association for financial professionals of arizona - 2013
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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. BernsteinExecutive DirectorJ.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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Source: BCG Global Payments Database, 2010
Volume of retail and wholesale cross-border payments, 2010-2020
6% 13%8%CAGR:
Mill
ions
2010
2020
25% 37% 9%
Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
N. America L. America W. Europe Cent/East Europe
Asia-Pacific M. East and N. Africa
World
2010
2020
0
1
2
3
4
5
6
N. America L. America W. Europe Cent/East Europe Asia-Pacific M. East and N. Africa
World
2010
2020
Average Revenue per Domestic Payment Transaction, 2010-2020
Source: BCG Global Payments Database, 2010
-2% -3% -8% -5%CAGR:
Average Revenue per Cross-Border Payment Transaction, 2010-2020
-2% 1% -1% -2%CAGR:
US
-4% -2% -3%
-3% -1% -2%
Overview of volumes, values and revenues in the payments marketplace, 2010 to 2020
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Process Standardization Drives Agenda of more International and Complex Client Profiles
ActiveTreasury
Management
Regional Treasury Centers
Regional Liquidity Solutions
Global Solutions
RegionalRisk
Management
RegionalShared Service
Centers
In-CountryLiquidity
ManagementFinance Solutions
Payables Cash FlowProjections Receivables
Country Level
EntityLevel
Cent
raliz
atio
n / G
loba
lizat
ion
Global funding, concentration and investments Commodity financing Global payment factory
Shared Service Centers – centralize AP and AR activities
Regional Treasury Centers – centralize FX and funding
Rationalization of banking relationships
Netting, pooling, sweeping structures
In-country accounts Basic payments / receivables In-country liquidity structures Sweeping cash into centrally managed bank accounts
or centralized in-country banks
Global Model
Regional Model
Decentralized Model
Client’s treasury structure will determine your relationship to the subsidiary
Physical & financial supply chain management
Regional re-invoicing center Active treasury and risk
management role
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Attribute Range Payment amount Low value High value
Speed of payment Multiple days, week Real time
Control of timing Undetermined Known, stipulated
Finality Returns Good funds
Ease of making/receiving payment
Complex, manual, slow Simple, automated, fast
Cost Unknown, range high to low Low, rebates
Risk mitigation Limited Full regulatory compliance, preventative
Posting/reconciliation Delayed, manual Real time, automated
Information attached Little to none Complete, including actionable data
Critical Characteristics of Different Payment Types
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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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Debit card 35%
Checks 22%
Prepaid 5%
Credit card 20%
ACH 18%
37.335.9
34.633.1
31.529.9
2003 2004 2005 2006 2007 2008
Businesses are responding to forces of economic pressures, scalability, risk management, and environmental consciousness by accelerating the transition from paper to electronic processing
Source: The 2010 Federal Reserve Payments Study based on 2006, 2009 volumes
Debit card 26%
Checks 32%
Prepaid 4%
Credit card 23%
ACH 15%
Distribution of the number of noncash payments
2006 2011
Total US check transactions (bn)
Over 10mm individuals are unbanked in the US, challenging electronification of certain payments (e.g. payroll), providing opportunity for payroll cards
Continued Global Migration from Paper-to-Electronic
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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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Inte
rnat
iona
l bus
ines
s
Occasional international
business
Regular international
business
Regular payments and receipts in same currency
Maintains operations overseas
Multinational corporation
International ACHWire Solutions
Range of needs
Consider International Business Activity
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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…
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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
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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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Originating company
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Non-Global ACH Client Model… for Making Payments
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Global ACH Client’s Payment Model
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Receiving banksBeneficiaries and debtors
Originating company ACH Gateway
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NACHA file
BankOriginator
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
How it Works
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¹ UK includes England, Wales, Scotland, and Northern Ireland
² British clearing system has a 3-day processing cycle
Step 1Monday by 8:30 AM CT bank receives
ACH file with effective entry date
of Monday
Step 2On Monday bank
sends ACH file to the British RGO¹
Bank
Step 3On Monday the payment file is
presented to the British clearing
system²
British Clearing System—Bankers
Automated Clearing
Service (BACS)
Settlement account at bank
Step 4aOn Wednesday,
bank debits customer’s
settlement account
Beneficiary’s Bank in the
UK
Step 4bOn Wednesday, British clearing system delivers transactions to
beneficiaries’ banks
Payment beneficiary
Step 5Beneficiary’s bank
credits beneficiary’s account on
Wednesday or later depending on that bank’s practices
ACH Payment Flow to the UK
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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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Rules and Procedures
Financial Institution
DomesticFormats& Rules
DomesticFormats & Rules
There can be one or more entry pointsinto or out of any country. The domestic
ACH Rules & Formats are not impacted by IPFA Rules and Procedures.
Euro US dollar
ISO 20022StandardFormat
Member Member
Intermediary Financial Institution
Clearing & Settlement Mechanism
Financial InstitutionCustomer
Customer
Customer
Clearing & Settlement Mechanism
Financial Institution
Financial Institution
Customer
Customer
Intermediary Financial Institution
Customer
Association
Association Association
IPFA Overlay Structure Model
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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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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
Payment Behavior and Trends differ Greatly by Region
Source: BCG, KPMG, and McKinsey reports, and EPS analysis
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Source: BCG, KPMG, and McKinsey reports, and EPS analysis
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: 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
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.
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
Payment Behavior and Trends differ Greatly by Region
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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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32Source: Chetan Sharma Consulting
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Online Spend: Global eCommerce Forecast in $millions (excluding Travel) 2009 2010E 2011E 2012E 2013E CAGR
US 144,124 165,791 187,693 212,253 235,289 12.4% Europe 188,446 195,174 210,876 246,651 283,014 13.2% Asia 107,078 155,718 208,953 286,560 323,065 27.5% ROW 44,963 55,811 73,113 95,047 121,660 29.7% Total 481,612 572,494 680,635 820,511 963,028 19.4%
Source: Nothing but the Net 2011: JP Morgan Internet Investment Guide
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
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– 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
Malaysia
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– 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
Send Money By Phone Anytime
Anywhere
M-Pesa
Kenya
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– 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 unemployedpeople—Wizzkids. Eight of ten customers previously had no bank account and never used an ATM. Fees are 1/3 cheaper than traditional banks
Wizzit
South Africa
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mobileAxept
– 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
Norway
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– 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
China
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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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– Customer must obtain IBAN from beneficiaries
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.
– Provided by the account holding bank– Alpha-numeric up to 34 characters in length
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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 % Share
Feb 2008 0.5%
Feb 2009 2.0%
Feb 2010 6.7%
Feb 2011 15.5%
Feb 2012 24.8%
Feb 2013 35.0%
Feb 2014 100%
FinlandFranceGermanyGreece
Italy
NetherlandsPortugal
Ireland
Cyprus
LuxembourgMalta
SloveniaSpain
31 SEPA countries including all 27 European Union m
ember states
Eurozone countries (EU16)
Denmark
Czech Republic
Hungary
LatviaLithuania
Slovakia
Bulgaria
Poland
Liechtenstein *Norway *
Iceland *
Estonia
Austria
FranceGermanyGreece
Italy
NetherlandsPortugal
Ireland
Cyprus
LuxembourgMalta
SloveniaSpain
European Economic Area
Eurozone countries (EU17)
DenmarkCzech Republic
HungaryLatviaLithuania
Slovakia
Bulgaria
Poland
Estonia
Switzerland *
Switzerland Monaco
BelgiumAustria
Finland
All 27 European Union m
ember
states
Other SEPA member states
BulgariaCzech RepublicDenmarkHungaryLatviaLithuania
SwedenRomaniaPoland
United Kingdom
Norway
Iceland Liechtenstein
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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
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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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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
United Kingdom Overview
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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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CHAPS UK Faster Payments BACS Transaction types
n Payments n Payments n Standing orders
n Payments n Standing orders n Direct debits
Ceiling n Unlimited n £100,000 for payments; £100,000 for standing orders
n £99,999,999.99
Payment cycle
n Same day n 2 hours for attended payments n Intraday for unattended payments n No guarantee of same day
crediting—depends on the beneficiary bank
n 3 days
Clearing opening hours
n 6am to 4pm n Monday to Friday
n Up to 24/7/365 n 7am Monday to 10.30pm Friday
Revocability n Irrevocable n Irrevocable n With recourse
Target customers
n Primarily for corporate customers n Limited retail customer use
n Primarily aimed at retail customers—internet payments and telephone banking
n Also applicable to corporate customers
n Retail and corporate customers
UK Faster Payments
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Source: Visa Europe, February 2011; Data does not include direct debits, checks; only debit and credit vs. cash
ForecastActual
Value Total Payments Values
£ billions
Total Payments VolumesMMs
Cash Credit Debit
ForecastActual
Payments – Debit is more popular than cash in the UK
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Asia Market and Change
Classified into four broad categories
China, India andVietnam
Thailand, Malaysia,Philippines, and Indonesia
Japan,Korea
Maturing
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
Emerging The three markets have vastly different
payment instruments and regulations, but have the common theme of a
constantly evolving clearing infrastructure
China, India andVietnam
Thailand, Malaysia,Philippines, and Indonesia
Australia, New Zealand, Hong Kong,
Singapore,and Taiwan
Japan,Korea
Advanced
Mature and paper
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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
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 Overview
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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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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
India Overview
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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
Australia Overview
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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
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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)
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
Mexico Overview
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Regulation
Availabitliy of credit
Budgets
Lack of appropriate solutions offered by the banks you have relationships with
Other
Survival
Regulation is reshaping the US Cash Mgmt Landscape
Dodd-Frank
Due to “end user exemption,” Corporations who use derivatives mainly for hedging are generally exempt from clearing their derivatives
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
FDIC
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
Rule 2a-7 (MMF Reform)
Increases mOn November 13th, 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
Source: TreasuryToday, Asia Pacific Corporate Treasury Benchmarking Study 2011, May 2011
What are the main barriers you face now and over the next 12 months within your treasury department? Please tick all that apply
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
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Basel III reforms were introduced to strengthen global capital and liquidity rules with the goal of promoting a more resilient banking sector.
2012 2013 2014 2015 2016 2017 2018 2019
Ris
k W
eigh
ted
Ass
ets
(RW
A)
2% 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%
2%
1%1.5%
1.5% 1.5% 1.5% 1.5% 1.5%
4% 3.5% 2.5% 2% 2% 2% 2% 2%
0.6% 1.2% 1.9% 2.5%
Tier 1 Other Tier 1 Other Capital Capital Conservation Buffer
8%
10.5%
Stock of high quality liquid assets
Net cash outflows over a 30-day period≥ 100%
Available amount of stable funding
Required amount of stable funding≥ 100%
Capital Ratio1 Liquidity Coverage Ratio (LCR)
Net Stable Funding Ratio (NSFR)
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)
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)
Promote focus on common equity and retained earnings as the highest quality components of a bank’s capital
1. Source (www.bis.org) – Basel III: A global regulatory framework for more resilient banks and banking systems (Annex 4 phase in arrangements)
Basel III: What is it all about?
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New Liquidity Coverage Rate
Stock of high quality liquid assets
Net cash outflows over a 30-day period
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 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
31-day money outside the purview of the liquidity
coverage ratio
Discretionary Cash
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
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
Post Basel III implementationWith Operational Services
Post Basel III implementationWithout Operational Services
≥ 100%
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Corporate Needs Implications to Corporates
Credit / Liquidity (incl. Trade /
Working Capital Loans)
Commercial Paper
Intraday Lines
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 market is expected to shrink and cost likely will increase3 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 guidance5
10% draw on committed credit lines1
100% draw on committed liquidity facilities1 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)
A 100% minimum liquidity1 (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 risks4,5
Basel III Guidance
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
4. Source – Financial Stability Paper No. 11 – June 2011 (Intraday Liquidity: risk and regulation); Bank of England
Credit implications of Basel III to corporations
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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%
Very negative impact 19%
Extremely negative impact 50% -
Source: Aite 2012
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The protection of your accounts and financial information is a top priority
Who’s at Risk? What’s at Stake?
Source: 2013 AFP Payments Fraud and Control Survey
2013 AFP Payments Fraud and Control Survey
Percent of Organizations Subject to Attempted or Actual Payments Fraud
55%68% 72% 71% 71% 73% 71% 66% 61%
0%
20%
40%
60%
80%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Percentage of Organizations Reporting
61% Experienced attempted or actual payments fraud in 2012
Median loss $20,300
67% Revenues over $1 billion
50% Revenues under $1 billion
27% Incidents of fraud have increased
Fraud attacks – or notice of fraud attacks – are decreasing…
…yet successful fraud attacks have resulted in greater loss amounts
Stay Informedon fraudster
practices and crime innovations
Adapt & Implementinternal controls and
external security services
Median loss: $17,100 $18,400 $19,200 $20,300
P A
Y M
E N
T S
F
R A
U D
P
R O
T E
C T
I O
N
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Potential Financial Loss
Potential loss averted by:
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
Potential Financial Loss (% distribution)
Source: 2013 AFP Payments Fraud and Control Survey
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
8
11
5
0
37
45
31
28
14
16
13
5
13
13
13
14
11
7
15
12
18
8
23
42
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
Revenues over $1 billion…
…and having more than 100
payment accounts
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Actual Financial Loss
Note: Additional actual losses may have occurred - but borne by another party (e.g. card issuer or processor, merchant or vendor, etc.)
Actual Direct Financial Loss (% distribution)
Source: 2013 AFP Payments Fraud and Control Survey
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
73
83
67
56
16
11
19
21
3
3
3
0
4
3
4
7
1
0
2
5
3
0
5
12
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
Revenues over $1 billion…
…and having more than 100
payment accounts
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ACH FraudAs electronic payments become more and more popular, ACH fraud continues a slow but measured increase
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
Source: 2013 AFP Payments Fraud and Control Survey
Payment Trends
Control Procedures to Protect Against ACH Fraud
12% of organizations that were subject to at least one ACH fraud attempt in 2012 suffered a
financial loss as a result.
77%
38% 41%
12% 18%
0%
20%
40%
60%
80%
100%
Reconcileaccounts
daily
Block ACHdebits on all
accounts
Block allACH debitsexcept on a
singleaccount
Non-bankfraud
controlservices
“Post nonchecks”
restrictionon accounts
Why ACH?
Payment Method Responsible for the Greatest $ Loss
Source: 2013 AFP Payments Fraud and Control Survey
Checks69%
ACH debits9%
Wire transfers
5%ACH credits7%
Corporate / commercial
cards10%
2006 2009
ACH volume 14.6 billion9.4% CAGR*
19.1 billion
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)
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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
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
The Risk of ACH & Electronic Payments
Social engineering
Identity fraud
Unauthorized access to payment systems
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