External Forces Affecting Global Transaction Flows: Is the Payments World Becoming Flatter?

In his 2005 book titled The World Is Flat: A Brief History of the Twenty-First Century, New York Times reporter and author Thomas Friedman famously wrote about the impact of technology on globalization, the result of which is a truly global economy with unprecedented flows of investments, goods, and ideas. This trend has continued, despite the global recession that followed a few years after his book was published. 

In contrast, corporate treasurers have seen little “flattening” of cross-border payment processing since SWIFT was introduced in the 1970s, with the exception of intra-EC euro-denominated payments. The reality is that even in 2016, most cross-border payments have several critical elements of uncertainty about them. And it's not just about moving the money more efficiently:  increasingly the focus is on how to improve the transparency and speed of payment information.

But it is important to recognize that the global banking system (including SWIFT) is not the only influence on cross-border payments. As corporate treasury organizations make tactical and strategic decisions about how to effectively make and receive payments across borders, they must take into consideration a wide range of external forces.

External Forces

Economic instability and geo-political conditions are categories of external forces that corporate treasurers need to take into account when moving funds across borders, not only in the immediate term but when considering the longer term strategic impact on instability on trading corridors and growth markets. Yesterday's historic "Brexit" vote by the citizens of the United Kingdom to exit the European Union is the perfect example of how geo-political instability has both an immediate impact on cross border payments in terms of the impact on FX rates but also on the longer term prospects for trade, foreign investment and the movement of people across borders. It will be many months, perhaps years, before the impact is fully understood.

Industry initiatives leveraging technology advances to improve cross border payment processing are playing a larger role than ever before as global adoption of SEPA elements becomes a reality, new regional payment networks and real time cross border payment solutions are being developed and alternative payment providers are offering solutions to some of the longest standing corporate complaints about traditional cross border payment processing.

Finally, demographic trends such as uneven population growth, migration and the rise of the digital natives will all have long term implications for how corporate treasury moves money and information across borders.

Celent's recently published report on this topic Following the Money: External Forces Affecting Global Transaction Flows includes some of the key data trends related to these external forces that are critical for corporate treasurers to understand and to continue to evaluate as they develop a plan for future proofing their payment environments. The report also includes recommendations for how treasury organizations should collaborate with their transaction banking partners to ensure that cross border payment processing and the delivery of payment information is optimized as the global payments landscape changes.  This report and the webinar on the same topic was produced as part of a series sponsored by HSBC on topics relevant to corporate treasury.



Liquidity management: Staying afloat in turbulent times

Liquidity management has recently begun to assume increasing importance as four key external forces create turmoil in a historically placid section of corporate treasury. External Forces

The most significant regulation affecting liquidity management is Basel III, along with others such as money market fund reform. Taken together, they’re changing the way banks structure their balance sheets and the relationship between business customers and their banking partners.

On the economic front, businesses of all sizes continue to seek opportunities abroad. Combined with an environment of negative interest rates in several countries, this is making management of liquidity distributed across markets, currencies, and business units that much more complex and increasingly challenging.

Industry initiatives such as expanded use of ISO 20022 XML and real-time payments provide both opportunities and challenges for cash and liquidity management, and as the speed of transactions accelerates, so does the need for even more timely information.

Technology evolution has facilitated a move toward centralisation, which in turn is accelerating the adoption of more advanced cash and liquidity management capabilities to support the modern day treasury function.

With external forces causing substantive and permanent shifts in available options, corporations need to have the technology infrastructure in place to manage their liquidity and investments with tighter risk governance. As discussed in the new Celent report “Staying Afloat: External Forces Impacting Corporate Liquidity Management,” no one can predict what lies around the next bend in the river, but robust strategic preparation can equip treasurers to ride out the next stretch of liquidity management turmoil.

Increasing headwinds in corporate banking?

This week I’m in Singapore, which provides a beautiful backdrop for Sibos 2015, the annual conference that brings together thousands of business leaders, decision makers and topic experts from a range of financial institutions, market infrastructures, multinational corporations and technology partners.


This year’s conference theme is connect, debate and collaborate and takes place at a time of increasing headwinds from a slowing global economy, higher compliance costs, increasingly global corporates, and competition from both banks and nonbanks alike. I spent the past few months taking a deep dive into corporate banking performance over the past 10 years–a period of both tremendous growth and unprecedented upheaval. As expected, corporate banking operating income and customer deposit balances have experienced healthy growth rates over the past 10 years. But surprisingly, despite increases in customer deposits, corporate banking income was largely stagnant over the past few years.

Corporate Banking Income and Deposits

Corporate banking plays a dominant role for the largest global banks. In 2014, corporate banking was responsible for 33% of overall operating income and 38% of customer deposits across the 20 banks included in this analysis.

As outlined in the new Celent report, Corporate Banking: Driving Growth in the Face of Increasing Headwinds, this critical banking sector is shaped by four external forces: economic conditions, the regulatory environment, business demographics, and financial technology. These same factors are slowing corporate banking growth and creating an environment in which banks are overhauling client offerings in the face of regulatory pressure, re-evaluating geographic footprints in response to shifting trade flows, and investing in technologies to ensure a consistent, integrated customer experience.

Much of the discussion at Sibos is on exploring transformation in the face of disruption. As they look to an unsettled future, corporate banks that are flexible, adaptable, and creative will be the ones that succeed. Changing time-tested ways of doing business is painful, but critical for future success.

Paying banks to take your money — huh?

Corporations have historically parked excess cash in their demand deposit accounts to take advantage of earnings credit allowances. Each month, the bank calculates the earnings allowance for a client’s accounts by applying an earnings credit rate to available balances. The earnings allowance is then used to offset the cost of cash management services. In the United States, corporates got the option of earning interest in money market accounts with the repeal of Req Q by Dodd Frank. The Liquidity Coverage Ratio (LCR) provisions of Basel III and the advent of negative interest rates in some European countries are upending traditional cash flow management for banks and their corporate and institutional clients. The LCR requires large and internationally active banks to meet standard liquidity requirements. It makes assumptions for deposit runoff in times of financial stress, resulting in a liquidity squeeze. Banks must hold enough high quality, liquid assets (HQLA) to fund their operations during a 30-day stress period. Examples of high quality assets include central bank reserves and government and corporate bond debt. The phase-in of the LCR started on January 1, 2015. It requires banks to distinguish between two types of short-term (30 days or less) deposits. Operational deposits include working capital and cash held for transactional purposes. Non-operational balances are other cash balances not immediately required and assumed to be investments; such as short-term time deposits with a maturity of 30 days or less and accounts with transaction limitations, such as money market deposit accounts. Non-operating/excess balances are assigned a 40% runoff rate for corporations and government entities and 100% for financial institutions, making them the least valuable to banks. As a result, corporates with non-operational cash investments may find it difficult to place in overnight investment vehicles. Many banks are reducing their non-operating deposits either by encouraging corporates to place their funds elsewhere, or by creating new investment products such as 31+ day CDs, money market funds and repurchase agreements to avoid the LCR charge on excess balances. Similarly, corporates also face a risk of higher costs for committed lines of credit which also require more Basel III capital to be held by banks. Bank demand for HQLA in the form of central bank reserves along with European fiscal policy has pushed central bank interest rates into negative territory for the safest monetary havens (Sweden and Switzerland). In other countries with central bank rates hovering near zero, once you take the inflation rate into consideration, those rates are negative as well (ECB and Denmark). Central Bank Interest Rates Central banks had hoped that negative interest rates would encourage commercial banks to increase lending, but there’s only been a slight increase in outstanding loan balances. Financial institution clients are hardest hit by central bank negative interest rates, particularly deposits in Euros, Swiss francs, Danish crowns and Swedish crowns. Many global banks are charging “balance sheet utilization fees” or other deposit fees. For corporate clients, savvy banks are taking a collaborative approach—working with corporate treasurers to educate them on the impact of regulatory and economic forces on their cash management and investment decisions and advising them on the available options.

AFP 2014

I just arrived home from Washington, D.C., where the Association For Financial Professionals – a leading society for treasury and finance professionals in the US – held its annual conference.  It was interesting that the AFP decided to hold its conference in Washington – the first time it has been held in AFP’s hometown – during the run-up to the 2014 mid-term elections, and it was clear that the town was abuzz in activity as Election Day came near. I’ve been to many AFP conferences during my days at Metavante, but had taken a few years off, and so I was interested how AFP was doing as the economy continues its 5-year crawl out of recession.  Was I surprised!  I was amazed and encouraged how strongly the conference has bounced back since the dark days of the late 2000s, and the vibe reminded me of the recent SIBOS 2014 in Boston, where bankers and tech vendors competed for the attention of … well, bankers. Perhaps reflecting the post-recession environment in which US corporates operate, I noticed little talk of traditional cash management topics like optimized sweeps or new investment vehicles.  Rather, most of the buzz seemed to be around risk management, Big Data, and treasury dashboards.  It was clear that treasurers are moving to embrace technology to automate routine operational tasks, provide analytics-driven insights that are hard to capture using Excel spreadsheets, and help treasurers see through the fog of data to prioritize their work. Should Excel spreadsheets be getting nervous?  It’s too early to tell, as they are still the dominant tool in use in treasury departments.  However as treasury technology vendors continue to migrate their offerings from high-priced licensed solutions to flexibly-deployed SaaS offerings, many companies will find it harder and harder to justify holding off on treasury automation. We’ll continue to study the situation and will hope to bring back some interesting examples and use cases of companies making the leap into full-scale treasury automation.

Are security fears hindering corporate mobile banking adoption?

Corporate mobile has been a popular topic for a number of years now. While many banks have launched solutions, corporate adoption has stagnated. 66% of respondents to a Capital One survey  indicated “security challenges with sensitive corporate data” as their number one barrier to adoption. There are other reasons for slow adoption of corporate mobile, but this one is quite interesting and can be challenging to overcome. Should banks and corporations be concerned about mobile banking security? Is it a real threat at this stage? The short answer is that security should always be a concern — there are all kinds of real threats out there. However, it’s important to quantify and understand the risks and myths associated with current threats. At this stage, I would argue that security is an often overlooked BENEFIT to corporate mobile banking. It provides an additional layer of security; when executives receive mobile alerts, they have the ability to intercept potentially fraudulent transactions in near real time. A sandboxed app can also be quite helpful. I can go on and on here, and encourage you to read more about it in, Corporate Mobile Banking Update: Adoption Conundrums and Security Realities. Do the benefits outweigh the risks? Should banks be investing in corporate mobile given these adoption challenges? There is a chicken and egg situation; it’s quite difficult for banks to prioritize mobile investments when corporate adoption simply isn’t there. Celent believes that all banks should be investing in digital infrastructure that encompasses online, mobile, and tablet banking. Each of these touchpoints should leverage common components and banking modules (e.g., ACH, wires, etc.) This infrastructure should allow banks to eventually support mobile. Banks don’t need to deploy actual mobile solutions immediately, but should be poised to rapidly deliver when customers ask for it. Customer demand should dictate when banks invest their hard-earned IT budgets in corporate mobile apps and solutions. I’ll be at the AFP Conference next week, drop me a note if you would like to meet to discuss this topic.

AFP Conference 2012, Miami Beach

I had the pleasure of attending the Association for Financial Professionals (AFP) Annual Conference in Miami Beach this week with several of my colleagues in the Celent banking team. The venue was well attended. I can say it was much more comfortable inside the convention center than being in the Miami hot and humid weather. This probably explains the large number of polo shirts and tieless casual dress shirts.

For those of you not familiar with the AFP Annual Conference, it’s a large event of about 6,000 treasury and finance professionals that meet for education and networking opportunities. A broad range of best practice topics are covered including payments, risk management, treasury operations, financial planning, and much more.

I spent much of my time at the event in constructive meetings with clients and prospects. Some of the hot topics I have encountered include cash forecasting, data analysis, risk management, mobile, paper-to-electronic, and treasury management systems. I did not feel that any topic reigned supreme but mobile does continue to increasingly take up the agenda items. The ‘newest’ topic which I think will continue to drive interest and top of mind for many, is the cloud.

The word that would best summarize many conversations across disciplines is “integration”. We are talking integration of data from mobile, integration of cash management banking portals, integration for data analytics, and integration of solutions and systems across the financial and peripheral systems within organizations.

The most exciting aspect for me was the level of innovation, investment, and excitement demonstrated by banks and vendors alike in our strategy meetings. There seems to be a sense of ‘seizing the opportunity’ from organizations across multiple topics. The folks I had a pleasure meeting with showed a genuine enthusiasm about their new services and solutions while the future is seen as being a glass half full instead of half empty.

Overall, I felt the conference was beneficial and met my expectations. However, I did hear from several attendees that this year seemed to have a lower attendance. Regarding the exhibitors, it appeared at par with previous years. I did observe several new exhibitors of smaller size but very innovative – this was very encouraging. The sessions also received mix reviews but mostly favorable.

Next week, I will be at SIBOS in Osaka, Japan.

Why Smaller Banks Should offer Image Cash Letter Deposit Services

Farmers & Merchants Bank, a $2 billion-asset bank based in Long Beach, Calif., is launching an image cash letter service. The accompanying press release caught the eye of American Banker resulting in a story today on the topic, Big Check Volumes Aren’t Just for Big Banks, a Small Bank Says, written by John Adams. I was grateful to see an important (albeit not terribly exciting) topic get coverage in American Banker. This blog post serves to add some additional insight to Adam’s article, specifically, why the opportunity for image cash letter (ICL) deposit services is so large. In a previous post, I commented on why wholesale lockbox belongs in the headlines even though it has been around as a staple treasury management offering for five decades. The post emphasized that fter all these years, the market opportunity for wholesale lockbox services remains significant. While the majority of large corporations already use bank WLBX services, WLBX adoption falls markedly with the size of business – particularly among businesses with annual revenues below US$250 million.
WLBX and ICL Deposit Services are Complimentary

WLBX and ICL Deposit Services are Complimentary

The above chart shows the number of businesses by annual revenue that utilize bank WLBX services, or not. Why wouldn’t a good size company, say one with $250 million in annual revenue not use a bank for WLBX services? Because, for whatever reason, they choose to do the work internally. A significant number of these companies have their own remittance processing systems. Some are dated, but most are image equipped and are equipped to send x9.37 compliant files to a bank (or could be made to be). Lots of businesses in other words. All are ICL deposit candidates. Offering an ICL deposit capability used to be a hassle. In the early days of image exchange, there were many variations on the x9 standard going around, and accepting an image file from someone’s in-house system was easier said than done. Well, it probably still is, but not nearly as much so. Now, a bevy of solution providers offer this capability. Some offer outsourced item processing services also, making the task even easier for smaller and midsize banks. But most banks have been focused on offering RDC solutions bundled with desktop scanners, even though tens of thousands of businesses don’t want to buy RDC – they already have scanners. As a result, a minority of U.S. banks offer ICL deposit services. And, the smaller the bank, the less likely ICL services are offered. icl-deposit Hungry for fee revenue? Opportunity knocks!