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

The digital transformation

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

What exactly is digital banking?

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

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

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

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

How has the pandemic impacted the digital transformation of your treasury

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

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

Where do banks stand in the race for digital?

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

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

What is a neobank?

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

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

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

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

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

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

Navigating the digital banking landscape

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

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

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

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

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

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

The importance of cashflow forecasting

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

Data quality

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

Communication among contributors

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

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

Overview of the main cashflow forecasting tools

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

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

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

The impact of AI on forecasting

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

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

Cashflow tools that use AI

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

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

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

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

How to choose the right cashflow forecasting system & tools

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

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

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

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

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

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

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

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

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

What type of company is your service aimed at?

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

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

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

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

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

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

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

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

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

How does Redbridge work with its clients?

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

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

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

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

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

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

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

What is the return on investment for clients?

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

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

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

Reduce costs, boost revenue, and minimize fraud

LEARN MORE ABOUT PACE

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

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

Banks are stepping up

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

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

The trouble is far from over

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

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

What’s next?

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

What is a QR code?

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

When did QR codes become mainstream?

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

Why did they fade in popularity?

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

Why are QR codes relevant again?

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

What are their current uses?

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

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

Is global adoption of QR codes the future for payments?

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

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

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

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

Where are they the most popular?

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

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

Are there downsides to QR codes?

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

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

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

How long will their popularity last?

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

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

Nate Guers & Lucie Kunesova

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

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

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

The value of cashflow forecasting

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

Methods for forecasting cashflow

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

The indirect method

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

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

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

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

The direct method

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

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

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

Reconciling both methodologies is a management necessity

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

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

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

The Redbridge approach

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

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

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

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

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

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

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

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

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

Eric Page, Senior Director of Compliance and Controls at Airgas

What is PCI Compliance?

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

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

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

What are the requirements of PCI Compliance?

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

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

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

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

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

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

Eric Page, Senior Director of Compliance and Controls at Airgas

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

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

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

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

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

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

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

Eric Page, Senior Director of Compliance and Controls at Airgas

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

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

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

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

Justin DiCioccio & Sara Moren

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

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

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

What can virtual accounts offer?

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

Advantages of virtual accounts

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

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

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

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

Drawbacks of virtual accounts

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

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

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

Is there an ideal virtual account customer?

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

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

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

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

When to transition into virtual accounts

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

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

Thomas Finkelsztejn & Chris Gibson

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

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

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

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

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

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

Heterogeneous ESG structures

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

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

A virtuous but perfectible approach

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

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

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

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

Who benefits from the mechanism?

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

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

Our advice to corporates

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

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

Working hand-in-hand with treasurers and CFOs to innovatively optimize their financing strategy, liquidity, payments and treasury efficiency, we observe four promising trends in supply chain optimization.

Inventory build

Due to the ongoing supply chain disruptions, cash-rich clients have decided to rebuild their inventories. It is the quickest way to invest cash and avoid the cost of cash balances. Although conceptually simple, it requires a strong understanding of the activity and detailed classification of different inventory categories.

Dynamic discounting

Supporting your suppliers through earlier payments in exchange for discounts brings many benefits for the buyers:

• Attractive risk-free returns. Buyers are effectively investing their own cash in order to capture discounts, which translate into risk-free returns.
• Immediate reduction of the cost of goods and services purchased, which can support procurement KPIs.
• Enhanced supply chain resilience and reduced likelihood of any disruptions.

Conversely, benefits for suppliers include:

• Reduction in days sales outstanding (DSO) and thereby cash conversion cycle improvement.
• Access to external funding, often at a lower cost than other options available, enabling better management of unexpected costs or investment in growth and innovation.
• Choices in financing a single invoice, several, or all of them.

On the implementation side, resorting to digital solutions/platforms can be extremely helpful to avoid the operational burden arising from the management of dynamic discounting programs.

Supplier short-term funding

Should you want to further strengthen your supply chain, another option is to provide your suppliers with direct financing. In such cases, we would highly recommend implementing a counterparty risk assessment framework to avoid adding any risks to your liquidity investment.

ESG reporting

Close to 80% of retail and consumer staples companies’ carbon footprints come from the supply chain. To tackle global warming, suppliers will have to be involved in the company’s CO2 reduction effort.

One way is to associate them with the reduced funding costs you can extract from your banks and investors. Our experience has shown that most ESG or sustainability-linked financing instruments today can help you reduce your funding costs by 5bps to 10bps.

We foresee the rise of supplier financing programs, where suppliers are no longer tiered according to their size or strategic importance, but instead based on their ESG rating or commitment. This is an efficient way to foster the alignment between your suppliers and your own ESG strategy.

Time for action

We assist our clients at various stages to ensure that their projects make a real impact. Together, we build a solid cash forecasting and working capital monitoring framework to identify the optimum available liquidity to invest.

Highlight: Forecasted returns that can be achieved through the above options range from 2% to 12% of the investment, via increased EBITDA and lower cost of funds, i.e., way higher than any secured liquidity investments.

We estimate the potential benefits of supply chain investment to build a business case and support the change management. We support the selection of the relevant digital/platform providers and, when required, we assess counterparty risk profiles, or review counterparty risk policy/process. Ultimately, we implement the above and transfer ownership/expertise to our clients.

– How is the finance-treasury function organized at Albéa?

– A three-person central treasury team in Paris leads the finance-treasury function, and it relies on local relays in India, China, Indonesia and the U.S. This setup provides centralization without a hierarchical relationship. Each financial director has autonomy and the ability to consult local banks. We’re keen to retain this entrepreneurial spirit and enable our local finance directors to evolve freely within a defined framework and shared processes. It’s an organization based on trust, mutual recognition and appreciation — and it works well.

The central treasury department plays a supporting role by providing knowledge and experience. We help everyone to carry out the reporting that is crucial for our executive management team to monitor activity. We also provide tools. Because we have deployed a treasury management system (TMS) for the group, treasury processes between countries and business lines are more secure and homogeneous.0

In terms of financing, the group’s medium- to long-term debt is centralized in our holdings in Luxembourg. Our priority is to fund the working capital needs of our subsidiaries. To that end, we have four cash-pooling schemes – in Europe, the U.S., China, and Indonesia – as well as factoring programs in Europe. Until recently, we also had an Asset-Based Lending (ABL) scheme in the U.S. In China, our factoring program is dormant because our subsidiary’s treasury has a surplus. Financing working capital needs enables us to eliminate the discrepancies between our receipts and disbursements — and ultimately to better manage inventory. This is essential in our businesses.

– What principles guide your banking relationships?

– We seek to establish stable, long-term relationships with banking partners capable of providing quality cash management services in line with local needs. We are still working with too many banks around the world — a total of about 30. Our bank account structure could be simplified so that we can spend less time reconciling, minimize operational and fraud risks, and free up teams’ time for projects with higher added value. The ideal target would be to have two local banks and one international bank in every major geographical area in which we operate.

The adoption of our treasury system has led us to streamline our banking environment with the aim of limiting the multiplication of contracts, licenses and implementations on the one hand and concentrating our side business on the other.

– What challenges did your recent cash management tender in the US involve?

– In the U.S., where we make a quarter of our turnover, we had a single bank. The relationship had existed for a decade or so. We were satisfied with the quality of the cash management services, but the relationship had become strained with respect to the functioning of our ABL program. This collateralized financing, worth some $60 million, had many constraints — do’s and don’ts — requiring the U.S. banking partner to agree to our development strategy. We felt like we had a bank whose team failed to understand our concerns and those of our board of directors.

Repaying the ABL removed all of our obligations to the U.S. banking partner and facilitated all of our M&A operations. As such, we repaid the debt, paid the break-up fees, and put inter-company financing in place. This, in turn, triggered an immediate termination letter from our bank. We had 120 days in which to leave the relationship with the bank. Our priority was to notify our clients and launch the process of selecting a new banking partner for the next 10 years.

– How have you replaced your ABL program?

– Having financing from your cash management bank is convenient, but it’s not indispensable. After the sale of several assets in the U.S. in June 2020, the introduction of new financing was no longer an urgent matter. Our U.S. subsidiaries have no debt, and the proceeds from sales remove short-term treasury requirements. The ABL provides an important financing base on invoices and inventory, which we no longer need as much.

Given the funding envelope required for the next three years in the U.S., we decided to break away from the legal, organizational, structuring and lien (guarantees, cross-guarantees, obligors) constraints of the ABL. This will enable us to avoid the hassles we had experienced when dealing with our former banking partner.

We have naturally switched to factoring, which is a lighter, simpler solution that is not too expensive. This new funding is confirmed for three years, like our European program. From the point of view of rating agencies, it is a stable resource. Finally, in the U.S., factoring is seen as true sales (no recourse) and, therefore, deconsolidating, which is an additional advantage.

– What criteria did you use to select your cash management partner

– We had a preference for a U.S. partner that was fully compatible with our banking communication tool and TMS. We were also looking for a bank recognized by our clients and suppliers. We wanted a partner that was well known and recognized in-house; able to deliver the same quality of service as our former cash management bank, including the capacity of setting up letters of credit, guarantees, leasings and financing beyond factoring; and provide the broadest possible portfolio of services.

The structuring of the tender, led by Redbridge, enabled us to prioritize the essential matters: lockboxes, letters of credit, treasury tool compatibility, forex, and generation of dematerialized checks. We built our specifications in project mode. With the call for tender, which was conducted quickly and efficiently, it was ultimately easy to separate from a banking partner we had worked with for 10 years. We were surprised by Redbridge’s ability to put us in contact with banks that we would never have dreamed of.0

The collaborative approach also facilitated the final decision. We got our U.S. subsidiaries on board before proposing the final choice to Albéa’s Chief Financial Officer, and there was no hesitation in our selection. Moreover, although the priority was to change banks, we achieved the savings that we had envisaged two years ago when we were looking into the matter.

– Constance Veron, you have accompanied for Redbridge your client Albéa in this RFP. Can you briefly explain the choices that were made with Albéa to match the deadline?

– Because Albéa only had one banking partner in the U.S., we needed to find one or two new partners who could address all of their needs and constraints in terms of cash management and financing. We built our specifications in project mode and invited U.S. banks, international banks and lenders to the RFP. We designed the tender to include both cash management and financing while prioritizing essential matters such as lockboxes, letter of credits, treasury tool capability, forex and digital check solutions.

Redbridge already assisted Albéa in our TMS selection, so we were familiar with its treasury operation, and it made the difference in completing the project within the limited timeframe we discussed. We worked closely with the banks to find the best solution and services for Albéa, as well as competitive pricing. Less than three months from the beginning of the project, Albéa found a new U.S. banking partner for our cash management operations. After the review of all the financing offers received, none of the banks or lenders met during the RFP process offered us a factoring program. Instead, most banks were proposing either a new ABL program or a noncommitted or overly restrictive program for Albéa. So, we finally selected a factoring program with one of the group’s partners in Europe that met all of the requirements of the financial department.

– Oliver, how has the migration  to your new bank taken place?

– Once the accounts were live, we first circulated the information to our clients and then called each of them to let them know about the change of bank. Fortunately, we had a strong relationship with our U.S. clientele. We issued our first payments. Apart from electronic checks, which we are not yet fully prepared for, we have re-established the full range of banking services, enabling our U.S. entity to operate as normal. We are currently using our new bank’s in-house platform, and the connection to our treasury tool will take place at the end of the year.

– What about your financing partner?

– We selected Eurofactor for the U.S. factoring program. It already operates our pan-European program and provides a tool compatible with our TMS. True sales involve additional legal costs, but overall the cost of our financial resource in the U.S. has fallen considerably compared with the pre-existing ABL. A slight downside is that financing will only be credited D+1.

– What are Albéa’s treasury plans now?

– We always have a lot of projects on the go! We aim to finish optimizing our treasury architecture with our TMS, to continue aligning our internal signatory processes and operating methods, to train subsidiaries that fall within our TMS, and to activate the new modules on our treasury tool, such as netting, cash forecasting, cash pooling, debt management and exchange rates. We also intend to prepare as best as possible for M&A operations in the near future by starting to reflect on our debt structure and the positioning of our credit profile (credit insurers and rating agencies).

What is in-house banking?

An in-house banking structure aims to replicate the services offered by an external bank. Such services can include liquidity management, payments on behalf of (POBO), collections on behalf of (COBO) and even managing the foreign exchange risk of a group’s sub-entities.

Adopting in-house banking encourages the finance department to revise its practices and rethink its effectiveness and alignment within the organization.

The benefits

In-house banking can provide a company with a number of benefits.

1. Adopting in-house banking compels a company to define an organizational model to improve its flows and rationalize its banking structure, thereby optimizing the working capital requirement. It enables the company to work with a solid, sustainable cash management structure that can support the company’s growth.
2. In-house banking also enables groups to manage their currency risk better. That’s because currency risks are concentrated within the same entity. It provides a more direct overview of the financial risks and the treasury team can be more responsive when it comes to managing these risks. What’s more, transaction execution costs can be reduced due to the company’s greater bargaining power resulting from its foreign exchange operations being concentrated, and hence bigger in size.
3. In-house banking directly contributes to a reduction in the risk of fraud and improvements in cybersecurity. Group entities reduce their external interactions and delegate responsibilities to the company conducting the in-house banking. The operational risk associated with workflow management is concentrated and opportunities for fraud are minimized.
4. A related benefit of in-house banking is a reduction in bank charges: the complicated banking environment that was previously justified at a local level by a large number of transactions, currencies or even types of cash receipts can be streamlined, reducing the associated fees.

Some important considerations

There are a number of factors to think about before successfully implementing an in-house banking function.

1. 1. Don’t underestimate the scale of the change management process that will be necessary, both within the company and with respect to its customers and suppliers (especially if a POBO-or COBO-type payment center is being established). When implementing such a project, bank flows should be anticipated and the customer recovery service should be supported to avoid a slip in customer payment terms. Training for stakeholders is needed to demonstrate the medium-term benefits of the new structure. There needs to be buy-in among staff as they will be faced with a heavier workload during the implementation phase of the project.
   2. Deploy gradually. There will be substantial effort required from everyone involved, and detailed project management will be necessary. To avoid overstretching your teams, the project can be deployed in phases; for example, by country or region. This also enables the organization to learn and test its processes as it goes. In the projects we’ve been involved with, we have found that good preparation of the project upstream – with the drafting of a target operating model that is the result of collegial reflection between experts throughout the company – accounts for a third of the success of this kind of project.
   3. Ensure that the financial tools your company uses – especially those dedicated to cash management and accounting – are able to support such a structure. The need to manage the allocation of flows and update current accounts manually should be avoided. Work can be carried out upstream to streamline the number of financial applications used by the company. Our customers regularly take the opportunity presented by the implementation of in-house banking to optimize their application environment.
   4. Investigate the potential tax impacts and documentation requirements related to transfer pricing in the jurisdictions involved, both from the perspective of the participating entities and the parent entity. Strong intra-group relationships are vital if all the benefits of establishing an in-house bank are to be enjoyed to the full. The company’s tax scheme can only be optimized if the tax departments are involved in the project from the outset. We also recommend that the accounting treatment of intra-group flows are validated with the company’s auditors. Ongoing management of post-implementation tax audits and declarations is essential.

Prerequisites

We summarize some of the prerequisites for implementing an in-house bank below.

1. 1. • Confirm the maturity of the organization carrying out the project in view of organizational and practical changes. Not all organizations are eligible.
      • Be aware of the tax impacts applicable to the jurisdictions of the companies to be integrated, particularly in cases in which the in-house bank structure includes a POBO- or COBO-type payment center.
      • Assess the ability of the application environment to support an in-house banking structure. In the event of disparities in accounting tools, operating the in-house bank may be a complex affair.
      • Ensure that both the financial department and the IT department are aware that the project is a priority. This is vital if the project is to have the dedicated business (accounting, treasury, tax and legal) and technical resources that it needs at its disposal.

Challenges

In-house banking has been around for some time, but there are still some challenges it needs to overcome.

Harmonization of regulations

Depending on the country, the regulations in force may not necessarily be favorable for in-house banking. But this could change. It’s a good idea to monitor prospective regulatory developments to assess whether it may become beneficial to adopt in-house banking and, conversely, where it may become less favorable to do so.

The increasing importance of technical skills

The successful implementation of an in-house banking project is dependent on the people working on it having the right skills. Beyond the involvement of the CIO, the treasury resources need to be able to combine expertise in both operations and technology. External assistance will sometimes be required.

Conclusion

Despite the cross-functional requirements of this kind of project and the extra work needed to get it up and running, the creation of an in-house bank will bolster a company’s treasury practices and should provide an attractive financial return on investment.

Over the last five in-house banking projects we’ve worked on, the set-up costs have been made back after an average of around 1.5 years of operation. This has been possible due to the reduced bank charges and foreign exchange transaction costs and the return on investment of the additional cash that has been invested.

Taking into account the productivity gains and reduced risk of operational fraud these kinds of projects result in, they pay for themselves, on average, within one year.

Having attended both TXF and GTR conferences in Geneva over the last few weeks, I could not help a feeling of going back to normality, after over 18 months of virtual events only. What looked even better was to see everybody more concerned about how to secure liquidity and risk appetite for performing commodity-trading businesses rather than manage problem loans. Both commodity traders and their bankers need to cope with increases stemming from both volumes and prices.

In the past, as a banker the biggest business risk I saw was that of persistent low commodity prices, with credit lines utilized at 20-30% and revenue seemingly going nowhere. Couple that with low interest rate environment driving overall limited performance of the transaction banking sector and senior management quickly run their attention to cutting costs. Rather short- term thinking!

An even bigger trigger for banks retrenching was brought about by the pandemic with several commodity trading firms causing billions of losses for the main trade finance banks and some specialized direct lenders. A year ago, some banks were completely exiting the commodity trade finance sector, while others were trimming their portfolio as part of a “flight to quality” (probably one of the most misused sayings in modern finance and banking). Again, this was short-term thinking!

The business boom

Fast-forward 12 months and we are in a booming (musical) world. The commodity traders have learned to play the accordion feature of their syndicated facilities. With commodity prices 50–100% higher than a year ago, liquidity is king again – especially for those traders with the privilege of high margin calls, as driven by the rapid appreciation of various commodity prices. As rising prices go hand-in-hand with increased volumes, line utilization has also doubled – or more – over the past year. Profits are accumulating for trading companies, and they are for banks too, which means they are likely to have their best year in a decade.

But it’s not been an easy journey. Banks have been allocating a lot of risk capital to other businesses, and cut head-count s while still struggling with KYC requirements. As I anticipated a year ago, the resilient banks are now reaping the benefits of the current volume and price boom and have successfully passed the stress tests they’ve been subject to.

The “exiters” have become spectators and are now re-thinking their approach. A leading European investment bank is even considering re-entering commodities trading after exiting the arena eight years ago due to the reputation risk it involved and concerns about return potential. But as a commodity structured finance leader stated, “we don’t like banks that come and go”. That perception has a cost too, it’s not just about switching the lights on again.

Is the current business boom sustainable?

Some analysts believe that despite the economic rebound, inflation is only likely to be transitory. But if the economic recovery and pent-up demand for commodities are sustained, there will be continued pressure on liquidity management for commodity traders. The well-known global trade finance gap, as measured by the Asian Development Bank increased from USD 1.5 trillion to USD 1.7 trillion according to figures released on 12 October. This is worrisome as it witnesses the incapacity of the providers of trade finance solutions to keep up the pace with growing needs. And into 2021 this gap is probably much higher in reality, also with risk appetite for emerging markets remaining scarce.

All this means that commodity traders will have to, both compete for bank liquidity and access new, generally more expensive, sources of capital, such as funds, capital markets, family offices and private equity. The latter represents healthy diversification and a reality check, driving up average cost of borrowing.

Meanwhile, competing for bank liquidity should not mean overpaying for bank financing, especially for established players. No more covid premium. It means understanding who their banks are, the right price for the risk bank are taking, and the way it translates into regulatory capital. Basel IV standards, which are expected in January 2023, are still being formulated, and have the potential to deal further surprises affecting the cost of trade financing (watch out for the credit conversion factors and Loss Given Default levels).

Any bank is the sum of its people and its business model

As I mentioned in an article a few years ago, the better commodity trading firms understands what drives their bankers’ perception of risk, the higher the chance of increasing their credit appetite and reducing the margin charged. As one of my former managers used to say, “perception is reality”. The risk perception of your relationship manager and especially that of his business and risk chain will be the reality when it comes to your liquidity and cost of borrowing.

Are you spending enough time improving that perception, or do you think it’s simply the relationship manager’s job to write all those memos, perform risk analysis and ensure you receive an optimal deal? What drives banks’ risk appetite remains an ever- green topic! (click here for a refresher) Will your banker help you become more profitable, on a risk weighted basis, for the bank and hence be able to provide more credit? Will the structure of your facility result in risk-weighted return improvements?

On a related note, linking loans for commodity traders to ESG KPIs is becoming the new norm, almost similar to compliance. There is still work to be done educating both sides, and especially in terms of how companies should be rewarded or punished via their cost of financing in a meaningful way. One thing is for sure: the malus premium should not be kept by banks. Embracing ESG criteria and related mechanisms may alleviate certain internal pressure within banks on the sector. That explains the need to press forward full- steam ahead, embrace the change and learn along the way. But don’t be afraid to challenge what’s relevant and needed in developing the commodity trade finance sector ESG guidelines.

Conclusion

As the pendulum seems to have swung all the way back in a rather short time frame, CFOs and treasurers of commodity traders need to stick to their long term diligence with the banks! Either way, whether prices keep on surging or demand falls in the new year, NOW is the best time to monetize the trust and increased comfort across relationships with those resilient banks while still investing in newer financing partners.

Ensure a successful migration from the MT format

The world of payments is in permanent evolution, but some changes are bigger than others. In today’s environment, commercial exchanges are globalized, and payment transactions are tremendously varied, numerous and complex. To address these challenges, the payment industry is preparing itself for the largest disruption so far in this century: the migration to ISO 20022.

Why is the MT standard being phased out?

Created in 1973, SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a private company that developed the SWIFT network, which enables all businesses and financial institutions to connect and exchange financial messages.

In 1977, the first electronic message using the MT standards was sent. Since then, SWIFT has introduced many changes and innovations to the MT messaging system. Although the new MX standard was introduced in the early 2000s, the old MT standard remains predominant.

The industry, however, has decided to replace the old MT standards entirely with MX messages because they are compliant with ISO 20022 standards.

When will the MT format no longer be available?

The adoption of the MX format will be progressive and depends on countries or regions. In the European Union, cross-border / high value payments across the regions going into the SWIFT Network, Target2 and a few others in scope will be transitioned first in November 2022. The U.S. Federal Reserve will transition in November 2023. Both formats will coexist until 2025 (the deadline set by SWIFT), and most of MT messages will then no longer be permitted. The following figure shows the timeline planned for the interbank space.

Source: ISO 20022 Programme – Quality data, quality payments

What is the main difference between MT and MX messages?

Message type (MT) messages are structured according to the specifications of the ISO 15022 standard, using the FIN protocol. MX messages are structured according to the ISO 20022 standard and use the XML protocol.

Message structures

MT messages are followed by a three-digit number:

• The first digit indicates the message category
• The second digit indicates the message group
• The third digit specifies the message type

The MX message is composed of four parts:

• 4 alpha characters indicate the message type
• 3 alphanumeric characters identify the message number
• 3 numeric characters highlight the message variant
• 2 numeric characters indicate the version number

For example, a single customer credit transfer MT 103 will appear as pacs.008.001.0x in MX format.

MX messages will be composed of 940 separate fields and will incorporate more structured, robust and comprehensive data.

What are the advantages of the MX format?

The goal of this new standard is to use the same message structure, form and meaning to relay financial transaction information around the world.

Who does the ISO migration affect and how?

The migration will affect all SWIFT members: banks, brokers, corporates, non-bank financial institutions, service providers and others.

The impact on banks

Some banks already support ISO 20022 for corporate payment and account statements services. However, if they do not, process changes are required to transform the internal processes to be interoperable with future market infrastructure ISO requirements.

Most banks have legacy messaging platforms that have been in operation for years. The new ISO 20022 migration, along with the overall shift in the payment industry to “instant,” will place immense pressure on banks by making these platforms obsolete. Banks will have to choose between fully upgrading their platforms or building an external, integrable system. If they do not act, they risk making their existing products and services inoperable.

The impact on corporations

The migration will impact end clients in multiple ways while also offering new opportunities.

For example, some legacy payment messages allow address information to be inputted into a nonspecific field and in no particular order. ISO messages, however, require filling in building number, street, city, and other specific data fields. Breaking down the addresses, coupled with procuring any missing data fields, will likely prove a cumbersome task for end clients. If the migration of data fields is not mapped and prepared properly, a significant risk of data loss or data integrity arises.

Corporate treasurers should ask their ERP providers when they plan to migrate from the MT format and the formats they will able to receive. Treasurers should also ask their banking partners what formats they will be able to send and receive in the future.

The impact on treasury management systems

Regarding banking communication, some treasury management systems (TMS) are already integrated with a transcoder that converts data to any target format. As a result, Regarding banking communication, some treasury management systems (TMS) are already integrated with a transcoder that converts data to any target format. As a result, there is no impact in terms of development. This transcoder is available for all clients, enabling them to be autonomous.

However, this integrated solution required that, on the company side, the ERP must be able to provide the needed data to build the target file because MX messages contain more information than MT messages. In some cases, the transcoder permits the user to apply rules in case the ERP is unable to provide all of the information to build a viable file.

In terms of information processing, the capacity of the TMS to manage large volumes may be a concern. MX messages are very dense, which will test the robustness of the existing banking communication, posing potential speed and storage issues for vendors.

SWIFT is offering a Test Sparring Partner to enable members to test to confirm that their systems can send and receive the messages to validate functional integration testing. Most SWIFT users are aware of this offer, but some may be unaware. Detailed information on this migration is available on the myStandards web portal.

Achieving a successful migration

TMS providers remain highly dependent on the ability of banks and ERPs to provide the new formats. The new MX standard involves several parties and requires all of them to coordinate and communicate to ensure a successful migration.