codes resides literally (and figuratively) in the hands of the consumer. The people holding the mobile power will determine whether this technology becomes a staple for transferring information and initiating a payment process. The steep rise of mobile technology will be a hard one to turn back. Therefore, it’s quite possible that the only thing to limit the use of QR codes is the development of a similar technology that would directly replace their function.

However, just as barcodes have not driven numeric representations out of product packaging, it’s unlikely that QR technology will disappear. No longer seen as a revolutionary technology, QR codes have solidified their place in the daily lives of consumers and merchants. Current research predicts that the use of QR codes for electronic payments will surge more than 300% over the next five years.

Nate Guers & Lucie Kunesova

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

The value of cashflow forecasting

Forecasts are not only important for defining and making investments, but also for ensuring a company’s future viability. A 2019 study conducted by Redbridge showed that 94% of companies carry out some form of cashflow forecasting*. So, for most companies, the question is not should they predict what cash will be generated in the future, but rather how should they produce their forecast?

Methods for forecasting cashflow

Cashflow forecasting involves estimating cash inflows and outflows over a specific period of time. Companies use two main methods to predict what their future cash situation will be. Each has its individual strengths and weaknesses and may be used for different reasons.

The indirect method

The first method is known as the indirect, or budget method. It involves the use of balance sheet items to determine the company’s monthly ability to generate cash for the year as a whole. This method makes it possible to define long-term strategic objectives. It also creates a cash culture within the company, which can have a positive impact on working capital and the cash conversion cycle.

Because the budget method involves a production delay (lasting anywhere from 8 to 30 days following the end of the month), there may be a lag of as much as a month before it can be determined if the original forecast was correct. Consequently, there may be more political overtones to the forecast, with a need for more buy-in from other teams. And as the financial year goes on, the objectives may need to be adjusted. As a result, with this indirect method, it isn’t always possible to monitor the performance of the cash and transform the reporting into a useful management measurement tool.
The indirect method is relatively easy to manage, as you can rely on the balance sheet data, but…

• non-cash transactions (such as depreciations, losses and bad debts) need to be added back in
• cashflow receipts and payments are less granular and less accurate
• this method can’t spot intramonth funding shortages

A good way to visualize the indirect method would be to look at it as a type of map. Looking at a map using the Indirect method, you would only know your own position as well as your destination. Based off of that, you would have to head in the general direction of your destination and hope you picked a good route.

The direct method

The second method is known as the direct, or bank balance method. This method uses bank balances to define the cash the company generates on a weekly or monthly basis over the course of the quarter. This enables real-time monitoring of the cash conversion cycle. In addition, the group can use reconciliation to compare actual cashflows with the forecast to ensure close monitoring of cash to prevent fraud as well as for investment and management purposes.

The direct method might seem cumbersome at times because of how long it takes to set up with the proper amount of data as well as the regular updates it will need. However, it should allow you to overcome the limitations of the indirect method and to monitor whether or not the cash creation objectives of the year will be reached.

When it comes to visualizing the direct method, you could look at it as another type of map, similar to the direct method but with different information. On a map of the direct method, you would be more focused on the best route to get to your destination before you embark on your trip.

Reconciling both methodologies is a management necessity

So, what’s the best method among the two? That depends on what a company’s goals are, since both methodologies have different strengths and weaknesses. However, rather than simply choosing one method or the other, most of the time the best approach is to blend the two to create a hybrid approach. This provides greater flexibility that can be used to maximize the strengths of each methodology, while limiting their weaknesses.

Once they have been combined, both methodologies also balance out one another and provide senior management with both a long-term strategic objective and cash that can be used for short-term debt and liquidity investments.

Visualizing the reconciliation between the two mythologies can be seen as another type of map. Reconciliation would be a hybrid map that takes what was provided by the previous two maps and provides live updates throughout your trip if anything were to change. For example, if there was a road closure, your route would be updated and a newer more efficient route would be chosen.

The Redbridge approach

Although it may seem straight forward, the first step in a cashflow forecasting project is not determining that a tool is needed. Even the best tool will be useless without high-quality data and efficient processes. The project also requires the involvement of other departments, including IT, because they will be closely involved in implementing it.

For this reason, when Redbridge works on a cashflow forecasting project, it takes the following approach to ensure success:

1. First, we assess the quality of the source data. Future cashflows cannot be forecast properly without good data. We look at the quality of the data and determine how easy it is to access it. This leads to the question of system interaction and integration.
2. We then determine your group’s goals and the accuracy objective at the legal entity, regional and country levels. This leads to a focus on the pattern of how the different data is collected.
3. Finally, we assess production capacity. Do you need a tool to automate production? Is it better to use your treasury management system or a dedicated tool? Do you want to create a liquidity stress test to better understand your cash situation? Is artificial intelligence (AI) cost-beneficial for you? If you use AI, do you have historical data and does it accurately represent your activities?

Only after these and other questions have been answered can we help you determine what the right tool for your particular situation is. In addition, it is important to ensure that the data quality is sufficient and that there is buy-in from other key departments, such as IT, as they will serve as key partners. Taken together, all of these elements will ensure the success of your cashflow forecasting project.

While blending together different methodologies is a good strategy to ensure accurate cash flow forecasting no matter the situation, it is only one solution. In our next article, treasury consultant Solene Moyne will assess the different TMS and vendor solutions to produce accurate cash flow forecasting.

The questions surrounding the setup of your back-end system can be overwhelming and daunting – What are my options to make sure I adhere to PCI standards? Is my system compliant? What measures should be taken to prevent a data breach? Is it necessary to house the information or outsource the storage of payment data?

The responsibility to manage your card payment environment is delicate and any breaches in PCI compliance could lead to potential negative fallback from your customer’s perception of your company. This could lead to diminished sales, fraud losses, higher subsequent costs of compliance, as well as other very expensive costs of remediation such as credit monitoring to all impacted customers, damaged systems, cash paid out, and damage to your brand name.

As Eric Page, Senior Director of Compliance and Controls at Airgas says:

“[PCI Compliance] is a company wide effort. When we look at PCI, the cost is not necessarily just what we pay to vendors [or] how much the salaries are of the people managing PCI. It’s the intrinsic cost across the organization to make sure that everybody knows what PCI rules are, how PCI affects the organization, how critical it is to maintaining our internal control, and how critical it is to make sure our executive officers can sleep at night.”

Eric Page, Senior Director of Compliance and Controls at Airgas

What is PCI Compliance?

In 2004, the main players in the payment card industry established several security requirements called the PCI (Payment Card Industry) standards. They did so in order to address the ever growing increase in payment card fraud. The goal was to harmonize the security measures between different parties in the payment card realm. Each party is responsible for ensuring the rules are properly applied by its members.
PCI Security Standards have 3 different components, which include all parties involved in the payment card chain:

• PCI PTS: PIN Transaction Security applies to payment card terminal manufacturers
• PCI PA-DSS: Payment Application Data Security Standard applies to developers
• PCI DSS: Data Security Standard applies to merchants and processors

The standards continue to evolve and update in order to keep up with the ever changing landscape of technology and fraud. “You have to deal with the PCI Council and when they change the regulation and you have to mirror that with your requirements on top,” says Eric Page, “so it does become a challenge not only to keep up with the latest risks but also keep up with the latest regulation and latest technology—we try to keep pace with all of that.”

What are the requirements of PCI Compliance?

For the purposes of this conversation, only the Data Security Standards (DSS) requirements that apply to merchants and processors are highlighted below. There are 12 requirements broken down into six different goals.

These 12 requirements are only the minimum in order to be in compliance with the Payment Card Industry’s Data Security Standards. These requirements alone do not guarantee against data breaches, and depending on your business you should exceed what is expected and treat your customer’s data with the utmost safety. At Airgas, Eric Page and his team tighten things up far more than standards require. “Just because there are PCI standards out there, doesn’t mean that is our exact guidebook; we use those as minimum standards, and above and beyond those in certain areas we make sure that we reduce our risk and really address those concerns through additional controls, additional security measures, as well as configuration.”

What are my PCI Compliance obligations and what options do I have?

PCI compliance has a far reach in all avenues of payments and fortunately, the burden of data security does not have to fall solely on the merchant’s shoulders. There are two options for PCI compliance: outsource to a specialized vendor or accept the burden and internally house the payment card data securely.

One avenue for payment processing is to eliminate the need for the customer’s payment method from passing thru the merchant’s site, such as utilizing PayPal, Amazon, Square, or other providers to bear the burden of payment data security. By adding these providers as a form of collection of payment, the merchant reduces their risk and thereby reduces their PCI compliance obligations. This is exactly how Eric Page discussed Airgas’ approach to their compliance.

“As our business changes we have to keep up with vulnerabilities to our existing business. We bring in experts that tell us what the new vulnerabilities are. So that is key—we have partnerships outside of Airgas, and the folks inside of Airgas that have intense knowledge of how our networks are set up, where payment card data flows through. So for us we look at the different payment channels. We understand our global risks, we seek outside expertise to analyze those risks, and then internally we ask ourselves where our payment card data is flowing through our systems and try to remove it as much as possible. We try to tokenize it as soon as we get it and try to move it outside of our systems so that we don’t have any actual credit card data in our systems. There has been an evolution for a hands off approach to credit card data, and that is to let the experts handle it, because they know how to encrypt it and keep it safe, use the data only when necessary, and keep that data and information out of the hands of bad actors.”

Eric Page, Senior Director of Compliance and Controls at Airgas

However, some merchants prefer to have a DIY approach and house the card data internally. PCI compliance would need to be examined from the beginning of the payment transaction to the storage of the card data. A full blown assessment of the credit card data flow would need to be mapped out followed by the phases needed to secure the information. This would consist of testing the storage of the data on the merchant’s internal network, conducting random penetration tests, and sampling the data for any potential breaches. A partnership across internal departments from Treasury to IT would be needed along with input from your providers to ensure compatibility with your internal systems/networks.

Regardless of the approach, the degree and frequency to which your systems must be assessed depend on which tier or level your business falls into. These levels are largely based on the amount of payment card transactions your business processes annually.

As merchants move up the compliance tiers, their obligations and responsibilities increase. In order to better meet the requirements merchants should not store any customer data when it is not necessary to do so, segment networks and separate systems that store, process, and transmit cardholder data from those that do not, tokenize transactions, and/or equip a point-to-point encryption solution. Utilizing these recommendations, merchants can drastically decrease their PCI DSS scope.

An annual self-assessment questionnaire (SAQ) is one of the requirements that all merchants must complete, except for those that qualify as level 1. These merchants instead are subject to an annual compliance report completed by a qualified security assessor or internal auditor. The majority of merchants that qualify in the other 3 tiers will all have a questionnaire to be completed by a dedicated employee(s) of the merchant. These questionnaires are meant to validate and document the results of the merchant’s own PCI DSS self-assessment and detail their level of compliance. The specific questionnaire that each merchant completes will vary greatly depending on the merchant’s business.

What channel are my payments accepted and how does that affect my PCI compliance?

Whether your payment card transactions are taken in person, over the phone, or online, they are all subject to the same 6 goals and 12 requirements of PCI DSS. Although the requirements are always the same, the stakeholders and systems involved in the transaction flow will surely differ. Which is why the questionnaires meant to document merchant’s level of compliance differ based on your business. As the merchant, it is important to understand all of the employees, stakeholders, systems, and networks your payment card transactions flow through for all of your different payment channels. Airgas accepts payment card transactions over all three channels so Eric Page needs to ensure he has a complete understanding of the transaction life cycle from start to finish, and then ensure his understanding is passed on to other relevant parties.

“We have a telesales environment where account managers process telephone orders. Those account managers need to know how to safely handle credit card transactions just as much as the person at the store location that actually receives a credit card and swipes it. So all of those people have to receive information in different ways and we have to train them differently. You can’t train someone sitting at a desk with a headset on all day the same way as someone at a physical location. The stakeholder depends on how we have to approach it. Our role with PCI is to make sure we’re aware of who touches it, what’s our risk, making sure the controls are in place, then most importantly, testing it to make sure that what we say we are doing is what we are doing.”

Eric Page, Senior Director of Compliance and Controls at Airgas

Other merchants may not have been used to multi-channel payment acceptance, but this pandemic has forced many merchants to implement an additional payment channel like e-commerce or even develop an omnichannel solution. Additionally, especially with an omnichannel solution, creating customer profiles aimed at increasing customer loyalty with faster and improved checkout experiences is quickly becoming the standard. The only way to maintain customer specific profiles is by collecting and storing customer information.

Although collecting and storing this information increases risk, exposure, and your PCI DSS scope, there are still ways to do this safely. In addition to the 12 PCI DSS requirements, merchants can utilize multi-pay tokens that encrypt customer cardholder data at the time of the transaction. That token will stay with its respective cardholder for the life of the card and can be used across the merchant’s entire payments platform. Multi-pay tokens present a tremendous opportunity for merchants to meet customer’s checkout experience expectations, while at the same time keeping their sensitive data safe and secure.

In conclusion, PCI compliance is not a topic that any merchant can afford to ignore. Increased regulations and obligations inherently make doing business more difficult, but these security standards were born out of necessity and are meant to protect both the customer and the merchant. Obtaining compliance is not an easy task and it’s never completely achieved as technology and standards progress and change.

It’s important to identify employees within your company that can be champions of the compliance process, while also remembering that there are industry experts and other resources available. These resources can help make the process as easy as possible and reduce the burden placed upon the merchant. Utilizing these resources are key to maintain compliance with the data security standards and above that, ensure your customer’s data is properly safeguarded. Airgas has the employees and internal processes aimed at giving PCI compliance the attention it deserves, but what sets Airgas apart is their ability to utilize the resources within the industry. These items together make Airgas a pillar for success and an excellent merchant to model after.

Justin DiCioccio and Sara Moren

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

What can virtual accounts offer?

Virtual Accounts have evolved through technological innovation, offering businesses the advantage of streamlining account structures and enabling true end-to-end solutions that are fluid, accessible, and integrated. Virtual Accounts provide broad functionality and facilitate interconnectivity between debt, receivables, and liquidity solutions through a better view and control of the activity. They also support localization strategies and global treasury operations. The primary benefit of virtual accounts is the concentration of all activity into a single physical account, while maintaining the ability to reconcile transactions at a more granular level (e.g. by entity or customer).

Advantages of virtual accounts

For many international businesses, global banking is time-consuming, frustrating, and costly. Without a resident bank account in Europe, international payments can take nearly a week to post. In addition, because of the sprawling systems and thousands of employees of traditional banks, the costs are high.

With virtual accounts, you do not need to be a resident to open an account. This is not the case with opening traditional bank accounts where you have to be a permanent resident. Virtual bank accounts are a solution for global entrepreneurs who do not have European residency, for example. This avoids the complexity and costs associated with traditional international cash pooling.

Virtual bank accounts can also facilitate the centralization of cash activities and daily cash management. They add agility in the structure of payments and receipts with the ability to open, close, or modify as many virtual accounts as needed and organize account hierarchies at your convenience without the need for heavy KYC documentation.

In addition, virtual accounts maintain the traditional bank reporting functionality with Swift, Camt, and other methods available. Undertaking digitization as part of the virtual accounts project allows for centralizing of the cash flow and achieving economies of scale. For professionals, it guarantees better visibility and control of transaction volumes.

Drawbacks of virtual accounts

Despite all of the benefits and years on the market, companies have been slow to adopt virtual accounts. There are a few reasons as to why this slow implementation into the market persists:

1. The first issue is that not all banks are at the same level of development due to different banks having different capabilities across geographical regions. Not all banks offer virtual accounts, at least not in the optimal capacity. In some cases, banks do not develop this offer as a priority due to lack of demand. For example, regional banking in countries where legal restrictions are important and where physical accounts are mandatory negate the benefits of virtual accounts. In other cases, it is a question of technical capacity. The issuance of virtual accounts adds a new layer of reconciliation complexity from the provider’s perspective.
2. The second issue is companies’ fear, uncertainty, and doubt surrounding significant changes in their treasury model. Indeed, banks need to address customers’ risk appetites in this new transition. For example, coding between physical and virtual accounts may not be the same, which can generate problems for companies if the bank has not made the link.
3. The third issue is the unwillingness or inability to accept significant change in the treasury structure required by implementing virtual accounts. Projects can be spread out over a few months to more than a year depending on the company and the internal resources available. Moreover, teams within a company require thorough training to be able to take full control and realize all of the benefits the virtual structure has.

In addition, certain tools are required, such as TMS, for maximum use of the solution. It is therefore understandable that the move to virtual accounts requires a great deal of effort on the part of companies in terms of time and cost associated with this change. Virtual accounts also suffer from their current lack of recognition as an innovative payment architecture. Plus, the interest of the banks is not necessarily to push the solution if the companies do not have many accounts in other banks.

Is there an ideal virtual account customer?

At first sight, virtual accounts are a product for all companies that want to be innovative.
The product can be implemented by a young start-up that can initiate a flexible and innovative architecture from its inception before making it more complex as it grows over the years.

They can also be used by large, mature firms to simplify the treasury structure, optimize cash management efficiency, and facilitate post-acquisition integrations. A large number of companies can be interested in this, from educational institutions, loan companies, electronic distributors and generally all companies acting in B2B, to retailers and others! Virtual accounts allow companies to customize the transfer and collection chain, so revisiting a traditional architecture will make sense.

Companies that are in the process of rationalizing the number of bank partners and accounts should be very interested in virtual accounts, as they offer a quality service and their implementation fits perfectly with this transition.

Virtual accounts are not an isolated solution. What makes VAM structures powerful is their connectivity with other capabilities related to cash, payments, collections, channels and currencies. A complete VAM solution has the power to transform a reporting layer service into an effective and powerful business tool. A company that is looking to revamp its payment chain would be well advised to take an interest in the subject.

When to transition into virtual accounts

Virtual Accounts have evolved with technological innovation and virtual reference numbers have paved the way for more holistic virtual account offerings that streamline account structures. These offerings enable true end-to-end solutions that are seamless, accessible and integrated. They offer broad functionality and facilitate interconnectivity between debt, receivables, and liquidity solutions. They support localization strategies as well as global treasury operations and
Virtual accounts are part of a futuristic vision of treasury and the digital transformation that is and will continue to be required to centralize flows while retaining visibility and control.

The rather “slow” implementation can be explained by the human factor and the magnitude of a project affecting the entire treasury function. The transition between the traditional to the virtual model requires technical skills and support in the implementation and thus human resources for IT integration. The ideal moment to make the transition ultimately depends on each company’s specific situation, but the benefits of virtual accounts await those who are willing to take the plunge.

Thomas Finkelsztejn & Chris Gibson

A special report on the cash management & payment trends that will transform your treasury department in 2022

The growth and vitality of the payments industry has fascinated all observers during the past two years of the pandemic. Now with recent geopolitical developments arising from the Russia-Ukraine conflict, it is being tested again.

Our new publication analyzes the most prevalent trends and innovations in the treasury world today.

For a company seeking liquidity, integrating the ESG dimension into its financial strategy has become key. Today, while numbers are still low in the US, more than 30% of syndicated loans in Europe and nearly 40% of bond private placements (notably EuroPP) include objectives based on criteria of this nature (source: Redbridge). In the euro public bond market, 26% of the amounts raised last year by all non-sovereign issuers were in the form of green, social, sustainable, or sustainability-linked bonds vs. 17% in 2020 (sources: Bloomberg, Natixis).

Sustainable finance will continue to grow until it becomes the new norm in the near future, in Europe as well as in the US. On the supply side, banks are repeating their intention to reallocate their balance sheet resources to clients committed to corporate social responsibility, while an ever-increasing proportion of fund managers’ inflows are directed towards SRI-labeled or equivalent funds.

On the demand side, the “greening” of liabilities has also become a priority for many finance departments. Last September, Redbridge surveyed European and American corporates on this topic: 61% of them had already issued ESG financing or were considering doing so in the next 18 months. Over a five-year horizon, 41% even anticipated that more than half of their financing resources would come from instruments that integrate a sustainable dimension.

Heterogeneous ESG structures

For the past four years or so, this trend towards sustainable finance has been focused on sustainability-linked financing, both in the banking sector (sustainability-linked loans) and in the bond sector (sustainability-linked bonds). These general corporate purpose finance products aim to encourage the borrower / issuer to expand its CSR approach by including a number of environmental, social, or governance objectives (usually two or three) in the financial documentation. Depending on whether or not these objectives are met, the borrower’s credit margin or the issuer’s coupon may fluctuate by a few basis points, either upwards (malus) or downwards (bonus).

In this respect, the deal structuring varies from one transaction to another. Our recent survey showed that two thirds of the sustainability-linked loans raised by the corporates surveyed incorporated a bonus/malus mechanism, and one third a malus mechanism only. For sustainability-linked bonds, the ratio was 75% to 25%. Regarding the size of the bonus/malus, it is generally +/- 5 bps for bank loans and RCF facilities, and between +/- 5 bps and +/- 10 bps or more for bonds.

A virtuous but perfectible approach

Designed to be virtuous, the bonus/malus mechanism deserves to be improved to achieve greater materiality.

First, the purpose of ESG financing is to encourage a company to grow in a more responsible and/or sustainable way. However, the bonus is far too low to be a real incentive, at an average of 5 bps in bank financing. In this respect, sustainable financing serves more to reinforce an existing CSR strategy than to give a boost in this area.

Secondly, banks like to present this bonus as a way to reward their clients for their efforts in favor of major issues, such as energy transition and social inclusion. However, as a reminder, the purpose of the credit spread is to compensate the lender for the default risk of the borrower not being able to make payments. Therefore, the ESG bonus tends to distort pricing and benchmarking. The mechanism further opacifies the banking market, insofar as lenders integrate this potential future bonus into their initial pricing. Since the transactions are different, it becomes difficult to distinguish the price of credit risk. The same goes for private placements.

Add to this the fact that we find it surprising to reward a company for keeping its commitments. Let’s bet today that in the short term, the bonus system will naturally disappear as ESG becomes the norm, leaving only a penalty.

Who benefits from the mechanism?

In a mechanism where the borrower who fails to meet its CSR objectives is penalized with an additional margin, the question of how the malus is allocated is central. Currently, the malus is allocated to the lenders in almost all transactions. The banks consider this situation to be legitimate and are even happy to claim it! For example, ING recently explained its position in these terms: ” As a credible sustainability strategy aligns increasingly with credit risk, discounts and premiums are part of a bank’s business model and we would be reluctant for them to go to charity”.

Our analysis of the subject is completely opposite. Given the philosophy of sustainable finance and the onerous costs of ESG compliance, failure to meet targets should not be exploited by lending institutions with no transparency for borrowers. The mechanism must redirect the malus to specific projects related to the energy transition or social impact managed by the company or institutions working to offset the non-completion of the sustainability targets.

Our advice to corporates

1. Be a driving force in the structuring of financing
   Despite the existence of guidelines (Principles) established by international organizations such as the International Capital Market Association or the Loan Market Association, practices related to the implementation of a sustainability-linked loan remain disparate from one lender to another. As banks seek to impose their own standards, it is essential to maintain control over the process of structuring the financing (nature of the KPIs used, trajectory of the targets, etc.) so that it takes into account the DNA, business model, and CSR strategy of the company. The best approach to achieve this is to surround yourself with one or two lenders who share your convictions, so that they can then convince the other participants in the syndicate.
2. Negotiate a loan at the right price
   If the borrower cannot avoid the inclusion of a bonus mechanism, he or she must ensure that the financial terms offered are not artificially inflated by banks anxious to cover the potential cost of disbursing the bonus later on.
3. Introduce a progressive malus grid
   Whether the issuer fails to meet its ESG targets by a small margin or by a large margin, the penalty will be the same, as the malus will be applied in a uniform manner. In order to make the issuer more accountable, and in order to stay in line with the “Principles”, we could consider introducing different malus thresholds.
4. Making the use of the malus conditional
   Last but not least, we recommend that corporates include a system for earmarking the funds corresponding to the possible excess margin or coupon in the financing documentation. Thus, this malus envelope could only be used to finance projects that contribute to compensating for all or part of the consequences of not achieving the objectives defined when the sustainability-linked loan or bond was set up.

*ING, Position paper – The credibility of the sustainability linked loans and bond markets, 2021

Avoid costly oversights by double-checking 5 key provisions

Once the term sheet is done and everyone agrees on the deal, the rest can be left to the attorneys, right? Not so fast!

Redbridge has seen multiple examples of terms—even relatively important terms—changing from what was on the term sheet, and we’ve encountered even more examples where what was on the term sheet did not match with the borrower’s understanding of the terms.

A minor mistake in documentation may be fixable, but it can also be a warning sign for misunderstandings, sloppy drafting and even a purposeful change to the terms without prior agreement. Loan agreements are complex, and mistakes can be extremely costly in terms of wasted time, missed business opportunities and damaged relationships.

Common sources of problems

Although transactional attorneys managing relationships usually have years of experience, it should be understood that often a relatively junior attorney may be executing the first draft of the document for the bank, and a junior associate for the borrower’s counsel may be handling the first review. Newer attorneys lack the hard-won experience to spot potential trouble signs and to understand the issues that may turn into hot buttons for the borrower.

Attorneys rarely start from a clean piece of paper when drafting loan documentation; they usually adapt documentation from the bank’s standard form or a previous transaction. Each borrower has different priorities and business drivers, so what works for one client rarely works for another. The bank’s standard agreement is usually more conservative than the terms and restrictions offered to a particular borrower. Many items are glossed over in the term sheet. Each of these items can potentially limit the borrower’s flexibility and lead to inadvertent defaults as many borrowers do not read and fully understand their documentation.

Key provisions to scrutinize

While each agreement is unique, it’s wise to pay attention to these five elements:

1. Defined terms: A list of defined terms appears near the beginning of the document. They drive the understanding and interpretation of the rest of the agreement. If a defined term has a different meaning than the plain English that a borrower assumed, it could be a serious fight to win a court battle. Trace all capitalized terms in the credit agreement to all of the defined terms, sometimes three layers or more. Often one defined term contains a reference to a second defined term and so on.
2. Financial covenants: These covenants should be tailored to the business plan and expected results. For example, if your company plans to use existing cash on the balance sheet to invest in the business or pay shareholders, make sure that expenditures made from excess cash do not flow through Fixed Charge Coverage Ratios. Even when companies are clear about requirements, the documentation can default to the cookie-cutter situation.
3. Nonfinancial covenants: Similar to financial covenants, these provisions should align with plans and expectations. Pay close attention to the process to waive or amend the covenants. Consider allowing the agent bank to have some discretion, within certain limits, to avoid the delay caused by the agent getting approval first and then going to the banks, which will all move at different speeds.
4. New trends: When banks struggled with energy loans in the mid-2010s, they began inserting “cash hoarding” language into credit agreements. If more than a certain amount of cash is on the balance sheet for more than a defined number of business days, the borrower must repay the line of credit. This has expanded beyond the energy space, and Redbridge has seen this in some agreements for COVID-impacted industries. Although agreements currently have representations and warranties to state that the company does not believe there is a potential default, cash hoarding language limits the availability of the revolver in a much more structured and severe manner.
5. Rate structure: Consider the grid pricing levels, leverage vs. ratings-based pricing, and the timing and frequency of permitted borrowings. Borrowing procedures can force companies to borrow at the alternate base rate due to required minimum notice or a limited number of permitted LIBOR/SOFR borrowings outstanding. The alternate base rate can be 1.5% or more above the LIBOR/SOFR rate! Paying attention to the mechanics of the borrowing process is important.

How to protect yourself

These five elements are by no means an exhaustive list of potential problems and concerns when negotiating loan documentation. Redbridge’s process involves drafting a detailed term sheet, which includes defined terms, detailed baskets, covenants and borrowing mechanics for the financing. This process eliminates last-minute surprises during closing, allows the borrower to dictate terms to the banks and eliminates documentation time by up to 50%.

Schedule time with us today to learn more about market trends and how Redbridge can help!