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.

Redbridge – Hello Pascal, hello Pierre, and thank you for joining us today. We’re going to be talking about financing for tech companies, growth companies, scale-ups and unicorns. Could you start off by telling us a bit about Mirakl?

Pascal Ichard, Mirakl – Mirakl is a software publisher specialising in e-commerce platforms. It was founded in 2011 by two entrepreneurs, Philippe Corrot and Adrien Nussenbaum. In the past we have developed a marketplace and dropship platform and more recently we have also expanded into the areas of pay-out and retail media solutions.

Do you have some figures to give us an idea of the size of the company?

Yes. Mirakl is part of the French tech ecosystem, a member of the Next40 and has had unicorn status since our Series D funding roundin 2020. In 2023 there was $8.6 billion of Gross Merchandise Value exchanged on our marketplaces – over 50% more than in 2022. We have around €160 million in average recurring revenue, which is a key indicator for companies in the software sector. We have around 450 customers from all over the world and employ about 750 people.

How is Mirakl’s finance function organised?

Mirakl’s finance function is centralized in Paris, with a few employees in Bordeaux and Boston. We currently have a team of around 40 people, including the legal and IT functions.

What is your role, Pascal?

My role within this organization is to manage cash flow and financing, as well as supervising the accounts, tax and purchasing functions.

How would you describe Mirakl’s financing strategy?

Historically, Mirakl has developed as a company with fairly limited financing needs. Our SaaS (Software as a Service) model generates recurring revenues. Scrupulous monitoring of costs and investments has helped to limit our cash burn.

Since its creation, Mirakl has tended to finance itself through equity, with significant fundraisings in 2019, 2020 and 2021. Our latest round of $555 million valued the company at $3.5 billion. This funding enabled us to invest in innovation, drive our geographic expansion and launch new products.

How does the syndicated loan fit into this strategy?

The syndicated loan is linked to the increasing maturity of the Mirakl group. Our prior fundraisings have been important in helping us to develop Mirakl, but from now on the idea is to have maximum flexibility and a more balanced pool of partners providing our financing. This means we now receive strong support from investors who have been with us almost since our creation on the one hand, and bank lenders on the other.

Credit facilities have become a popular component in the financing strategies of tech companies against a backdrop of a dearth of very large fundraising rounds since 2022. There are still many investors backing companies and projects in their early stages, but they have become much more cautious than they were in 2020-21, when a huge amount of money was raised in France.

The syndicated loan is intended to diversify your sources of finance, but why do you need it?

Mirakl’s syndicated loan, which we signed last year, is an extension of our financing strategy. It’s an additional building block that will enable us to finance potential acquisitions and support our continued growth.

The idea is to find less dilutive sources of finance with a better balance between equity and debt. By rebalancing our sources of financing, we know that we can now rely on our historical investors and the cash that is already available to us, but also on this new banking pool and this credit facility, which has already been negotiated, if we need to position ourselves for an acquisition. It means we can act quickly if we see an interesting target. The syndicated loan is therefore important from the perspective of our company’s strategy.

How did you go about setting up this inaugural syndicated loan?

The transaction took place in the first half of 2023, after we had decided to embark upon this course of action at the beginning of the year. The transaction took a few months to complete, which is in line with market practice.

What were the criteria for selecting the banks?

We selected our banking partners on the basis of their ability to support us with this financing transaction at attractive terms, but we also looked beyond this individual syndicated loan.

Our idea was to understand how the banks joining the pool could support us in other areas. For example, we looked at the geographical footprints of the banks and chose those that could support us in our geographical expansion.

We also looked at the quality of cash investment opportunities offered by these institutions in a high interest rate environment.

Finally, I mentioned that the purpose of this financing line was to fund potential acquisitions. With this in mind, we looked at the strength of the banks’ networks. We expect our banking partners to be able to suggest targets and put us in touch with them. In short, the banks need to be able to facilitate the work of our teams dedicated to external growth.

All this led us to select more global partners, to which we can give side business in the short term and that will be able to help us when we engage in major operations in the future.

Who are your banking partners?

Our pool of five banks is made up of two historic partners and three who joined the pool at the time of the deal: Natixis, HSBC, BNP Paribas, JP Morgan and Société Générale.

How much was the funding package?

We syndicated €100 million with an option to extend. It’s an inaugural loan, so the idea was to structure an initial operation that was intended to live on and that will enable Mirakl to secure further credit facilities in the future.

Why did you enlist the services of an external advisor to lead this inaugural bank financing operation?

Start-ups and scale-ups are unusual in that they grow fast. Their teams are often very busy, with lots of issues to deal with, and the teams are often in the process of being structured. Mirakl’s finance department has grown considerably in just a few years, and we didn’t necessarily have all the expertise in-house or the time available to work on the deal ourselves.

Bringing in an external advisor was an obvious choice for what was going to be an intricate operation, in which there would be a lot to negotiate. We felt it was imperative to receive support from a consultant with experience of this type of deal and who could alert us to the key points, support us during the negotiation phases and provide us with benchmarks on market clauses and conditions based on their knowledge of similar deals set up by companies with the same kind of profile as Mirakl.

How did you work with the Redbridge team?

We benefited from the support of the Redbridge teams from the outset – even before we contacted potential banking partners, in fact. The objective we set the Redbridge teams was to coordinate the operation and assist us on a day-to-day basis. We also had a real desire to train ourselves, so there was an educational aspect to the project to help us get to grips with the subject of financing.

And what did the Redbridge team deliver?

While respecting confidentiality, Redbridge helped us with the negotiations by telling us what was generally acceptable, what wasn’t and what we should focus on in our negotiations and discussions. A number of our staff were already familiar with Redbridge’s work in cash management and treasury, so it was quite natural to put them in touch with Redbridge’s finance advisory team.

The Redbridge teams were with us every week and provided regular progress updates. All the planning was in place from the outset, enabling us to keep the operation on track, with clear milestones set out. We had support at every stage of the process, from negotiations to defining the terms of the loan. This enabled us to close the deal before the summer and everyone was able to go on holiday with peace of mind.

How do you draw up your initial bank financing documentation, bearing in mind that this will become a reference point for future documentation?

Before launching the deal, within the company we needed to document our trajectory, prepare our Info Memo, and talk about the past and our ambitions for the next four to five years both in terms of our product roadmap and in terms of figures. Basically, we had to explain where we wanted Mirakl to be in the future.

As far as the documentation itself was concerned, we relied on the Redbridge teams to ensure that the documentation framework negotiated would be with us over the long term and also on the day when we needed to renegotiate. It was important to create a basic framework.

Pierre, I’m sure you have a few words to add on this subject…

Pierre Bonnet, Redbridge – In all transactions, and particularly in inaugural ones, the three facets of price, size and documentation need to be successfully negotiated simultaneously, and without one of acting to the detriment of another.

When it comes to documentation, you need to have very clear objectives from the outset – intangible things that you know you don’t want to give up, and ensure you can achieve them through good preparation for the consultation, through the info memo, and by having a very clear conviction about the quality of the credit.

How many banks were consulted?

Pierre Bonnet – We consulted quite a few banks, for several reasons. First, because Mirakl is a very good credit risk, we knew that many lenders would be interested in a deal like this. We know that banks are looking for fast-growing companies, scale-ups, French tech firms, members of the Next40. Mirakl operates in a world that’s attractive to banks, but it’s one that they don’t really know much about.

We worked together with Mirakl to find the right way to get the banks on board.

Pascal Ichard – A lot of banks were interested, even though they’re more used to working with very mature companies. Not all of them were familiar with the business models and trajectories of scale-ups. Unlike investment funds, which focus on growth and the top line, banks are more concerned about profitability issues and they are also more risk-averse.

There was a real need to explain our business model and what lies behind the figures. We emphasized the new markets that were opening up and our new products, and we had discussions with certain banks that had difficulty understanding the business models of fairly young companies. This was often because they did not have a practice dedicated to this customer segment. In the same way that Redbridge taught our teams about certain aspects of the structuring of the credit facility, we saw that we needed to teach the banks about our figures and our trajectory.

What can be done to align the banks’ views on Mirakl credit?

Pierre Bonnet – To reconcile views, it’s important to build strong convictions – to help them understand our business model, concepts related to activation, and to see how all this can be reflected in the documentation.

It’s important to understand that companies like Mirakl, whose sales volumes can grow by more than 50% in a year, are rather special animals. We need to avoid having credit documentation that constrains such companies. Banks need to understand that trajectories can change very quickly, and that scale-ups have different needs to traditional companies.

To achieve alignment, it’s vital to consult a sufficiently large number of banks to find those that will support the company’s vision for the future.

Was it difficult to build a strong relationship with your banks?

Pascal Ichard – Having some form of recurring income helps, of course. You need a fairly clear route to profitability, and it shouldn’t be too far off, so that the banks are prepared to take a bit of risk. Finally, the quality of the investment funds backing the company, the quality of the management team and the amount of funds raised, all matter enormously.

Following this inaugural round of financing, what are the plans for Mirakl’s treasury financing department from here?

We have to bring this pool to life. We are in the process of building long-term relationships with our new lenders. We are reallocating side business to certain geographical areas, and we are distributing our new business to this or that player. I also mentioned the subject of investments, which means we are open to new products and new offers from our new partners.

We’re also looking at optimization issues, such as WCR, which perhaps we haven’t taken the time to address until now. These can be interesting subjects and can lead to side business for our banks. At the same time, we are continuing to optimize our flow management.

Do you have any projects relating to the organization of cash flow and payments?

Mirakl is fairly centralised, so there will come a time when we’ll need a cash management system to streamline the management of external flows, but it’s not a priority at the moment. Things will evolve according to what’s going on, so we’ll probably have to deal with this when we make a major acquisition.

Has Mirakl broached the subject of green financing?

It’s a subject we’re considering. We work a lot on ESG issues in collaboration with Mirakl’s CSR team. For the time being, this work has mainly focused on cash investment. We are currently working on integrating ESG issues and our ESG trajectory into our financial policy.

What impact has your new business had on your banking relationships?

One of the major challenges was to convince the banks about our new retail media business, which we are investing heavily in and in which we have a great deal of confidence. We also have more and more flows in foreign currencies due to our joint venture in Japan and our new businesses in the APAC region and Brazil, and this is giving rise to foreign exchange issues. The development of our business is generating new side business opportunities that we need to work on.

How did Redbridge add value throughout the process?

They helped us in terms of keeping to the timetable, educating our teams and the banks, and their ability to put things into perspective. They also did a lot of work to ensure that the documentation was not too restrictive. This was important because we need to avoid having belts and braces imposed on us so that we can continue to grow.

– Can you briefly describe the US Private Placement market?

– Muriel Nahmias, Redbridge: US Private Placements are multipurpose financing instruments tailored to the needs of US and European companies with a solid credit profile. Like any private placement offering, they’re essentially halfway between bank financing and bond financing.

The main investors and lenders are US insurance companies and asset management companies. They have a long-term horizon and they have a buy-and-hold approach. The market is deep, always open and highly international in nature. There’s more than USD 100 billion of new issuance every year, with nearly 30% of the volume coming from Europe.

Almost all – 98% – of the transactions are of investment-grade credit quality. Around 70% of issues are used to fund corporates, 25% are for infrastructure or project finance, and the remaining 5% to finance leases.

– Why should European corporates be interested?

By turning to the US Private Placement market, companies can raise amounts ranging from USD 50 million to more than USD 1.5 billion, with maturities from 7–30 years. That means they have a far wider range of options available to them than banks or the Euro Private Placement market are able to offer. What’s more, it’s possible to raise funds in complete confidentiality, generally without an external credit rating, and in a variety of currencies, including US dollars, euros and sterling.

Depending on basis swap conditions, it can be cheaper to access euro-denominated funding on the US Private Placement market than on its Euro equivalent. And that’s what we’re seeing at present: companies have been making savings of around 60 basis points on recent financing deals that are broadly equivalent in terms of credit quality and maturity.

Deferred funding is also possible at a modest cost. Meanwhile, a shelf programme can be granted by certain Tier 1 investors, enabling companies to lock, on an uncommitted basis, an additional amount after an inaugural issue.

– What do issuers need to pay attention to?

It’s important to bear in mind that investors in the US Private Placement market are generally highly sophisticated. They ask many questions and require clear answers during discussions. Their objectives can also be heterogeneous. The issuer must have a good understanding of the points to be negotiated and any potential hurdles to overcome if they want to optimise the terms and conditions and/or maximise the size of the deal.

The National Association of Insurance Commissioners (NAIC) assigns an internal rating to the transaction after it is issued. This rating (called NAIC designation), which in principle remains private, determines the regulatory capital charge that the insurance company must hold to back the exposure. Consequently, it may influence the positioning of investors in the US Private Placement market. Some investors may want a credit agency rating – which may also remain private – in order to secure an NAIC 2 rating.

Although the main contractual terms of a US Private Placement are generally aligned with the existing primary credit facilities of the issuer, there are some differences, particularly with regard to external debt in subsidiaries, asset disposals, financial covenants and off-balance sheet financing. Issuers also need to be aware of early repayment penalties. ‘Make whole’ clauses may be applied in the event of early redemption, as is the case with all bond financing, and they can have significant financial repercussions.

– Who are the eligible borrowers?

The US Private Placement market is only accessible to issuers of investment-grade credit quality, although they do not necessarily need an official rating. Companies wishing to access this market must have a stable business model with recurring cash flows and a maximum normative leverage level of 2x, although in exceptional conditions this may go as high as 2.5x if it is the result of the likes of mergers and acquisitions or specific one-off capital expenditure. Issuers must be leaders in their sectors, with sales of at least EUR 600-800 million per year, in our view. One thing to bear in mind is that the NAIC uses similar methodology than the major rating agencies (S&P and Moody’s), which favours large corporates. It has also tightened its criteria since the COVID pandemic. It’s possible to secure an NAIC 2 rating with other NAIC-approved rating agencies, such as DBRS or Kroll, which assign greater weight to the business profile than the financial profile.

– What are the main requirements in the documentation?

A single covenant is generally possible if the view on credit quality is solid. This leverage covenant is tested semi-annually to ensure compliance with established leverage ratios. There are limitations on subsidiary debt, generally set at between 10% and 15% of total assets. Limits are also imposed on asset disposals, with a right of first refusal on disposal proceeds if there are mandatory early repayment clauses in any of the company’s other financing.

Investors justify these strict requirements with the long maturities – up to 15 years for corporate financing – that they offer and the demands of their own investors. Their criteria ensure that the US Private Placement market is of high quality and that it is relatively safe for their investors to allocate to. There can also be tough negotiating points. We enable companies to access the attractive financing on offer in this market within a structured and transparent framework. The set-up process, which generally takes 2-3 months, must be rigorous and well prepared.

– How do spreads on euro-denominated transactions compare with what’s on offer in the Euro Private Placement market?

Historically, euro-denominated US Private Placements have offered more attractive pricing than similar deals in the Euro Private Placement market – on average, the difference has been around 40 basis points. But they’re even more attractively priced in relative terms at present – they’re currently around 60-70 basis points cheaper.

Treasury departments: a mix of generalists and specialists

Our recent survey of treasury organisations confirms the existence of two kinds of treasury department: those in SMEs and SMIs, which are generally made up of generalists, and those of large groups, in which treasury team members generally focus on particular areas.

The treasurers in SMEs and SMIs have very limited resources at their disposal. Generally, they cover the three dimensions of treasury – risk, cash flow and liquidity management – with teams ranging in size from just two to eight people.

Companies with turnover of EUR 5 billion and above tend to have much larger treasury teams.

Beyond this threshold, there can be big differences in terms of the number of team members. This is because treasury departments may face specific challenges and as organisational issues often take on greater importance in larger firms.

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

A budget comparison tool for treasury-finance departments

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

Half of the respondents to our survey shared information about their treasury-finance department’s budget.

The distribution of these budgets, excluding bank and card fees, increases steadily in line with company turnover. This information? makes it possible to assess whether a treasury team’s budget is within the normal range for the company’s turnover.

Information systems: a huge drain on human resources

Regardless of the size of the company, on average the finance department allocates close to 20% of its time to financing matters. In relative terms, cash flow / cash management requires less of the treasury staff’s time? in the largest groups.

By contrast, the proportion of time allocated to risk management and managing information systems rises sharply as company turnover increases. This can be explained by the higher number of tools dedicated to daily tasks being used as the company grows.

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

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FIRST SESSION – March 12th, 2024

Optimization Strategies To Improve Approval Rates

On March 12th, 2024, at 16:45, please make your way to Room Potsdam 3, where we will address the merchants’ primary quest in payment solutions: how to provide shoppers with the best customer experience, maximize revenues, and enhance customer retention while adhering to stringent anti-fraud requirements? Join us as we explore innovative strategies to tackle these challenges.

• Understand your payment flow, whether it involves a customer-initiated transaction (CIT) or a merchant-initiated transaction (MIT).
• Select the right Key Performance Indicators (KPIs) to monitor your acceptance rate.
• Discover approaches to optimize your process.

SECOND SESSION – March 14th, 2024

Facilitating Value-added Services for Modern Ecommerce

On Thursday, March 14th, just before the conference concludes, Gabriel Lucas will host a roundtable titled ‘Value-added Services for Modern E-commerce’ at 10:45 am. This session promises a dynamic exchange of ideas and will feature panelists from leading industry players.

Joining Gabriel on stage are distinguished speakers, including Julian Martin from Miravia (Alibaba Group), Samuel Flynn from Hands In, Jana Maleckova representing Everifin, and Yves Ruland from Datatim. Together, they will explore new forms of value-added services as important sources of revenue and market advantage for payment players. The panel will also discuss innovative strategies and emerging trends in value-added services tailored to meet the evolving demands of contemporary e-commerce.

To stay updated on the latest developments and join the conversation, follow the hashtags #mpe2024, #MPEAwards, #mpecosystem, and #ILOVEMPE across social media channels.

Redbridge is looking forward to engaging with you at MPE 2024!

Link to register: https://www.merchantpaymentsecosystem.com/get-ticket

If there’s to be a shift towards a more sustainable and environmentally friendly economy there needs to be massive investment: it’s been calculated that implementing the European Green Deal will require around €520 billion of investment per year between 2021 and 2030. While public authorities are providing support to hasten the transformation of key sectors of the economy, start-ups and innovative small- and medium-sized companies are still facing challenges in accessing private finance. The stakes are high, as they may need this funding – often within a tight timeframe – to execute their development plans.

And the way start-up growth companies can secure initial bank loan early is evolving. Traditionally, lenders have tended to provide support based on established activities – which are often limited for such companies – which means shareholders have generally been responsible for funding development. But at a time when investment in crucial social and environmental projects needs to accelerate, equity fundraising is slowing down. According to a report by Atomico in November 2023, total capital investment in the European tech ecosystem in 2023 looked set to reach $45 billion – far below its peak level in 2021, when it surpassed $100 billion.

Given the fluctuating nature of the equity fundraising, bank debt plays a crucial role in ensuring that growing companies can obtain the funding they need to carry on expanding.

How to persuade lenders to lend – securing your business bank loan

Securing bank finance is generally challenging for companies that are still to prove that they can be profitable. Lenders often turn away such firms when they need substantial investment, even if their business model is transparent and their technology proven. Failures to raise debt in this way are typically kept private, but credit committees generally raise concerns like: “not convinced about the company’s ability to make a profit in the near future,” “too early in the company’s development,” or “isn’t this more the role of equity?”

Nevertheless, companies at the early stages of their development may approach a bank successfully before asset financing is in place if the projects they are involved in have attained a certain level of maturity and the primary development and profitability risks they are exposed to have been mitigated. Recently, a number of companies involved in the energy transition and tech have managed to secure funding by showcasing their ambition, methodology, and transparency. They have done this by making clear the key elements of their credit story. It is also thanks to their in-depth understanding of how banks work and their ability to garner support within these institutions.

Much like a compelling equity narrative is vital when raising equity capital, a company looking for bank financing needs to develop a credit story that is realistic, well-argued and impactful. It must also set out how it will be able to repay the money it wants to borrow based on the company’s capacity to grow and settle or refinance the loan in the medium term. Banks are rarely willing to provide borrowers with a window of longer than two years to generate a positive profit.

All this means that a company’s underlying technology needs to be operational and have entered the commercial and industrial deployment phase. Biotech companies, which predominantly use the money they raise in product development, are for this reason excluded

Bankers also generally stipulate that the company’s initial liquidity needs must be covered by the equity they have already raised, with bank debt seen as a complement to equity. As such, a well-planned timetable for raising both equity and debt is vital.

To ensure the business plan is credible, the application must provide evidence that the company is moving towards sustainable profitability by including detailed information on the company’s projects, with a focus on their maturities and execution risks. This kind of detail enables banks to assess the company’s capacity to repay its debts.

The importance of optionality and assertiveness

Another crucial aspect of a business model – and one that is often overlooked in credit analysis – is the value of optionality; specifically, a management team’s capacity to adjust its strategy. This optionality might involve slowing some investments to preserve liquidity or welcoming new investors to finance assets under development and meet cash requirements. Although they are not always easy to quantify, such options strengthen a company’s credit profile by providing a safety net to banks in the event of a company’s business performance deteriorating.

While the most mature projects may secure growth through non-recourse asset financing, while the various layers of future financing and their legal security structures becomes imperative. When it comes to the financing of holding companies, it’s important to explore other mechanisms to reassure lenders, such as providing enhanced visibility over flows returning to the holding company, partial early repayment mechanisms, and control of the portfolio of projects under development.

It’s also important to be creative when it comes to the credit framework. For growing companies with negative or low EBITDA, conventional covenants such as leverage are likely to be either ineffective or excessively restrictive. To help banks track the pledge while preserving operational flexibility, it is better to use indicators like recurring annual revenues, sales volumes or the physical deployment of infrastructure.

Even though borrowers may not be in a strong negotiating position with banks, it is nonetheless crucial to be assertive about the structure of the loan taking into account factors like its term, maturity schedule, covenants and undertakings to perform and not to perform. This is especially pertinent in the case of an inaugural loan as it will serve as a benchmark for subsequent loans. The financing margin must be assessed against other, potentially more costly financing options.

Mixing lender profiles

Lenders’ appetite to provide funding is linked to the potential to do business with a company in the future. Activities such as cash management, cash flow, sureties and guarantees, asset financing, interest rates, foreign exchange hedging, equity financing, or, in some cases, wealth management for the company’s founders – all these commercial levers can effectively engage competition amongst potential lenders.

It is evident from Redbridge’s recent advisory deals that the most successful outcomes for companies seeking funding are achieved by combining regional banking networks, which are responsive to the opportunity to bolster development in their territories, with global investment banks that are more interested in ancillary business opportunities.

For early-stage companies seeking securing business bank loan, advisors have an important role to play in reassuring lenders, crafting the credit story negotiating the best possible terms and conditions, and helping the company understand the way that banks think and work. Meticulous preparation of the application before entering any discussions with lenders maximizes a company’s chances of obtaining the financing it needs to secure its growth momentum.