Transcript Pitchbook US template
A s s o c i a t i o n f o r F i n a n c i a l P r o f e s s i o n a l s o f A r i z o n a - 2 0 1 3
Steven E. Bernstein Executive Director J.P. Morgan Chase
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Factors Impacting Payment Market Development
Macro/Socioeconomic Factors
Demographics
– Higher proportion of young people in the regional/national population could lead to faster adoption of new payment methods
Unbanked Population
– High proportion of consumers with no formal banking relationship will also lead to rapid uptake of new payment methods
GDP Growth
– Rapidly growing economies generate a greater number of new market entrants and faster adoption of new types of payment methods
Average Real-Income Growth –
Markets with relatively high real-income growth foster increases in average payments values and favorable returns on investments in payments innovation.
Export-Import Balance –
Cross-border trade growth leads to greater opportunities for high-margin payments products (but also heightens competition) Source: Boston Consulting Group: Winning After the Storm, 2011
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Factors Impacting Payment Market Development
Macro/Socioeconomic Factors
Regulatory Outlook
– Rigorous government regulation can have a dramatic impact on payments economics, sometimes necessitating strategic transformations.
Infrastructure
– Active government involvement in building payments infrastructure can have large implications on the pace of market evolution and potential profit pools.
Industry Factors
Mix of Payments Instruments –
Greater use of cash and checks can generate high potential to capture new payments flows, resulting in new market entrants and the likelihood of more innovation
Efficiency Level –
In inefficient markets with a low degree of operational excellence, new market entrants are more likely to excel. Source: Boston Consulting Group: Winning After the Storm, 2011
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Globalization is moving down market and middle market customers are now also requiring more international capabilities
Source: Aite Group
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Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020
Volume of retail and wholesale cross-border payments, 2010-2020 CAGR: 8% 6% 13% 4 25% 37% 9%
Source: BCG Global Payments Database, 2010
2010 2020
Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020
Average Revenue per Domestic Payment Transaction, 2010-2020
1.4
1.2
1 0.8
0.6
0.4
0.2
0
CAGR:
N. America
-2%
L. America
-3%
W. Europe
-8%
2010 2020 Cent/East Europe Asia-Pacific M. East and N. Africa World
-5% -4% -2% -3% Average Revenue per Cross-Border Payment Transaction, 2010-2020
6 5 4 1 0 3 2 N. America L. America W. Europe Cent/East Europe Asia-Pacific M. East and N. Africa
-1%
World
CAGR:
Source: BCG Global Payments Database, 2010
-2% 1% -1% -2% -3% -2% 5
2010 2020
Process Standardization Drives Agenda of more International and Complex Client Profiles
Global Solutions
Global Model
Global funding, concentration and investments Commodity financing Global payment factory
Regional Liquidity Solutions Regional Treasury Centers Regional Risk Management
Regional Model
Shared Service Centers – centralize AP and AR activities Regional Treasury Centers – centralize FX and funding Rationalization of banking relationships Netting, pooling, sweeping structures
Regional Shared Service Centers
Physical & financial supply chain management Regional re-invoicing center Active treasury and risk management role
Country Level
Active Treasury Management
Entity Level
Payables In-Country Liquidity Management Cash Flow Projections Finance Solutions Receivables
Decentralized Model
In-country accounts Basic payments / receivables In-country liquidity structures Sweeping cash into centrally managed bank accounts or centralized in-country banks
Client’s treasury structure will determine your relationship to the subsidiary 6
Critical Characteristics of Different Payment Types
Attribute
Payment amount
Range Low value High value
Speed of payment Control of timing Finality Ease of making/receiving payment Cost Risk mitigation Posting/reconciliation Information attached
Multiple days, week Undetermined Returns Complex, manual, slow Real time Known, stipulated Good funds Simple, automated, fast Unknown, range high to low Low, rebates Limited Full regulatory compliance, preventative Delayed, manual Little to none Real time, automated Complete, including actionable data
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Key Concepts and Definitions
Large value payments
A somewhat generic term generally used to describe electronic, RTGS payments. What are described as wire transfers generally fall into this category. Historically, these payments types were used primarily for large payments because they were expensive. But, there is no official amount threshold that delimits them. Most international payments fall into this broad category.
Small value payments
Typically smaller electronic payments processed in batches. These payments are generally not time sensitive, and are processed on a store and forward basis. They also typically are not final and irrevocable. These payments are usually less expensive to process as their smaller amounts make it harder to justify expensive processing. US ACH payments are an example of this type of payment. Small value processing is historically limited to domestic payments, though this is gradually changing.
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Continued Global Migration from Paper-to-Electronic
Businesses are responding to forces of economic pressures, scalability, risk management, and environmental consciousness by accelerating the transition from paper to electronic processing
Distribution of the number of noncash payments 2006
ACH 15% Prepaid 4% Checks 32% ACH 18% Prepaid 5%
2011
Checks 22% 37.3
Total US check transactions
(bn) 35.9
34.6
33.1
31.5
29.9
Credit card 23% Debit card 26% Credit card 20% Debit card 35%
Source: The 2010 Federal Reserve Payments Study based on 2006, 2009 volumes
2003 2004 2005 2006 2007 2008 Over
10mm individuals are unbanked
in the US, challenging electronification of certain payments (e.g. payroll), providing opportunity for payroll cards
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Let’s Dig Deeper….What is International ACH?
ACH (Automated Clearing House) is a US system/process for lower value, non-urgent payments and collections International ACH —an international payment and collection process that leverages in-country clearing systems Provides a cost effective method for corporate clients to make high volume payments such as Payroll Accounts Payable Dividends Expense Reimbursement Payments and/or Collections are made to Vendors Businesses Consumers Employees
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Why International ACH?
Customers looking for cost effective reliable payment channels Improved experience for the beneficiary No lifting fees on originated transactions Increased awareness in the market Customers are asking for International ACH Provides dual revenue source Fee income Foreign exchange revenue Leverages domestic ACH system Intelligent use of communication, delivery channels and billing processes and expertise
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Customer Benefits and Value Proposition
Reduced funds movement costs More predictable cash flow Integrated disbursements Electronic return reporting Fast confirmation Settlement on a specified value date Full value of item received by beneficiary Reduced need to maintain multiple bank relationships globally
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Consider International Business Activity
Wire Solutions International ACH
Occasional international business Regular international business Regular payments and receipts in same currency Maintains operations overseas
Range of needs
Multinational corporation
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Payment Types
Credits
Employees —payroll, expense reimbursement Shareholders —dividend payments Customers/Vendors —insurance payments, accounts payables
Debits
Consumer —subscriptions, dues and utility bills Corporations —trade payments, loans, leases, disbursement, funding, dealer drafting, cash concentration, and franchise royalties
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Client Profile —International ACH or Wire?
If client needs
Payments only Same day availability Advices (individual) Repairs (non STP transactions) Third party payment capability Accessible via SWIFT Low number of transactions per country Countries that do not have national low-value clearing system
Wires are the best route … 15
Client Profile —International ACH or Wire (continued)
If client needs
Payments and/or direct debits Repetitive transactions High volume of items per country per month Transactions are non-urgent (i.e., not same day) Need only to send minimal information Does not require advices Country offers non-urgent clearing alternative Bulk file preference
They are a good global ACH candidate 16
Typical Customer Industries for International ACH
Travel services/hospitality Oil/drilling/energy Engineering services Legal services Manufacturing Insurance Securities dealer Educational services Computer software Churches
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International ACH Parties
Originator
Company originating the ACH item
Originating Gateway Operator (OGO
) Originating financial institution Re-formats file to local country specifications Creates settlement by country to originator
Receiving Gateway Operator (RGO
) Receives file from OGO Distributes file into local country payment system
Beneficiary
Recipient of payment in foreign country
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Non Global ACH Client Model…
for Making Payments
Receiving banks
Beneficiaries and debtors
Receiving banks
Beneficiaries and debtors
Originating company Receiving banks
Beneficiaries and debtors
Receiving banks
Beneficiaries and debtors
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Global ACH Client’s Payment Model
Originating company ACH Gateway Receiving banks
Beneficiaries and debtors
Receiving banks
Beneficiaries and debtors
Receiving banks
Beneficiaries and debtors
Receiving banks
Beneficiaries and debtors
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How it Works
Originator
NACHA file
Bank Bank acts as OGO
Performs FX —USD to foreign currency or Originate in settlement currency Translates modified NACHA into foreign format Performs OFAC Review Sends to RGOs
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ACH Payment Flow to the UK
Step 1
Monday by 8:30 AM CT bank receives ACH file with effective entry date of Monday
Step 2
On Monday bank sends ACH file to the British RGO¹
Step 3
On Monday the payment file is presented to the British clearing system²
Bank
British Clearing System — Bankers Automated Clearing Service (BACS)
Beneficiary’s Bank in the UK Step 4a
On Wednesday, bank debits customer’s settlement account
Step 4b
On Wednesday, British clearing system delivers transactions to beneficiaries’ banks
Payment beneficiary Step 5
Beneficiary’s bank credits beneficiary’s account on Wednesday or later depending on that bank’s practices
Settlement account at bank
¹ UK includes England, Wales, Scotland, and Northern Ireland ² British clearing system has a 3-day processing cycle
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Differences Between US ACH and International ACH
There is no such thing as true Global or International ACH!
No international standard No standards or common rules No centralized system No “international version” of US prenotification process Longer settlement time/varies by country Different formats for account numbers and routing numbers Different holiday schedules In most countries, reversals are not allowed In most countries, must pay in local currency Differing debit rules in country Some countries have no low value system or it is an immature system Local language requirements for clearing systems
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IPFA Concept
Defining rules, standards and operating framework Simplifying non-urgent cross-border credit transfers Leveraging existing payment networks and international standards e.g. ISO 20022 Enabling interoperability between domestic and regional non-urgent payments systems and banks Why?
Globalization is continuing to drive a broader base of clients who demand cost-effective, less complex payment services with a wider reach The International Payments Framework approach is to enable locally originated non-urgent credit transfers to reach markets around the world Leverage existing “railways”, enhancing existing “rules” and deploying existing international “standards” Increased regulatory requirements requires institutions to collaborate with counter-parts in order to ensure compliance
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IPFA Overlay Structure Model
Customer Euro
Domestic Formats & Rules Association
Rules and Procedures
Member ISO 20022 Member Standard Format Association
Clearing & Settlement Mechanism
Association
Clearing & Settlement Mechanism Financial Institution Customer Customer Financial Institution Financial Institution Intermediary Financial Institution There can be one or more entry points into or out of any country. The domestic ACH Rules & Formats are not impacted by IPFA Rules and Procedures.
Domestic Formats & Rules
US dollar Financial Institution Customer Customer Intermediary Financial Institution Customer 25
IPFA Governance
International Payments Framework Association (IPFA) was established as a U.S. not-for-profit association in February 2010 Two membership categories Primary Member – financial institution or a clearing & settlement mechanism Affiliate Member – an association that represents one or more FIs (but is not a FI) a standard-setting body, an industry vendor or a user of payment services.
Has a nine member Board of Directors Is run by a Chief Executive Officer Cooperates with Observers from international and national organizations / regulatory bodies
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Payment Behavior and Trends differ Greatly by Region
North America:
Snapshot: Paper checks are still heavily used (representing almost half of the non-cash value in the region) and credit cards are leveling off. Payments are growing but slower than rest of the world.
Trends: Debit card use continues to grow rapidly Demand for more detailed remittance data included with payment Consumers are moving from the credit based economy of the past decade to a savings based economy
Europe:
Snapshot: Credit transfer and debit card are most frequently used non-cash payment types. Credit cards have not been embraced in this region, except in the UK. Innovation is not as extensive as in developing regions due to high level of electronic payment adoption and low unbanked population. Trends: Significant margin pressure across region (e.g. SEPA-driven consolidation and regulations are shrinking transaction fees) pushing need to manage costs Less mature markets (e.g. Eastern Europe) will experience double-digit growth in payments value
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Source: BCG, KPMG, and McKinsey reports, and EPS analysis
Payment Behavior and Trends differ Greatly by Region
Asia Pacific:
Snapshot: Large divergence on trends and initiatives based on high and low income countries. Region offers attractive structural opportunities for innovation in payments. Domestic payments growing quickly. Cards represent about half of non-cash transactions. Large unbanked population.
Latin America:
Snapshot: Still heavily cash based, and fear of inflation remains a strong driver of payment choice. Credit transfers are most frequently used non-cash instrument. Significant unbanked population. Trends: China: government encouraging migration to e-payments, and Alipay has become the dominant e-wallet (more registered users than PayPal globally) Hong Kong: smart cards (e.g. Octopus) are replacing cash for micro payments Japan and South Korea: increasing use of mobile payments Australia and New Zealand: likely to follow the lead of the North American or European models
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Trends: Credit cards are growing rapidly, as the banked population has increased significantly, banks are aggressively pushing electronic payment enablers (such as POS network), and banks and retailers have successfully partnered Source: BCG, KPMG, and McKinsey reports, and EPS analysis
Payment Trends —Definitions
Wireless payment: The initiation and or confirmation of a payment transaction from a wireless device (mobile phone or a PDA) At point of sales, vending environment M-commerce environment Contact smart cards: Chip embedded in a card Contactless cards: Contactless chip embedded in a card or other fancy packaging carried by individuals, does not need to be inserted into the card reader to complete a transaction Near Field Communication (NFC) mobile phone: Mobile phone equipped with a chip using NFC protocol. It can be used like a card or like a reader
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Source: Chetan Sharma Consulting
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Source: Chetan Sharma Consulting
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Mobile Payments and Mobile Banking
Mobile payments comprise a growing population of payment types and related transaction information: Bill payment: text bill alerts, two-way text payments Shopping: text-to-buy, apps and stores, retail payment apps Point of Sale (POS): Bling mobile tags, Square Prefunded accounts: Green.dot, others Person-to-Person (P2P) networks: PayPal, Obopay Online Spend: Global eCommerce Forecast in $millions (excluding Travel)
2009 2010E 2011E 2012E 2013E US
144,124 165,791 187,693 212,253 235,289
Europe Asia ROW Total
188,446 107,078 44,963
481,612
195,174 155,718 55,811
572,494
210,876 208,953 73,113
680,635
246,651 286,560 95,047
820,511
283,014 323,065 121,660
963,028
Source:
Nothing but the Net 2011: JP Morgan Internet Investment Guide
CAGR
12.4% 13.2% 27.5% 29.7%
19.4% 32
Malaysia
– – – –
Product:
Government Multipurpose Card, Dual interface (government & private) contact/contactless smart card
Target:
All Malaysian citizens (<12 years children: MyKid card)
Uses:
8 functions: Biometric Identity card, driver’s license, regional passport, health information, e cash (maximum of $500), ATM card, Touch ’n Go transit card, Digital certificate (PKI: Used for secure online tax returns, Internet banking and email)
Launched in 2001.
By 2005, all citizens were mandated to carry the card outside the home. Failure to do so may incur a fine of between RM3,000 ($622) and RM20,000 ($6,218) or jail term of up to three years
Currently, Japan is testing a smart card built into a mobile phone that allows for 40(+) applications to be stored.
Mykad 33
Kenya
– – –
Product:
Mobile payments —Vodafone and Safaricom Ltd.
Uses:
Pay rent, taxi, groceries. Intend to expand to pension payments, school fees, wages to workers, contract phones, water and electricity bills
Launched in 2007.
Expanded to Afghanistan and plan to expand to India and other African countries. No bank needed in Kenya but may need one in India
M-Pesa Send Money By Phone Anytime Anywhere 34
South Africa
– – –
Product:
Mobile money services —South African Bank of Athens
Uses:
Pay utility bills, hair cuts, buy mobile airtime, send money to relatives
Launched in 2005.
2000 unemployed people —Wizzkids. Eight of ten customers previously had no bank account and never used an ATM. Fees are 1/3 cheaper than traditional banks
Wizzit 35
Norway
– – –
Product:
Mobile payments - Directly charges an existing credit card or a bank account, either by customers calling or sending a SMS to a specified number
Uses:
Purchase goods and services online or at physical locations, and donate money (e.g. several Norwegian churches are collecting donations from people via mobileAxept payments instead of small notes or coins)
Launched in 2003.
Piloting customers from different countries, and currently has operations in Norway, Denmark, Sweden, and USA
mobileAxept
mobileAxept
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China
– – –
Product:
Mobile Payments – UMPay is a joint-venture between China Mobile, the world’s largest mobile operator, and China UnionPay , China’s only inter-bank fund-transfer network
Uses:
Check phone bills and make payments, check bank account balances and other information, pay utility bills, online goods, buy lottery tickets, and book airplane tickets.
Launched in 2004:
By June 2009, 19 million users have conducted mobile payments. In the first half of 2009, there were 63 million transactions worth 17 billion yuan, up 42% and 64% year-on-year respectively.
Union Mobile Pay 37
Euro Overview – Key Changes
Payment Services Directive (PSD) legislation affecting delivery time and charge practices The PSD affects payments where the first and last bank in the chain are EU residents Harmonisation of the high-value, national clearing systems by the implementation of TARGET2 Introduction of a single EU payment scheme for credit & debit transfers as part of the single euro payment area (SEPA) Increased competition among banks resulted in a greater focus on costs to remain competitive Escalation in the volume and cost of processing third-party bank charges for commercial payments driven by regulatory change Wide-scale use of the SWIFT bank identifier code (BIC) and international bank account number (IBAN) on payments within the European area EC Regulation 1781/2006 required ordering financial institutions make sure all wire transfers carry specified information about the payer, through the payment chain
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International Banking Account Number (IBAN)
Description
An international standard that identifies bank accounts across national borders and merges existing country specific account number formats into a global standardized framework Required for European payments Mandatory to ensure straight through processing
Objective
The IBAN number reduces routing errors that result in payments delays and extra costs incurred Allows for payment information validation at the point of data entry using: Country code Appropriate number of characters (by country) Specified format
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International Banking Account Number (IBAN)
Composition
The IBAN is made up of the beneficiary’s account number and a prefix that includes the International Organization for Standardization (ISO) Country Code, two check digits and a bank identifier, which varies, by country/institution. – – Alpha-numeric up to 34 characters in length – Provided by the account holding bank Customer must obtain IBAN from beneficiaries
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Single Euro Payments Area (SEPA)
“SEPA harmonizes the way we make and process retail payments in euro”
SEPA enables customers to make cashless euro payments to anyone located anywhere in Europe, using a single payment account and a single set of payment instruments.
SEPA Credit Transfer (SCT)
A payment initiated by the payer. The payer sends a payment instruction to his/her bank. The bank moves the funds to the receiver’s bank. This can happen via several intermediaries.
SEPA Direct Debit (SDD)
A transfer initiated by the receiver via his/her bank. Direct debits are often used for recurring payments, such as utility bills. They require a pre authorization (“mandate”) from the payer. Direct debits are also used for one-off payments. In this case, the payer authorizes an individual payment.
SEPA Card Clearing (SCC)
Debit cards
- allow the cardholder to charge purchases directly and individually to an account.
Credit cards
- allow purchases within a certain credit limit. The balance is settled in full by the end of a specified period. Alternatively, it is partly settled. The remaining balance is taken as extended credit on which the cardholder must pay interest.
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SEPA Successfully Launched and Volumes are Rising
January 28th, 2008: SEPA Credit Transfer launched successfully November 2, 2009: Banks started to offer SEPA Direct Debit SEPA member states include all members of the European Economic Area (Inclusive of the Eurozone and the EU) in addition to Monaco and Switzerland SCT volumes are rising:
Date
Feb 2008 Feb 2009 Feb 2010 Feb 2011 Feb 2012 Feb 2013 Feb 2014
% Share
0.5% 2.0% 6.7% 15.5% 24.8% 35.0% 100%
Austria Belgium Estonia Finland Germany Greece Luxembourg Malta Netherlands Portugal Slovenia Spain Bulgaria Czech Republic Czech Republic Denmark Hungary Latvia Lithuania Poland Iceland * Latvia Sweden United Kingdom Iceland Liechtenstein Norway Monaco Switzerland 42
SEPA Migration End Date
The SEPA Migration end date imposes a mandatory adoption for clearing systems and the retirement of legacy ACH by Feb 1, 2014 EU Regulation 260/2012 of the European Parliament and of the Council (the SEPA end-date regulation) was finally published on 30th March establishing EU-wide requirements for credit transfers and direct debits in euro. The regulation was adopted by the EU Council and the European Parliament in February 2012. The objective is to establish technical and business requirements and set deadlines for migrating credit transfers and direct debits in euro from national to Union-wide standards Corporations operating cross-country and the public sector are analyzing SEPA impacts and re-evaluating their bank relationships
SEPA Migration end date: SCT February 1, 2014 SDD February 1, 2014 43
SEPA Migration End Date
The day after publication of EU Regulation 260/2012, the following entered into force: Reachability for euro Credit Transfers and Direct Debits (the latter only where national Direct Debits are available to consumers) Payment accessibility across EU Member States, implying accounts can be held in any European Member State Removal for €50,000 limit on equal charging practices aligning cross border with domestic charges for payments of the same value and in the same currency Impact on banks: National timeframes for winding down niche services Complying with interoperability requirements Flexibility with national variances The removal of the obligation for customers to provide BIC with the IBAN.
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Are all banks now reachable for SEPA DD&CT?
Within the Eurozone
All consumer / retail and commercial banks in the Eurozone are reachable SCT was launched in January 2008 and currently has more than 4,400 European banks registered with the EPC for this service EC Regulation 924 that came into force on 1st November 2009 mandated the SDD reachability of all Eurozone banks – currently 2,600 European banks have registered with the European Payment Council (EPC) for the SDD Core service and 2,400 banks for SDD Business to Business service
Outside the Eurozone
Limited reach for banks outside the Eurozone and some private / special institutions Dependent on countries: UK and Switzerland are leading here, some eastern European non-euro countries already have BIC & IBAN as mandatory. If banks offer Euro accounts then they are SEPA ready Generally SCT reach into non-Eurozone countries is good. For instance, in excess of 100 banks are reachable in Switzerland SDD reachability is considerably lower at this point in these countries. Most have less than 10% of their banks as reachable for the Core DD service and participation is lower still for the Business to Business DD service
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United Kingdom Overview
Currency: GBP –₤
– Residents are permitted to open and maintain domestic (GBP) and foreign currency accounts both in the UK and abroad – Non-residents are permitted to hold domestic and foreign currency accounts in the UK – Resident and non-resident accounts in domestic currency are convertible into foreign currency – Interest payments on current and short-term accounts are allowed – Interest, if earned, is paid on a daily basis to residents and non-residents
Relevant Regulatory & Tax Implications:
– A company is a UK resident if it is either incorporated in the UK or centrally managed and controlled in the UK – 20% withholding tax levied on interest paid to non-resident companies without a UK branch
Banking Structure:
– Payment and clearing systems High-value/urgent payments in GBP are processed through the Clearing House Automated Payment System (CHAPS) and delivered with same-day value Low-value/non-urgent payments are cleared through the Banker’s Automated Clearing Services (BACS) and operates within a three-day cycle Single or multiple transactions of less than 10,000 GBP in value cleared able to be cleared through Faster Payments Service (FPS). FPS offers a two-hour delivery timeframe, longer operating hours, extensive capacity for remittance information Paper-based clearing system operated by the Cheque and Credit Clearing Company Ltd offers three-day settlement cycle
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UK Faster Payments
Near real time for electronic and telephone initiated payments £100,000 or less Funds credited to beneficiary within two hours of receipt Standing orders of £100,000 or less will have intraday cycle Launched June 2008 Aimed largely at retail sector but corporates also benefit
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UK Faster Payments
Transaction types Ceiling Payment cycl e CHAPS
Payments Unlimited Same day
UK Faster Payments
Payments Standing orders £100,000 for payments; £100,000 for standing orders
BACS
Payments Standing orders Direct debits £99,999,999.99
3 days 2 hours for attended payments Intraday for unattended payments No guarantee of same day crediting — depends on the beneficiary bank Up to 24/7/365 7am Monday to 10.30pm Friday
Clearing opening hours
6am to 4pm Monday to Friday
Revocability
Irrevocable
Target customers
Irrevocable With recourse Primarily for corporate customers Limited retail customer use Primarily aimed at retail customers — internet payments and telephone banking Also applicable to corporate customers Retail and corporate customers
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Payments – Debit is more popular than cash in the UK
Value Total Payments Values £ billions Total Payments Volumes MMs Actual Forecast Actual Cash Credit Debit
Source: Visa Europe, February 2011; Data does not include direct debits, checks; only debit and credit vs. cash
49 Forecast
Asia Market and Change
Advanced Japan, Korea Mature and paper Maturing Classified into four broad categories Emerging Vietnam Japan, Korea Australia, New Zealand, Hong Kong, Singapore, and Taiwan Vietnam In both countries the payment systems are considerably advanced, with the low value clearing system also functioning as a high-value clearing system. Both markets are characterised by a relatively low usage of cheques Standard payment methods, including check, RTGS, and GIRO. Though declining, cheques still commonly used and GIRO (ACH low-value transactions) continues to grow at a significant pace Cheques are still the most common form of payments in these markets with growing acceptance of ACH equivalent systems The three markets have vastly different payment instruments and regulations, but have the common theme of a constantly evolving clearing infrastructure
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China Overview
Currency: Renminbi RMB –
元 – RMB accounts can be held outside of China by either residents or non-residents – Non-resident companies are permitted to hold local and foreign currency accounts – Two main types of local currency settlement accounts, basic and general, are for payment and receipt purposes
Relevant Regulatory & Tax Implications
– Opening bank accounts in China requires extensive documentation – Under the existing income tax law, an enterprise incorporated in China is considered to be resident for tax purposes unless the enterprise is regarded resident in another country under a double tax treaty – Financial institutions are required to report all international transactions to the State Administration of Foreign Exchange (SAFE) – Paying banks send the required information for international payments, though a company, whether the remitter or the beneficiary, must also send supporting data to SAFE
51 Banking Structure
– Payment and Clearing Systems High-value (above RMB 20,000)/urgent (within two hours) electronic payments are processed via China’s National Advanced Payment System (CNAPS) –Large-Value Payments (LVPS) Low-value/non-urgent electronic payments are processed via CNAPS- Bulk Electronic Payment System (BEPS) Direct debits are cleared via CNAPS-BEPS All checks, which are only valid for ten days, are cleared via Local Clearing Houses
China: Internationalization of Renminbi (RMB)
What’s Changing?
The RMB was unpegged from the dollar to reference a basket of foreign currencies on a managed floating exchange rate. The year-old cross-border RMB trade settlement program was expanded to 20 provinces; restrictions for eligible corporations outside China were removed. Free flow of RMB in Hong Kong: China lifted restrictions blocking the flow of RMB in Hong Kong. Increased investment in domestic interbank bond market Eligible entities in China with necessary approvals, can bring RMB out of China to do direct overseas investment to set up subsidiaries, buy out equity stakes (M&A) and conduct project investment. The PBoC recently announced an expanded exporter list, including 67,000 companies both local Chinese entities and multi-national corporations, are eligible to settle merchandise trade in RMB with counterparties globally and enjoy tax rebates. The previous list included only 400 eligible companies.
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India Overview
Currency: Indian Rupee INR –₨
– US $ accounts allowed in-country for residents and non-residents; possible authorization required – Demand Deposit Accounts (DDA) in INR cannot be interest bearing – Non-resident company must usually have an office in India to open an INR account
Relevant Regulatory & Tax Implications
– Non-residents may have to pay a withholding tax on interest payments – No foreign bank is allowed to collect taxes directly – Local regulations require FX conversion be done onshore for INR payments, regulation prohibits INR receipts outside India
Banking Structure
–
Payment and Clearing Systems
High-value payments are processed through the Reserve Bank of India’s RTGS system Most checks are settled via the MICR process, with the clearing process giving value on D+2 service, recently introduced by the Reserve Bank of India for the clearing of MICR checks issued and cashed in separate cities (outstation checks) Operating in 17 cities throughout India, checks cleared through this process are treated as local checks rather than outstation checks and take between one to two working days to process
53
Australia Overview
Currency: Australian Dollar (AUD)
– Companies are permitted to open local currency and foreign currency account in Australia – Interest bearing accounts available – Physical cash concentration and single-entity notional pooling are available
Relevant Regulatory & Tax Implications
– The Australian dollar (AUD) is freely convertible, and Australia has no currency or foreign exchange controls.
– – Capital transactions are usually subject to exchange controls, and companies must report any relevant equity or securities transactions to the appropriate authority. Tax payments can be paid from any checking/DDA account
Banking Structure
–
Payment and Clearing Systems
The three main clearing systems are the High Value Clearing System (HVCS) for high-value electronic payments (Real Time Gross Settlement), the Bulk Electronic Clearing System (BECS) for low-value electronic payments (including direct debits and credits), and the Australia Paper Clearing System (APCS) for checks and paper instruments Electronic payments are increasingly common with debit and credit cards serving the predominant retail payment method 6.3 billion non-cash transactions in 2010, up 8.3%, cards accounted for 61% of al transactions in 2010; next most popular instrument, credit transfers, accounted for 24%.
Non-cash payments market highly developed 283 transactions per inhabitant in 2010, among the highest in the world.
Transaction reporting requirements to the central bank both in/out of Australia and if deposits are greater than AUD10,000
54
Brazil – Payments and Trends
5th Largest economy 52% of Latin America payments market share Cash accounts for 50% of domestic transactions Young population of sustainable growth Payment margins are attractive Central Bank and regulators support migration from cash to electronic payments and the use of banking services by unbanked Government – the biggest player in payments. Aims at encouraging the use of pre-paid cards on social benefits distribution
55
Mexico Overview
Currency: Mexican Peso MXN –$
– US $ accounts allowed in-country – Residents only – Mexican Demand Deposit Accounts (DDA) in MXN and USD can also be interest bearing – DDAs cannot be overdrawn on regular basis –Only arranged Over-drafts (Intraday and Overnight) are allowed
Banking Structure
– Payment and Clearing Systems Same day electronic payment system (SPEI) Next day electronic payment system (Cecoban/TEF) Payroll can be done as any other electronic funds transfer Paper clearing –next day settlement (CECOBAN) Direct Debit transactions –next day settlement (CECOBAN)
56 Relevant Regulatory &Tax Implications
– Withholding tax –ISR (Impuesto Sobre la Renta) on interest paid on DDAs Resident: 0.60%(annually) over average balance.
Non-Resident: 4.9 to 40% on the interest paid –rate depends on various factors such as country of origin of account holder, tax treaties, etc – Cash Deposits totaling over $15,000 MXN (or USD equivalent) within a monthly period (30 days) are taxed at 3% (i.e. if client deposits $16,000 MXN, there will be a tax of 3% on the $1,000 MXN that exceed the limit) – In-Country Notional Netting or pooling of accounts are not permitted, only ZBA where there is a physical movement of funds – No withholding tax on cross border transactions
Regulation is reshaping the US Cash Mgmt Landscape
What are the main barriers you face now and over the next 12 months within your treasury department? Please tick all that apply Dodd-Frank
Due to “end user exemption,” Corporations who use derivatives mainly for hedging are generally exempt from clearing their derivatives Regulation Availabitliy of credit Dodd- Frank substantially impacts derivatives trading and this may impact some IHBs if are they are truly “financial entities”. Should the IHB be a Legal Entity incorporated as a “non-financial entity” there will likely be limited impact Budgets
FDIC
Lack of appropriate solutions offered by the banks you have relationships with Other FDIC insurance on the full amount of non interest bearing transaction accounts expired on December 31, 2012 FDIC modified the FDIC assessment calculation, doubling JPMorgan’s fee assessment base Survival
Rule 2a-7 (MMF Reform)
Source: TreasuryToday, Asia Pacific Corporate Treasury Benchmarking Study 2011, May 2011
Basel III
Intended to strengthen financial systems against future losses; may impact the cost and availability of capital; implementation between 2013 and 2019 Capital adequacy: raises the quality, quantity and international consistency of the capital base Liquidity: guards against a “run” on a bank’s wholesale liabilities over 30 days of acute market stress Funding: creates additional incentives for banks to fund their activities Increases mOn November 13 th , 2012, the Financial Stability Oversight Council (FSOC) proposed additional reforms: Floating the Net Asset Value Stable NAV with NAV Buffer and “Minimum Balance at Risk”: Stable NAV with NAV Buffer and Other Measure
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Basel III: What is it all about?
Basel III reforms were introduced to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector.
Capital Ratio
1 Promote focus on common equity and retained earnings as the highest quality components of a bank’s capital 10.5%
Liquidity Coverage Ratio (LCR)
Promote short term resiliency of a bank’s liquidity profile by ensuring it has sufficient high quality assets to survive an acute stress scenario (30 days) 8% 4% 3.5% 2.5% 2% 0.6% 1.2% 1.9% 2.5% 2% 2% 2% 2% Stock of high quality liquid assets Net cash outflows over a 30-day period ≥ 100% 2% 1% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Net Stable Funding Ratio (NSFR)
Promote resiliency of a bank’s long term funding structure by ensuring that it holds stable medium and long term funding for its asset profile (> 1 year horizon) 2% 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5% Available amount of stable funding Required amount of stable funding 2012 Tier 1 2013 2014 Other Tier 1 2015 2016 Other Capital 2017 2018 2019 Capital Conservation Buffer 1. Source ( www.bis.org
) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements)
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≥ 100%
Regulatory change drives our business: The impact of Basel III
Basel III intent Improve banks’ ability to sustain market disruptions by strengthening capital and improving liquidity Requires banks to build short-term liquidity & hold more capital, plus improve the quality of capital Liquidity Coverage Ratio – Measure of Liquidity health
New Liquidity Coverage Rate
Stock of high quality liquid assets Net cash outflows over a 30-day period ≥ 100% Assumes some balances are susceptible to higher & quicker runoff (within 30 days), and banks should hold liquid assets against potential outflows Drives value away from discretionary liquidity to operating cash tied to operating relationships & products Increases value of 31+ day placements through time deposits or call features Post Basel III implementation
Without
Operational Services Assumes the following will runoff in 30 days: 100% of financial institution balances, or deposits from correspondent banking operations 40% for corporates, sovereigns and public sector Post Basel III implementation
With
Operational Services Assumes the following will runoff in 30 days: 25% of all balances.(Assuming that all counterparties have 25% runoff for operational per fed guidance.
75% of balances assumed to remain core funding for the bank
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Discretionary Cash 31-day money outside the purview of the liquidity coverage ratio
Credit implications of Basel III to corporations
Corporate Needs Basel III Guidance Implications to Corporates Credit / Liquidity (incl. Trade / Working Capital Loans)
10% draw on committed credit lines 1 100% draw on committed liquidity facilities 1 for non – financial institutions, sovereigns, and central banks 100 % conversion on trade finance (exception – one year maturity floor for issued and confirmed LC 2 under certain conditions) Both committed and uncommitted credit lines will get expensive (and banks will be more judicious in extending credit) Structured trade (high risk weights) will costs more
Commercial Paper Intraday Lines
A 100% minimum liquidity 1 (cash or certain liquid assets) against net outflows less than 30 days Regulation advocates an approach that places an emphasis to have adequate systems in place to measure and manage intraday liquidity risks 4,5 Commercial paper market is expected to shrink and cost likely will increase 3 where CP issuance is issued with maturities under 30 days Bank facilities that back CP programs are counted as contingent liabilities Intraday lines may become costly for banks to both fund and to absorb risk, putting financial pressure on low margin, high volume payment services based on Basel III committee guidance 5 1. 2. 5. Source ( www.bis.org
) – Basel III: International framework for liquidity risk measurement, standards and monitoring (II.1.97. page 21) 3. Source ( www.bis.org
) – J.P. Morgan North America Fixed Income Strategy (27 September 2010) – Short Term Market Outlook and Strategy
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4. Source – Financial Stability Paper No. 11 – June 2011 (Intraday Liquidity: risk and regulation); Bank of England
Dodd Frank Section 1073
Two completely different public policies are covered Congress seems to express support for an interest in expansion of international remittances Federal Reserve Board required to report to Congress every two years on growth of international remittances and on factors that limit growth Congress establishes new consumer protections and requires the Consumer Financial Protection Bureau (CFPB) to implement those protections by rule making
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Amended Regulation E
CFPB published amended regulation governing one time remittance transfers Final regulation was to be effective February 7, 2013 On December 31, 2012, the CFPB published a notice of proposed rulemaking to refine several provisions of the Final Rule On January 22, 2013, the CFPB issued a rule temporarily delaying the effective date of the remittance transfer rule The CFPB will announce a new effective date upon the finalization of the December 31, 2012 proposal.
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Q. Based on your client interfaces, how big of an impact do your client banks expect Dodd-Frank 1073 to be to your clients?
- Somewhat positive impact 1% Somewhat negative impact 30%
Extremely negative impact 50% -
Very negative impact 19% Source: Aite 2012
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Who’s at Risk? What’s at Stake?
2013 AFP Payments Fraud and Control Survey
The protection of your accounts and financial information is a top priority
Stay Informed
on fraudster practices and crime innovations
Adapt & Implement
internal controls and external security services
Percentage of Organizations Reporting 61%
Experienced attempted or actual payments fraud in 2012 Median loss
$20,300 67% 50% 27%
Revenues over $1 billion Revenues under $1 billion Incidents of fraud have increased
Percent of Organizations Subject to Attempted or Actual Payments Fraud
80% 60% 40% 20% 0% 55% 2004 68% 2005 72% 2006 71% Median loss:
$17,100
$18,400
$19,200
$20,300
71% 73% 71% 66% 61% 2007 2008 2009 2010 2011 2012 Fraud attacks – or notice of fraud attacks – are decreasing… …yet successful fraud attacks have resulted in greater loss amounts Source: 2013 AFP Payments Fraud and Control Survey
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Potential Financial Loss
Potential Financial Loss (% distribution)
No loss/cost $1 to $25k $25k to $49,999 $50k to $99,999 $100k to $249,999 $250k or greater All Respondents 8 Revenues under $1 billion 11 37 45 14 13 16 11 13 7 18 8 Revenues over $1 billion… …and having more than 100 0 payment accounts 0% 5 28 31 10% 20% Source: 2013 AFP Payments Fraud and Control Survey
Potential loss averted by:
5 30% 14 40% 13 12 50% 13 60% 15 70% 42 80% 23 90% 100% Effective fraud detection and controls – internal processes as well as bank-offered fraud protection services Note: Additional potential losses may have been averted – but without the organization’s notice
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Actual Financial Loss
Actual Direct Financial Loss (% distribution)
No loss/cost $1 to $25k $25k to $49,999 $50k to $99,999 $100k to $249,999 $250k or greater All Respondents Revenues under $1 billion 73 83 16 11 3 4 1 3 3 3 Revenues over $1 billion… …and having more than 100 payment accounts 0% 56 67 21 19 0 7 5 3 4 2 5 12 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: 2013 AFP Payments Fraud and Control Survey Note: Additional actual losses may have occurred - but borne by another party (e.g. card issuer or processor, merchant or vendor, etc.)
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ACH Fraud
As electronic payments become more and more popular, ACH fraud continues a slow but measured increase
Payment Trends Why ACH?
2006 2009 ACH volume 14.6 billion 19.1 billion 9.4% CAGR* Average $ per ACH $2,123 $1,948 *Compound Annual Growth Rate Source: Federal Reserve Payments Study (2007, 2010) (2012 data pending publication of 2013 research)
12% of organizations that were subject to at least one ACH fraud attempt in 2012 suffered a financial loss as a result.
Not reconciling accounts on a timely basis Not using ACH debit blocks or ACH debit filters ACH return not being timely Not using ACH positive pay
Payment Method Responsible for the Greatest $ Loss
ACH credits 7% Wire transfers 5% ACH debits 9% Corporate / commercial cards 10% Checks 69%
Control Procedures to Protect Against ACH Fraud
100% 80% 60% 40% 20% 0% 77% 38% 41% 12% 18% Reconcile accounts daily Block ACH debits on all accounts Block all ACH debits except on a single account Non-bank fraud control services “Post non checks” restriction on accounts Source: 2013 AFP Payments Fraud and Control Survey Source: 2013 AFP Payments Fraud and Control Survey
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The Risk of ACH & Electronic Payments
Social engineering Identity fraud Phishing – attempting to acquire sensitive information, typically via e-mail, phony websites, and malware Posing as a known individual (or individual with a “trusted” affiliation) A “technical support associate” calls a high risk online banking user to offer unsolicited assistance on “technical problems” – hoping the target will reveal private account information A “vendor” provides a corporate client with instructions to change expected ACH or wire payments to a different account controlled by the fraudster Creating or using a false identity, then maneuvering their way into obtaining access to payment systems Unauthorized access to payment systems Launching attacks against corporate networks Using compromised credentials to access payment systems or email accounts to submit instructions in the legitimate account holder’s name
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