At SMCP, Jean-Christophe Sautereau regards relationships with banks as strategic partnerships founded on transparency. His group allocates its cash management activities to banks based on their lending commitments. “It’s about acknowledging mutual interests: the company must be fair,” explained the Head of Treasury and Financing, who oversees a financing pool consisting of 13 banks. In his role he also collaborates with six other banks that do not finance the group to help meet its local treasury needs, particularly cash remittances.

The company perspective: measuring and evaluating the relationship

At Air Liquide, banking relationships are governed by the principle of allocating ancillary business based on lending commitments. Chloé Audrin uses an advanced quantitative tool to analyze these relationships.

“RAROC, or Risk-Adjusted Return on Capital, is a metric that assesses the estimated profitability of Air Liquide’s banking relationships. For each bank we partner with, it calculates the bank’s profitability of its activities with the Group by determining the revenue and net margin generated per euro of capital requirement mobilized. This comprehensive analysis covers all the banking products and services we use. We conduct the analysis in the first quarter of every year using data from the previous year,” she explained.

Audrin shares her findings with all decision-makers within Air Liquide, presenting them with a highly visual graph that makes clear the commitments, profitability and business volumes associated with each banking partner.

Air Liquide complements this analysis with a qualitative assessment conducted across the Group’s various departments that work with partner banks. This assessment evaluates criteria such as the banks’ geographical presence, understanding of the Group’s needs and approach to social and environmental responsibility. The combined qualitative and quantitative efforts involved require the equivalent of one-and-a-half full-time staff members over a three-month period.

“Not every company is willing or able to undertake the same amount of work, but it is always possible to establish a quantitative monitoring process for banking relationships. The key is not that the model is perfectly accurate or comprehensive, but that it is consistent and enables us to make meaningful comparisons between banks,” she concluded.

SMCP does not conduct such detailed analysis as Air Liquide, but Jean-Christophe Sautereau shares a similar perspective: “We need to be able to make it clear to our top management which banks are generating the greatest added value. Our quantitative monitoring relies on statistics covering flows and compliance with banking quotas based on allocated credit lines, applying different weights to various instruments such as guarantees, forex and overdrafts”, he explained.

The banks’ perspective – what they are looking for?

Arnaud Morgant outlined the key factors driving credit decisions and pricing at banks in general, and SGCIB in particular. These include revenues, broken down by type and tracked by customer on an annual or even quarterly basis; and the consumption of capital, assessed in terms of Risk-Weighted Assets (RWA). RWA is influenced by the customer’s credit rating, the maturity of the financing or market transaction, and the type of loan, such as market guarantees or financing.

Deposits and ancillary business, such as cash management, are also factored into the analysis. Finally, alignment with the bank’s CSR policy is becoming increasingly important, according to Arnaud Morgant, and plays a significant role. So to do the history of the relationship and customer satisfaction, measured in terms of Net Promoter Score, which SGCIB has been using for several years.

The profitability of the relationship naturally plays a crucial role in financing decisions. “A bank cannot sustain a long-term relationship that is unprofitable overall. However, the decision to participate in a financing operation is not made solely on the basis of the risk/return ratio of the operation or the overall profitability of the relationship,” he explained.

If a relationship is deemed likely to prove unprofitable, key considerations for the bank include: is the low overall profitability due to structural reasons, or is there potential for improvement? What alternative options does the customer have if the bank declines? And finally, is this a strategic operation that the bank cannot afford to turn down?

Understanding your bank rating

A balanced banking relationship undeniably relies on thorough mutual understanding of the objectives and processes of the two financial partners involved. In addition to factors such as the allocation of ancillary business, a company’s bank rating is a fundamental element that is often overlooked in discussions with bankers.

As Arnaud Morgant highlighted, this rating plays a critical role. It directly influences the decision whether to provide credit: the higher the perceived risk, the more senior the decision-making body required. It also has a significant effect on the amount of capital mobilized through the calculation of RWA, which impacts pricing and, ultimately, the bank’s return on equity.

However, a live survey conducted during the round table revealed that half of the treasurers that responded were unaware of their internal bank rating, and another quarter only had partial knowledge of it. According to David Laugier, Chief Operating Officer at Redbridge and moderator of the discussion, “There is no doubt that internal ratings should be systematically requested and form the basis for discussions with the bank”.

Redbridge’s debt advisory team frequently observes discrepancies between the ratings assigned by different banks to the same company of up to three notches. These different ratings can have significant consequences, particularly in the context of major loan syndications. From this perspective, aligning lenders’ perceptions of the risk a company involves with the actual risk is vital to effectively manage the company’s banking relationships.

What is payment optimisation?

Before we go any further, what do we mean by ‘payment orchestration’? Payment orchestration is software that allows merchants to simplify payment processes, helping businesses reduce costs, increase revenue, and improve operational efficiency and resilience. It connects payment providers, gateways, and methods into a unified system. This allows businesses to handle transactions more effectively, routing payments through cost-efficient and reliable channels. By doing so, payment orchestration reduces transaction fees and minimises the risk of failed payments, which increases revenue.

In today’s payments landscape, where merchants must juggle numerous payment options and technologies, payment orchestration stands out as a powerful tool. While it is not suited or required for every company, everyone should closely watch this technology and assess whether it can help their business stay competitive and thrive.

What benefits and challenges does payment orchestration bring?

As for most payment-related topics, there is a lot of literature and marketing content out there about payment orchestration – and many companies sell themselves as such, while they lack the main benefits that such a tool could bring.

That said, what improvements could a merchant observe following the implementation of a payment orchestration layer?

1. Ensure business continuity and resilience: payment orchestration consolidates all payment processes and ensures automatic smart routing to the most efficient provider. One may say that this centralisation also creates a single point of failure, which is true. Therefore, to ensure uninterrupted business operations and resilience, it is crucial to select a robust provider and have a backup strategy.
2. Bring visibility and insights: once data is centralised and harmonised into one single platform, the orchestration layer provides valuable insights into transaction trends, performance, and costs. This visibility helps businesses make informed decisions and optimise their payment strategies.
3. Benchmark cost and performance: if all data is in the same place, and we can run a deep analysis on top of this, we can easily compare metrics across different payment providers, making it possible to identify the most efficient routing options. This optimisation typically reduces costs and improves transaction approval rates.
4. Improve checkout experience: with low or no-code solutions, payment orchestration can enhance the checkout process with secure input fields and UI components to collect payment data – making it smoother and more customisable without requiring extensive IT resources. It reduces the complexity for IT teams, which usually translates into fewer PCI DSS requirements.
5. Easily change or add payment providers: the orchestration layer simplifies adding or switching payment providers and third-party services, requiring minimal IT involvement. This flexibility helps businesses quickly adapt to market changes and maintain optimal payment performance.

Payment orchestration also has potential downsides. Centralising payment processes can create a single point of failure, making the system vulnerable if the orchestration layer encounters issues. Additionally, implementing and maintaining an orchestration layer can be complex and costly, requiring significant upfront investment and ongoing management. For example, integrating with multiple payment providers and systems may lead to compatibility issues or increased complexity. There may also be concerns about data security and compliance, as handling sensitive transaction information through a centralised system requires stringent measures to protect against breaches and ensure regulatory adherence. Finally, payment orchestration was born to serve ecommerce and digital transactions but it still struggles to play in the physical world, particularly when it comes to POS terminals – something we covered in our Tap-to-Pay article .

Key takeaways

Payment orchestration is a solution for merchants facing today’s complex payments environment. Centralising and streamlining various payment methods and providers into a single system simplifies transaction management, reduces costs, and enhances operational efficiency. Merchants can benefit from improved business continuity, better visibility into transaction data, and optimised payment routing, which can increase revenue and smooth the checkout experience. Despite its advantages, it is not without challenges. The centralisation of payment processes can create a single point of failure, and implementing such a system can be costly and complex. Compatibility issues and data security concerns also need to be addressed. Additionally, while payment orchestration excels in digital and ecommerce transactions, its adoption in physical retail and POS systems remains limited.

Ultimately, while payment orchestration holds great promise, businesses should carefully evaluate whether its benefits outweight the potential downsides and determine how to integrate it best into their operations to stay competitive.

What are the main challenges related to FX in payments?

FX directly impacts transactions by influencing the amount received due to exchange rate fluctuations, affecting costs and timing. From a customer perspective, whether in B2B or B2C environments, the primary concerns are ensuring that transactions are conducted with legitimate sellers and understanding additional fees. When the buyer and seller operate in different currencies, the need for currency conversion introduces potential volatility and FX fees, which must be managed by one or both parties – the same logic applies between a platform and its sub-merchants.

International exchange rates can be very fluctuating, making it challenging to predict the payment’s value in the currency of the recipient at the time of the transaction, and it can shift unfavourably. Moreover, international payments are usually more expensive than domestic ones, and banks and financial institutions may charge additional fees that will impact the final amount settled to merchants. Additionally, these fees are generally quite opaque, so all parties involved in the transaction are unaware of how much they will actually end up paying for this operation. Without clear visibility into the entire transaction process, businesses may face challenges in accurately monitoring and managing their cross-border payment activities.

How can merchants turn challenges into opportunities?

Discover FX solutions used to boost merchant revenue. For frequent transactions in specific currencies, some may choose to open an account in that currency, benefiting from favourable pricing conditions. However, this solution is less practical for occasional or low-value transactions, where additional costs might not be anticipated or not worth the effort. In such cases, the decision of who bears the risk of currency volatility and FX conversion fees becomes critical, with several solutions available:

1. Merchant currency – the merchant may choose to maintain transactions in its local currency, passing the risk and cost of FX conversion to the buyer. While straightforward for the merchant, this approach can negatively impact customer experience, particularly for those without multi-currency accounts or favourable FX conditions. Moreover, transaction fees can still be high for cross-border operations.
2. Dynamic currency conversion (DCC) – available for both online and physical transactions, DCC offers buyers the choice to pay in either the merchant’s currency or their own. If the buyer opts for their currency, a commission is disclosed before confirming the transaction. The merchant may receive a portion of this commission, becoming a new source of financial revenue, which offsets part of the high costs associated with international transactions. On top of that, offering DCC may reduce chargebacks, which are often triggered by customers not recognising foreign transactions on their statements. Paying in local currency may also have a positive impact on acceptance rates.
3. Multi-currency pricing (MCP) – merchants can offer MCP, allowing buyers to pay in their own currency. This enhances customer experience – but transfers the FX risk and fee burden to the seller. A potential mitigation strategy is for the seller to open a multi-currency account or a local entity (when this is worth the investment), enabling it to sell and receive payments in the same currency (also called ‘like-for-like settlement’). In certain cases, merchants can also monetise this service and receive a kickback from the FX provider.
4. Payouts – the same logic applies to platforms when sending payouts to their sub-merchants, where the platform can turn FX into a value-added service by proposing payouts in local currency, and therefore improving its value proposition while generating additional revenues out of it.

Key takeaways

In conclusion, the intersection of payments and FX is pivotal in today’s global economy, as businesses increasingly engage in cross-border transactions. The complexities introduced by FX, such as currency volatility and transparency issues, present significant challenges in managing transaction costs and ensuring smooth operations.

FX Solutions like DCC and MCP offer innovative ways to address these challenges, allowing merchants to enhance customer experience, reduce chargebacks, and potentially generate additional revenue. However, the effectiveness of these solutions depends on careful implementation and understanding of the associated risks. Leveraging these strategies can help businesses navigate the intricacies of international payments and optimise their operations. This is typically what should be assessed as part of your payment strategy and the resulting target payment architecture.

Europe Lags Behind

Across the Atlantic, Fannie Mae stands as the world’s largest issuer of green Mortgage-Backed Securities. Energy transition securitisation is also widely utilised by photovoltaic panel installers (a), who securitise their operating leases or the future cash flows from Power Purchase Agreements (PPAs) (b). More recently, securitisation has encompassed loans provided to individuals to finance their solar installations (c). In 2022, green securitisation accounted for 32% of all green bond issuance in the United States.

In China, green securitisation accounts for 8% of green bond issuance. Since the first green ABS were issued in 2016, a diverse range of asset classes has been utilised, including wind turbine revenues, energy equipment leasing, and ‘green’ trade receivables.

In Europe, securitisation represents just 2% of green bond  issuance. While the volume is growing, it remains far from sufficient. In 2023, securitisation volumes doubled compared to 2022, reaching €2.4 billion, but this figure is still well below the annual €300 billion estimated by AFME (d) as necessary to fund green construction, energy-efficient home renovations, and the transition to electric vehicles.

A Growing Market

In Europe,  green securitisation transactions have mainly been initiated by bank issuers. For instance, Landesbank Baden-Württemberg recently raised €350 million to fund solar power plants and wind farms, with support from the European Investment Bank (EIB).

Non-bank issuers, though less common, are becoming increasingly active:

• In 2022, Perfecta Energia, a Spanish solar panel installer, launched a €133 million securitisation fund to support the development of residential solar energy.
• In 2023, Enpal GmbH, a German solar installer, established a €365 million warehousing programme to finance 12,500 installations.
• In January 2024, Powen Group securitised a diversified portfolio of Spanish solar assets—encompassing loans, leases, and PPAs for both residential and industrial projects—raising €120 million.
• In November 2024, Enpal executed the first-ever public securitisation of solar assets, raising €240 million. The ‘AAA’ tranche was priced at 40 basis points above the 1-month Euribor, while the ‘AA-’ tranche was priced at 85 basis points.

Many energy companies rely on project financing through ad hoc entities, injecting capital into each venture individually. This fragmented approach often makes it difficult to secure funding at the holding company level. Securitisation offers a potential solution by pooling multiple projects—particularly those in the production stage—into a single refinancing structure.

The green securitisation market has significant potential for growth. The European Commission is currently working to relax regulations, which should help facilitate such transactions. (For further details, see our previous article: “Securitisation: A Necessary Revival of the European Market.”)

However, securitising assets tied to energy production presents unique challenges compared to other forms of securitisation, notably:

• Default and early repayment risk: Assessing these risks is complicated by the limited availability of historical data and, in some cases, the small size of asset portfolios.
• Non-financial risks: These include the risk of contract renegotiation, technological underperformance, inadequate facility maintenance, and climate-related vulnerabilities.

Redbridge, together with its partner Accola, brings extensive expertise in securitisation, including operational leasing transactions. We firmly believe that securitisation has a pivotal role to play in achieving the ambitious goals of the Green Deal, whether the underlying collateral consists of loans, lease streams, or offtake contracts.

Securitisation Scheme for Solar Energy Leasing Contracts

Notes

a/ Sunrun, a leading solar company, has installed 5 gigawatts of solar panels since its founding in 2007. Remarkably, 41% of these installations have been financed through securitisation.

b/ Power Purchase Agreements (PPA) are a common mechanism, acting as offtake contracts between electricity producers and consumers.

c/ The PACE programme (Property Assessed Clean Energy) provides another innovative financing option, enabling property owners to finance energy-efficient upgrades through property tax assessments.

d/ For more insights, refer to AFME’s December 2022 report: European Green Securitisation Regulatory State of Play.

Artificial intelligence in treasury: hype or reality?

The mention of artificial intelligence in treasury often conjures up visions of a utopian future – a world in which machines take over mundane tasks, freeing up treasurers to focus solely on analysis and strategic, value-adding activities, and in which they finally earn the recognition and favor of company management. But is this likely to be the reality?

Groupement Les Mousquetaires: pioneering the use of AI in cash flow forecasting

The story of Groupement Les Mousquetaires stands out as a rare example of how artificial intelligence can deliver a real, measurable positive impact to a treasury’s operations. Groupement Les Mousquetaires, the umbrella organization for retail brands such as Intermarché, Netto, Bricomarché, Brico Cash, Bricorama, Roady and Rapid Pare-Brise, has successfully integrated artificial intelligence in its cash flow forecasting processes. The initiative, which was launched in 2019, was spearheaded by Sébastien Schweickert, data analyst, and championed by Laurent Bonhomme, Director of Financing, Treasury and Investor Relations at Groupement Les Mousquetaires.

At a client breakfast hosted by Redbridge’s Treasury Transformation team in mid-November, Schweickert and Bonhomme shared some insights on the project. They emphasized the challenges of integrating artificial intelligence in cash flow forecasting, including the need for significant long-term resource allocation and ongoing oversight of the data set. This kind of vigilant monitoring ensures that the model can become more accurate over time and avoid stagnation or the propagation of inefficiencies.

Thanks to their efforts, Les Mousquetaires has successfully reduced the margin of error of its 12-week forecasts from 3% to just 1% – a level that Laurent Bonhomme describes as “acceptable for making financial decisions.” The Group estimates that it is making annual savings of €1 million thanks to its more efficient allocation of available cash and more precise calibration of bank borrowing and commercial paper issuance (NEU CP).

The background to the project

The project to enhance cash flow forecasts using a predictive AI model known as Cash Flow Management (CFM) began with the establishment of a data lab aimed at “realigning the planets between business expertise and data“, according to Laurent Bonhomme, who elaborates:

“Data was the first step in launching our project. The second was determining whether the effort was justified. For Les Mousquetaires, the answer was a clear yes given the significant difference between the cost of short-term financing and the return on cash investments. The third step involved ensuring the sustainability of the cash flow forecasting model through robust governance and making it accessible to all of the group’s departments. Finally, the fourth step focused on testing the model against our historical forecasts.”

The CFM project involves direct modelling of no less than €15 billion in cash flows over three months. Beyond this timeframe, the Group’s cash flow becomes too unpredictable to forecast due to various external factors. The project relies on a dedicated team consisting of 1.5 full-time equivalent data scientists and 0.5 data engineers. They are guided by the “third musketeer,” Sébastien Schweickert.

According to Schweickert, the group’s previous cash flow forecasting model, which was built in Excel, struggled to detect recurring patterns in cash inflows and outflows. “Although it was time-consuming and prone to long-term errors, the old model worked. Our challenge was to make the data more usable and eliminate the inaccuracies,” he explains.

Three years after the launch of the CFM project, Les Mousquetaires continues to compare its AI- and machine-learning-based predictions against the backtest results of its legacy Excel model.

Interface with treasury tools, enterprise resource planning (ERP) software and external data sources

The team began by developing an interface with its treasury software (Kyriba) to provide the model with streamlined, recurring access to raw treasury data. Without any external assistance from a software provider, the team developed two forecasting models.

The first is a business model, which replicates the firm’s previous Excel-based approach. This model relies on predefined business rules, such as annual pricing provided by central purchasing bodies and estimates for more volatile elements like how oil prices affect fuel sales.

The second is a predictive AI model that incorporates a much larger volume of external data. It includes variables such as oil prices and basic commodity prices, enabling the system to refine its forecasts through machine learning.

“The project’s success required several important elements,” explains the team. “These included efficient daily cash pooling, cash flow modeling with a focus on the income statement view (excluding inventory) and a seamless gateway between the accounting ERP and the treasury management systems”.

To ensure the model’s accuracy and reliability, the team monitors it daily by comparing its forecasts with actual cash flows from the previous day. This involves analyzing cash flow patterns and how data is sequenced, particularly payment timings by flow type. They also verify the stability and granularity of data allocation rules, with a minimum of five years of historical data required to support the model.

10,000 input lines processed every day

After a successful proof of concept in 2019, Groupement Les Mousquetaires officially launched the CFM project during the 2020–21 lockdown period. Its new cash flow forecasting model became operational in 2022.

“The COVID crisis was an exceptional event that we excluded from the learning phase,” notes Sébastien Schweickert. “However, it is still reflected in the evolution of behavioral data as consumer habits have changed profoundly in response to societal shifts like remote working.”

In the current model, COVID-related data can be re-entered by the treasurer at any time, treated as a replicable event. The system processes 10,000 input lines every day, and the team is now focusing on incorporating new explanatory variables into its predictive models. These include factors such as the impact of the energy crisis following the outbreak of war in Ukraine and the acceleration of inflation.

“We caution against making hasty changes to the data tags as this could cause the model to lose its ability to learn,” warns Schweickert. “Once the rules for classifying different flows are established, they must remain immutable and protected. This is especially important for the classification of operating costs and the analytical breakdown of food supplier costs.”

He also emphasizes that artificial intelligence is not infallible. “There are times when discrepancies persist for several months before being identified and corrected by humans.”

Greater accuracy and compelling financial benefits

The predictive model has evolved alongside the group’s business practices, particularly with the introduction of new rules on rebates. Initially confined to the group’s operations, the scope of the model was expanded at the beginning of 2024 to include entities affiliated to Les Mousquetaires.

What have the results been? The model has helped reduce gross debt by providing more accurate forecasts. Specifically, it has lowered the margin of error in cash flow forecasts to a maximum variance of €100–150 million – less than 1% of sales, which amount to €15 billion – compared with 3% previously.

“However, ROI isn’t just about financial savings,” notes Laurent Bonhomme. “Since our cash flow is cyclical, with significant downturns between January 15 and June 15, followed by a rebuilding phase from June 15 to January 15, it’s both interesting and reassuring to be able to accurately predict these low points. This enables us to notify our creditors in advance.”

Some of the current ESG-related initiatives in the payment systems

Over the past years and decades, financial institutions (FIs) have been playing a key role in advancing sustainability by reducing resource consumption through payment digitalisation and innovation.

Virtual cards help eliminate plastic waste, and software-based payment solutions like lessen the need for physical POS systems. Digital card platforms enable issuers to offer sustainable, data-driven options that educate consumers about their environmental impact. Additionally, optimising transaction efficiency, scaling responsibly, and partnering with carbon-neutral data centres help minimise the energy footprint of digital payments.

From a social standpoint, some fintechs have built their value proposition around financial inclusion and social responsibility. An example is enabling affordable financial products, inclusive wallets or banking accounts, or card-based distribution of social aid for financially vulnerable populations.

Financial incentives for more sustainable payments

Despite the clear benefits of these initiatives, a gap remains in ESG alignment between the payments industry and merchants. In contrast to lending, where institutions offer direct incentives to clients meeting specific ESG criteria, the payments sector has yet to fully embrace ESG-driven engagement with merchants and consumers.

As financial inclusion grows, some stakeholders in the payments industry are questioning whether businesses that contribute to ESG goals should receive more favourable transaction terms. For example, merchants could gain better interchange rates or pricing if they operate under certain that align with specific ESG principles. Similarly, should customers using Buy Now, Pay Later (BNPL) for essential goods or services receive reduced pricing?

In contrast, should certain payment methods incur penalties, particularly those that promote overconsumption or excessive debt? Should the fees for donating to a non-governmental organisation (NGO) be comparable to those for purchasing unnecessary goods produced under questionable conditions and transported from far away? And why not let some sectors when payers prefer to use a payment method with a worse ESG impact, or at least allow surcharging on certain industries with a positive ESG impact?

On the consumer side, we’re starting to see initiatives where companies encourage users to offset the carbon footprint of their transactions – especially in the travel industry, which has faced scrutiny over ESG and sustainability concerns –, or give customers the option to donate the remaining cents to charity projects to round up their transaction amount.

Key stakeholders for a successful transition

The shift towards a more sustainable payments industry necessitates coordinated efforts from various stakeholders, including FIs, networks, merchants, and consumers. Both private initiatives and public policies could promote this transformation by incentivising businesses that prioritise sustainability and ESG values.

In regions like the European Economic Area, financial regulations focus on ESG alignment by rewarding responsible investments and penalising environmentally damaging practices. However, the payments sector has largely remained unaffected by these regulatory changes, with interchange fees uniformly capped across industries under . The European Union (EU) has led the way in critical regulations, such as data protection through the General Data Protection Regulation (GDPR) and fraud reduction via various Payment Services Directives. However, the absence of clear and transversal ESG considerations in these frameworks signifies a missed opportunity to establish robust sustainability benchmarks within the payments industry.

Navigating the complexities of ESG adoption

While these concepts are intriguing, incorporating ESG principles into payment processes poses significant challenges, starting with the need for robust data management and transparency. Effective ESG reporting needs advanced data systems, which require substantial investment to accurately track and report environmental and social impacts. The lack of standardised metrics complicates performance benchmarking against industry peers, undermining the overall effectiveness of ESG initiatives.

Beyond technological investments, cultivating a commitment to ESG entails cultural changes within organisations. Payment companies must secure buy-in from all levels, from executives to frontline employees, to foster a genuine sustainability-oriented culture. Training and engagement programmes will be vital for embedding ESG into the corporate ethos, rather than treating it as a fleeting trend.

Cost considerations also present a major obstacle for smaller payment providers, who may struggle to reconcile sustainability investments with profitability. While the long-term benefits of sustainable practices, such as cost savings and increased brand loyalty, can outweigh initial expenditures, smaller firms often find it difficult to shoulder these costs without support from the industry.

Lastly, maintaining transparent communication and actively engaging with stakeholders – including shareholders, customers, and regulatory bodies – is essential for balancing profitability with sustainability. This delicate process requires payment companies to effectively convey their ESG initiatives and the long-term value they bring to all parties involved.

Conclusions

As ESG expectations increasingly influence the future of ESG payment systems, the question of leadership remains unresolved. Should payment networks and providers lead the charge in promoting sustainable practices, or should governments and regulators take a more active role in enforcing these changes? If private initiatives alone are inadequate for achieving ESG objectives, public policies might provide stronger incentives for the payments ecosystem to adopt greener standards. Could the EU’s approach to ESG eventually establish a global benchmark for ESG payment systems in the industry?

On the other hand, should consumers take a more proactive stance by helping cover the environmental costs of their transactions? Moving forward will certainly require innovation, collaboration, and a willingness to engage with these critical questions.

As the payments industry advances toward sustainability, each stakeholder must consider how they can contribute to a system that harmonises profitability with purpose. Most definitely, the very first actions merchants may undertake are to structure a solid and review the relationships with their current payment providers and acquirers.

Contact us for more information or payment advisory services.

Imagine yourself in the position of a treasury professional relying on the ECR to offset your banking fees. When the Federal Funds Rate rises, you’d probably expect the ECR on your deposits to increase accordingly. However, when the Federal Reserve was hiking interest rates in 2022 and 2023, US banks only passed on some of the increase in rates to the ECR. They also took their time to do so, responding slowly after each rate hike. We can see this in the graph below, which shows the ECR yields for a number of US companies that shared their data with Redbridge prior to renegotiating their cash management services.

Fast-forward to today, and monetary policy is now being eased – the Federal Reserve implemented its first rate cut in September. Given banks’ actions when rates were rising, a treasurer might expect their bank to only reduce their ECR slowly now that rates are falling. And yet our initial findings indicate that US banks reacted promptly and in full to the September cut, reducing the ECR by 50 basis points.

This imbalance is clearly going to be frustrating for treasurers, who might naturally feel that all this is evidence of banks acting primarily in their own interests. They might now be expecting their banks to reduce the ECR by another 25 basis points if the Fed cuts rates again this week, as anticipated. That said, such adjustments are not set in stone.

Redbridge has a simple message for all companies operating in the US: the ECR yield you negotiate with your bank should be based on a transparent, automatic mechanism that’s fair for both sides. What’s more, it’s possible to establish a spread over the Fed Funds Rate the offsets your costs significantly more than your current ECR.
In short, even though US interest rates are expected to fall further, there’s still scope for firms operating in the US to reduce their costs of cash management.

Securitisation in Europe was particularly hard-hit by the 2008 financial crisis. Prior to the crisis, the European market (including the UK) represented 75% of the US market. By 2020, however, it had contracted to just 6% of the US market’s size, with stricter EU regulations largely responsible for this gap.

Post-Crisis Regulation

In response to the financial crisis, European legislators reinforced the securitisation framework in 2017 through EU Regulations 2017/2402 and 2017/2401.

• To combat moral hazard—whereby banks originating securitisation transactions may inadequately assess borrowers’ credit risk because the risk is transferred to third-party investors, leaving banks with minimal exposure to losses—the legislation requires originators to retain at least 5% of the securitised risk. It also mandates that banks apply strict due diligence measures to securitised loans.
• The prudential requirements for Asset-Backed Securities (ABS) have been increased, and reliance on rating agencies has been reduced. Before the crisis, the prudential treatment of securitisation often relied on ratings assigned by these agencies to ABS tranches. However, it was later revealed that the agencies had incorrectly modelled the risk associated with some tranches, leading investors to believe that these securities were almost risk-free.
• Specific rules now define which assets are eligible for securitisation and set out the obligations of the seller in selecting assets for securitisation.
• Investor information requirements have been strengthened

The European Commission has also promoted the introduction of ‘Simple, Transparent and Standardised’ (STS) transactions by reducing their capital cost. These transactions are restricted to specific types of assets that comply with quality and diversification rules. However, obtaining the STS label requires relatively complex reporting to the European Securities and Markets Authority (ESMA).

Recovery Is Still a Long Way Off

The new regulations came into force on January 1, 2019, but more than five years later, it is evident that activity has not significantly increased. In a report dated October 2022***, the Commission noted that market participants do not believe the regulations have successfully revived securitisation. Furthermore, the investor base has remained narrow.

However, securitisation is an attractive funding technique for companies, especially in the current economic climate, which impacts working capital levels. Companies use securitisation to secure financing at significantly lower spreads than if they borrowed directly from banks. For instance, a BB-rated company can, through the tranching of risk, obtain AA-rated securitisation financing, significantly reducing its funding cost.

Towards Far-Reaching Reform

Several stakeholders, including the Association for Financial Markets in Europe (AFME), the European Banking Federation, and Paris Europlace, have proposed a series of concrete measures to enhance the attractiveness of the securitisation market.

In its current market consultation, the European Commission echoes some of the criticisms raised by these stakeholders, aiming to assess the merits of the following measures:

• Clarification of the definition of securitisation
• Reduction of due diligence and transparency requirements
• Lower capital requirements for securitisation transactions involving financial institutions
• Improved prudential treatment for investors such as insurance companies and pension funds

The Commission’s approach is not limited to bank securitisation; it also addresses the direct securitisation of trade receivables and leasing contracts by companies.

It is highly likely that the securitisation framework will soon improve, generating savings for issuers. Accola and Redbridge possess unique expertise in this area. In 2024, we closed three transactions with a combined volume of €1.7 billion. To learn more about these engagements:

Client case – NGE – Securitisation

Client case – Saint Gobain – Securitisation

* Sept 24, The future of European competitiveness – A competitiveness strategy for Europe

** Oct 24, Targeted consultation on the functioning of the EU securitisation framework

*** Oct 22, Report of the Commission to the European Parlement on the functioning of the securitization regulation.

The Challenge: A Complex, Decentralized System

Historically, ABB has issued a vast number of trade finance guarantees—currently, around 25,000 are outstanding. These guarantees are essential for securing international trade transactions, but their management had become increasingly cumbersome. ABB’s decentralized structure meant it was working with more than 150 banks worldwide. The sheer complexity of managing so many stakeholders made the guarantee issuance process difficult, compounded by banks that were not fully prepared to integrate with ABB’s existing automation tools.

Additionally, the interface used by the company was highly customized, making it difficult to upgrade or adapt to new requirements. As Petra Hunjet Moison, Global Head of Export and Trade Finance at ABB, noted, “The process was painful, slow, and not user-friendly.” ABB needed a solution that could simplify workflows and centralize the process. The aim was also to focus on a smaller group of core banks, around 30, and to find a platform that supported banking communication through the Swift channel.

The Solution: A Centralized, SaaS-Based Platform

To address these challenges, ABB initiated a request for proposals (RFP) aimed at finding a solution that could match these requirements. After careful evaluation, ABB selected a SaaS-based platform.

One of the major outcomes of this project was the consolidation of banking partners. ABB reduced the number of core banks it worked with, simplifying banking relationships and enhancing profitability for both ABB and its banking partners. This consolidation also allowed for greater standardization across the board, with more consistent language in guarantee issuances, although some regional exceptions, like China, or Egypt where local language regulations apply, remain.

Achieving Buy-In: Business Case and User Engagement

Convincing the business to support this transformation was relatively straightforward for ABB. The treasury team developed a robust business case demonstrating how the new platform would deliver significant cost savings, improve compliance, and enhance control. The positive reception from business users was equally important. More than 2,000 users at ABB are involved in the issuance of guarantees, and they were quick to acknowledge the need for change. The old process was not only slow but also poorly connected to the banks, requiring significant manual intervention and customization, which slowed down operations.

By providing a user-friendly platform that offered real-time connectivity with banks and streamlined workflows, ABB was able to significantly reduce the time required to issue guarantees. This improvement enhanced operational efficiency. In order to streamline guarantee issuance, ABB has implemented a system for delegating authority based on roles, allowing members of the company outside the treasury department to perform certain tasks within the guarantees platform. This role-based delegation reduces the need to maintain a list of individual authorized members and ensures that every action within the system is tracked, enhancing accountability and control.

Integration and AI: A Path to Further Innovation

The implementation of this new platform was just the first step in ABB’s broader efforts to optimize its trade finance and treasury functions. The company has also integrated AI into its treasury processes. Instead of requiring extensive training for new team members, ABB introduced a chatbot that can navigate the large volume of internal documentation related to guarantees and other financial operations. This innovation reduces the need for manual training, allowing employees to access critical information more quickly and efficiently.

Key Takeaways: Savings, Control, and Compliance

The successful implementation of ABB’s new trade finance guarantees management platform has already delivered tangible benefits. The company has gained greater control over its financial operations, improved compliance with global regulations, and significantly reduced costs. By centralizing its banking relationships and embracing innovative technologies, ABB has positioned itself as a leader in treasury transformation.

For other companies considering similar projects, ABB’s experience offers valuable lessons: avoid over-customization, focus on user-friendly platforms, and emphasize automation to drive efficiency. Finally, engaging business users early in the process and building a strong business case can make the approval and adoption process much smoother.

ABB’s approach demonstrates how even large, complex organizations can successfully transform their trade finance operations, setting a new standard for treasury excellence.

Here are the key takeaways from the session:

1. Inflation Under Control, But Tensions Remain

According to Harr, the inflation crisis in Europe is largely a thing of the past. While certain service sectors continue to experience pricing pressures, inflation overall has been brought under control. This gives the European Central Bank (ECB) room to continue reducing interest rates, easing monetary policy without risking a return to high inflation levels.

2. China’s Deflationary Impact on the Global Economy

Harr highlighted the growing concern over China’s economic slowdown. He suggested that China will likely become the largest deflationary force in the global economy in the coming years, as deteriorating economic sentiment continues. This deflationary pressure from China could have widespread effects on global trade and pricing.

3. Monitoring the Middle East Conflict

Although the current conflict in the Middle East has had minimal impact on global economic stability, the situation warrants close monitoring, according to Zettelmeyer. The potential for regional escalation could disrupt energy markets, leading to increased oil prices and heightened volatility in global markets.

4. Fiscal Discipline in Post-COVID Europe

European governments, particularly in France and Italy, face the challenge of reigning in their fiscal policies after significant stimulus spending during and after the COVID-19 pandemic. With economic growth slowing, these nations must find ways to balance fiscal discipline with the need for continued investment to drive economic recovery.

5. Uncertainty Over Investment in the Eurozone

The Draghi Report advocates for a surge in both public and private investment to boost eurozone productivity and competitiveness. However, political polarization across Europe is creating uncertainty. Nationalist and isolationist movements are gaining popularity, threatening the kind of cross-border collaboration needed to ensure a successful investment boom.

6. Green Deal and Inflation Under Control

Despite political uncertainty surrounding the future of Europe’s Green Deal, inflation forecasts for the eurozone remain stable. The ECB retains the necessary tools to manage inflation, ensuring that it does not spiral out of control even as Europe moves toward greener economic policies.

7. Preparing for Market Volatility

The panelists emphasized that treasurers should be prepared for more frequent financial volatility, driven by current geopolitical and economic events. While medium- to long-term macroeconomic stability is expected, short-term shocks are likely to increase, requiring businesses to adopt more resilient financial strategies.

A Time of Strategic Preparation

As the world grapples with changing geopolitical dynamics, shifting economic policies, and evolving financial conditions, corporate treasurers and financial leaders must be prepared for increased financial volatility. With inflation under control and interest rates poised for further reductions, the economic outlook remains stable. However, the challenges presented by China’s deflationary influence, fiscal pressures in Europe, and potential geopolitical disruptions signal a need for vigilance and adaptability in financial planning.

The Importance of Liquidity and Cash Visibility

One of the primary themes discussed was the importance of liquidity management. Rossetti emphasized that visibility on cash is the first step toward optimizing liquidity. Effective cash management starts with ensuring that reconciliation processes are efficient and streamlined. HERA, one of Italy’s largest utility companies, processes over million transactions monthly, making real-time visibility crucial for managing their working capital. Reconciliation plays a pivotal role in enhancing cash flow, as it allows companies to track payments accurately and avoid bottlenecks in their cash cycles.

The Shift to Digital Payments

Another significant trend is the growing adoption of digital and instant payments, based on SEPA Credit Transfer (SCT) transactions that are progressively replacing SEPA Direct Debit Transactions. With new payment methods comes the challenge of reconciling these transactions effectively. Indeed, SCTs are harder to reconcile than SDD. Corporate clients must adapt to these changes by implementing robust reconciliation tools to manage the influx of new payment methods. HERA is increasingly moving towards SCTs and instant payments, underlining the need to ensure that customers have a seamless payment experience. As Rossetti pointed out, “Nobody wants to go to a physical bank to pay their bill anymore.”

Virtual IBANs: A Solution for Complex Cash Management

Elise Hoyet from Societe Generale advocated for the use of virtual IBANs (VIBANs) as a solution for complex reconciliation challenges. Virtual IBANs allow companies to automate the reconciliation process by assigning a unique identifier to each customer or transaction, simplifying the process for both the business and the customer. Hoyet highlighted that VIBANs can be activated and deactivated in real-time, providing flexibility and ensuring high-quality reconciliation.

Use cases for virtual IBANs include handling large volumes of incoming payments. The solution also helps implementing payment factories, and managing Pay On Behalf Of (POBO) or Collect On Behalf Of (COBO) structures. VIBANS can streamline payment processes for corporate clients by clearly identifying different subsidiaries or transactions.

Case Study: HERA’s Implementation of VIBANs

HERA SPA, which manages vast numbers of transactions, chose to assign a VIBAN to each customer rather than each invoice. This decision was made to simplify the process for clients while maintaining clarity and control over incoming payments. The VIBANs are generated by the bank and assigned by the company’s CRM system to customers, with the payment information printed on the first invoice.

One of the key challenges that HERA faced was managing manual reconciliation, especially with large public administrations, which still require some level of manual intervention. However, by closing existing physical accounts and transitioning to virtual accounts, HERA has reduced the sunk costs traditionally associated with manual reconciliation processes.

Forecasting Cash Flows with Greater Accuracy

For companies like HERA, accurate cash forecasting is critical. By automating and optimizing the reconciliation process, HERA can refresh 95% of their cash forecast daily, allowing for more timely and accurate updates on their financial position. Understanding customer payment habits is essential in this regard, as it allows the company to predict which customers will pay on time and which will delay their payments.

The Role of Change Management in Automation

Hoyet stressed the importance of thorough analysis and change management when implementing such automation projects. These projects are often complex and expensive, requiring companies to redefine their treasury management systems (TMS) and onboard both internal and external partners. Testing is a crucial phase in the implementation process, and Societe Generale has set up dedicated implementation teams to help clients successfully transition to automated cash management systems.

Looking Ahead: AI and Machine Learning in Cash Management Trends 2024

While HERA has not yet integrated artificial intelligence into its processes, the company has begun using machine learning to identify transaction patterns and further streamline cash management. The adoption of these advanced technologies is expected to grow as companies continue to refine their automation processes.

In conclusion, the automation of cash management processes, driven by trends such as digital payments, virtual IBANs, and machine learning, is transforming the role of treasury departments. As companies like HERA and Societe Generale demonstrate, these innovations not only improve cash flow visibility but also reduce costs and enhance efficiency, positioning businesses for long-term financial stability.

The following article was originally published in The Paypers. 

Introduction

In the ever-evolving landscape of digital commerce, chargebacks and friendly fraud (also known as first-party fraud, as this fraudulent behaviour is all except friendly) have become one of the main concerns for merchants since they represent an opaque area resulting in a significant loss.

In 2023, chargebacks are expected to represent around USD 120 billion (according to a projection made by Chargebacks911 based on Mastercard data) in global losses for merchants. First-party fraud, making up to 75% of these chargebacks (according to Visa), would therefore cost merchants around USD 90 billion annually. The rise in ecommerce has exacerbated this issue, with first-party fraud increasing by 20% every year (according to Adyen). Addressing this requires enhanced verification methods and improved dispute management systems to mitigate losses and safeguard against fraudulent claims.

Difference between chargebacks, first-party fraud, and policy abuse

On the one hand, a chargeback is a transaction reversal initiated by a cardholder’s bank to dispute unauthorised or erroneous charges, providing consumer protection against fraud and merchant errors. On the other hand, first-party or friendly fraud occurs when a cardholder disputes a legitimate charge to get a refund while keeping the goods or services, often intentionally exploiting the system. The key difference lies in intent: chargebacks address genuine issues, while friendly fraud involves deceitful claims. Both can be costly for merchants, but friendly fraud is harder to combat as it involves disputes over transactions initially authorised by the cardholder.

Very close to first-party fraud, as most of the time it is also undertaken by genuine customers, policy abuse is being experienced by most merchants more and more often. Policy abuse refers to situations where consumers exploit or manipulate the terms and conditions set by merchants or service providers. This can include exploiting return policies, abusing loyalty programmes, using loopholes in discount offers, or making false claims to receive refunds or compensation.

How can merchants address these challenges?

To effectively address chargebacks, first-party fraud, and policy abuse, businesses can implement a multi-faceted approach by leveraging insights and strategies from industry experts:

1. Clear policies and communication – follow guidelines from the most reliable sources, like the card networks, and ensure transparent policies regarding transactions, returns, and dispute resolutions are clearly communicated to customers in order to mitigate policy abuse.
2. Advanced fraud prevention strategy – consider utilising specialised tools that employ machine learning (ML) and artificial intelligence (AI) to detect suspicious patterns and prevent fraudulent transactions proactively. Their key strength versus traditional rule-based tools is that they collect an extremely high number of data points so that they can individually determine the customer profile and therefore make better decisions – therefore, this applies to chargebacks but also to policy abuse like ‘wardrobing’ (i.e., customers returning a product after they have used it for a specific occasion) or refund fraud (i.e., returning a different product from the one that was originally purchased). Plus, some of these solutions can also propose a chargeback guarantee, which can be relevant in certain cases.
3. Real-time chargeback monitoring and response – employ real-time chargeback monitoring systems, either internal or from specialised providers, to identify and respond promptly to potential chargeback situations, preventing some of them before they even become a chargeback and resolving disputes before they escalate.

By integrating these strategies into their operations, businesses can effectively mitigate the risks associated with chargebacks, first-party fraud, and policy abuse. This proactive approach not only protects financial interests but also enhances customer satisfaction and strengthens the overall security posture of the organisation.

Conclusions

Chargebacks and friendly fraud present significant challenges in the landscape of digital commerce. Thus, implementing an effective chargeback strategy yields several key benefits for businesses:

1. Reduced financial losses – by deploying advanced fraud detection technologies and proactive monitoring systems, businesses can identify and prevent fraudulent transactions early. This minimises the financial impact of chargebacks and preserves revenue.
2. Enhanced customer trust – transparent communication of policies and proactive management of disputes contribute to a positive customer experience. Resolving chargebacks promptly and fairly can build trust and loyalty among customers, reinforcing their confidence in the business.
3. Compliance with industry standards – following best practices and guidelines from organisations like Visa ensures compliance with industry regulations and standards. This protects the business from penalties and maintains its reputation in the marketplace.
4. Improved operational efficiency – clear policies and streamlined dispute resolution processes enable businesses to handle chargebacks more efficiently. This reduces administrative burdens and allows staff to focus on core operations rather than managing disputes reactively.
5. Stronger relationships with payment providers – effective chargeback management fosters positive relationships with payment processors and card networks. This can lead to lower processing fees, better terms, and quicker resolution of payment issues.

In conclusion, a well-executed chargeback strategy not only protects the financial health of the business but also enhances customer satisfaction, strengthens operational efficiency, and fosters positive relationships within the payment ecosystem. By investing in technologies, policies, and training that support effective chargeback management, businesses can mitigate risks and position themselves for long-term success in an increasingly digital and competitive marketplace. Please refer to our articles for further chargebacks mitigation strategies while ensuring maximised acceptance rates.

The following article was originally published in The Paypers. 

Introduction

Over the past decade, the payments landscape has undergone significant transformation, with tap to pay technology standing out as a pivotal innovation. Leveraging Near-Field Communication (NFC), tap to pay enables consumers to complete transactions by simply tapping their card or NFC-enabled mobile device near a terminal, thus eliminating the need for a PIN. This advancement has substantially increased consumer convenience. The COVID-19 pandemic further accelerated the demand for contactless payments due to hygiene concerns, leading to over 100 markets witnessing a more than 50% increase in the share of in-person transactions that were contactless between the first quarter of 2020 and 2021. This growth trend shows no signs of slowing down.

Merchants and payment companies are acknowledging this shift and preparing for the future by adapting to new payment methods and upgrading terminals. A notable development in this area is SoftPOS, an application that converts Apple and Android smartphones into payment terminals. The rising popularity of SoftPOS has prompted historical leaders in the payment terminal industry to pivot in this direction. For example, Ingenico acquired Phos, a leader in software-only point-of-sale solutions, in March 2023. This strategic move positions Ingenico to serve merchants directly through their phones, eliminating the need for physical terminals.

New opportunities and challenges

From a customer experience perspective, tap to pay offers the convenience of using smartphones with digital wallets like Apple Pay and Google Pay. Transactions are completed quickly with a simple tap, reducing wait times, and enhancing convenience. These platforms integrate with digital wallets for seamless management of payments and loyalty programmes. The contactless nature ensures hygiene, while security features such as encryption and tokenization protect sensitive information, building trust and making the payment process smoother and more secure.

Merchants who adopt wallets like Apple Pay and Google Pay at the point of sale often notice increased customer satisfaction and improved payment process efficiency. However, they might also face higher monthly invoices in countries with co-badged cards where the local network predominates. This is particularly evident in France, where international wallets initially partnered with global networks, making it easier for issuing banks to rely, at least at first, only on Visa or Mastercard for NFC wallet payments.

The introduction of SoftPOS represents a significant shift at the point of sale. Smartphones or tablets can now function as payment terminals without additional hardware. This raises important questions for merchants about how POS digitisation will impact their business. Digitisation is likely to bring value-added services and flexibility, as hardware is no longer a core component of the Payment Service Provider (PSP) offering. Accepting payments through tap to pay now only requires a smartphone, a contract with a PSP, and the PSP app — an approach closely resembling ecommerce.

The future of POS terminals

Is the traditional POS terminal destined to disappear? Probably not, as the reality is more complex, especially for merchants covering numerous points of sale across different countries.

Historically, terminals have been provided by PSPs to ensure the security of these sensitive devices and their software. However, as tap to pay is software-based, how can enterprise merchants manage the complexity of purchasing hundreds or thousands of smartphones just to accept payments? This would involve dealing with smartphone manufacturers or new specialists, increasing complexity in their payment architecture.

The cost implications of purchasing smartphones can quickly exceed those of traditional POS terminals. Smartphones require regular maintenance and pose additional replacement challenges. Their batteries, for instance, may not endure the intensive, continuous usage typical in high-demand environments like supermarkets.

Conclusions

Tap to pay technology is here to stay and will continue to grow rapidly. From a customer perspective, the payment process is incredibly streamlined, as evidenced by its increasing adoption across all geographies. While accepting NFC payments on standard POS terminals has limited consequences for merchants, aside from higher costs in some cases, the main disruption lies in SoftPOS. This technology can transform smartphones into payment terminals, bringing transparency and flexibility to the POS ecosystem, potentially through orchestration.

The future of tap to pay payments will likely see a blend of traditional POS terminals and innovative solutions, each serving different needs within the retail environment. Merchants, PSPs, and technology providers will need to navigate the complexities of this evolving landscape to fully leverage the benefits of tap to pay technology while addressing the associated challenges. The continued growth and adoption of tap to pay payments indicate a significant shift in how transactions are conducted, making them more efficient, secure, and convenient for both consumers and merchants.

As the landscape of payments continues to evolve, it is crucial for all stakeholders to stay abreast of these developments and adapt accordingly. The intersection of convenience, security, and technological advancement that tap to pay represents holds great promise for the future of transactions, paving the way for a more streamlined and efficient payment ecosystem. By embracing these changes and addressing the challenges head-on, merchants and payment providers can enhance the customer experience, optimize their operations, and stay competitive in an increasingly digital world.

Can you give us a brief overview of an RCF?

– Matthieu Guillot, Redbridge: A revolving credit facility is an extremely useful liquidity instrument for companies. It can be used to finance the company’s general requirements and to meet one-off cash flow requirements by drawing on a confirmed line that is generally available for five years (often with two one-year extension options). It has to be paid back at maturity.

An RCF can include an accordion clause, which enables a company to increase the size of the credit line without having to obtain the unanimous agreement of the lenders. It can also be used as a ‘swingline’ by borrowers with commercial paper programmes (NEU CP, EuroCP, USCP). A swingline enables companies to draw money at day-value.

In terms of price, an RCF line includes a margin (generally based on the company’s leverage or credit rating), a utilisation fee and the currency index (e.g. Euribor for drawdowns in euros). On the undrawn portion of the loan, the borrower pays a non-utilisation fee. If the RCF is used as a back-up line, it is possible to negotiate tight margins with the bank, because the RCF used as a back-up line generates a very low liquidity cost for the banks.

RCFs can (and will increasingly have to) incorporate ESG (environmental, social and governance) criteria in the form of sustainability-linked loans with two or three performance indicators and trajectories for the company’s sustainable commitment fixed over the term of the loan.

What’s a term loan?

– A term loan is a medium- or long-term bank loan that enables a company to finance its investments or acquisitions. Term loans can have a maturity of up to seven years. It is generally an amortizing loan, although it is possible to negotiate a substantial bullet element.

It is possible and advisable to plan for a quite long period of availability during which the loan can draw, up to three years.

Term loans can also include accordion clauses. Term loan pricing consists of a margin (generally based on leverage or rating) and the currency index (e.g. Euribor for drawings in euros). The borrower pays a non-utilisation fee on the undrawn portion of the loan.

How do companies of different sizes use these instruments?

– Large groups generally use RCFs to ensure their liquidity: they guarantee their commercial paper programmes. They usually take out a term loan when financing an acquisition as part of a mix bridging loan (on capital market issues) / 3-5 year loan, with or without underwriting by banks.

Medium-sized companies often use RCFs as a back-up or to finance their working capital requirements, although they can also be used to finance growth. Term loans are more commonly used by small companies for (pre-)financing capex and acquisitions (hence the advantage of having extended periods of availability).

When it comes to bank debt, is it better to syndicate or use bilateral lines?

– The two formats can actually complement each other and be used together to meet a company’s financing needs. But to answer the question, let’s consider the advantages and disadvantages of syndicated and bilateral lines.

Syndicated credit provides a number of advantages for businesses. First, the legal documentation associated with a syndicated loan can be used as a reference for other kinds of financing, particularly in the context of acquisition financing. Second, syndicated loans can be used to cover a broad range of a company’s financing needs: working capital requirements, acquisition financing and capital expenditure projects (capex). The syndication market is deep, enabling a company to raise significant amounts of bank debt. Finally, syndicated loans are particularly well suited to acquisition financing as they bring together a pool of lending banks.

Bilateral lines also offer advantages. They are generally taken out at competitive prices as the relationship with the bank plays a key role. The legal documentation is generally more flexible and easier to negotiate than for a syndicated loan. That said, it’s important to ensure that the documentation for the various lines is aligned to maintain the same standard of documentation as in a syndicated loan.

Why should syndicated loans and bilateral lines of credit be mixed?

– Syndicated credit is more expensive, but larger amounts can be raised. Bilateral credit lines are less attractive to lenders and the management of credit events such as waivers and amendments is riskier. The administration of bilateral lines in terms of negotiation, refinancing, drawdowns and repayments is also more onerous.

As part of a corporate financing strategy, it can be useful to combine syndicated credit and bilateral lines to benefit from the advantages that these two forms of bank debt provide.

For example, syndicated credit could be used to finance the company’s holding company, with bilateral lines being used to finance subsidiaries. Finally, a syndicated loan can be used as a back-up line for the company’s cash flow requirements, while bilateral lines can be used to finance current needs.