AFP Blogs

Banks avoid being “behind” lenders in better security position
If you don’t have to open your deal, don’t
Banks generally prefer arranged verus underwritten (guaranteed) deals
Fewer financial institutions may commit to new deals
The pendulum swing from institutional lenders to bank lenders means ancillary business matters…a lot

Don’t just ask for references when interviewing vendors; ask to visit one of their current clients. “We visited a customer site and heard the good, the bad and the ugly,” said Kelly Kendall, senior director of revenue management with YRC North American Transportation.
Kendall led a presentation about how YRC automated accounts receivable. YRC chose Open Scan Technologies in part, Kendall said, because other vendors couldn’t produce clients or made promises they couldn’t keep. “We heard them say, ‘We’ve got that,’ then when I asked them about it they’d say, ‘It’s in an upcoming version of our software,’” he said.

Despite a starting time toward the end of a long day, Forum attendees were unusually alert for the general session, “Maintaining Liquidity in the Current Credit Environment.

PNC’s economists predict that the U.S. economy will pull out of its spiral at the end of the year in part because of the Fed/Treasury efforts. “How much is real growth and how much is from the stimulus? How do you benchmark it against the past?” said Richard DeVore, Executive Vice President for The PNC Financial Services Group and Chief Credit Officer for National City.

What forms of capital are available today? DeVore said for retailers who need short-term financing with revolving credit facilities, borrowing base deals are available but not so for cash flow while factoring is sideways. For long-term financing of debt, there is no institutional and high-yield, unsecured and equity loans available right now, he said. “If a deal happens, it’s likely asset-based and I know you don’t like to hear that because it has the most controls on it,” he said. Of the seven retail finance deals that have occurred this year, only one was unsecured, he said.

Daniel Littman, Senior Payments Research Consultant, Federal Reserve Bank of Cleveland took a different tack and compared payments to, of all things, trans-oceanic shipping. Both are old, complex and labor-intensive. And both underwent revolutions that started slowly in the 1950s. Container ships were created in the 1950s and transformed shipping while credit cards and automated processing began during the same period.
Even though the concept of payments is old, even ancient, this mature business is still innovating, Littman argued. “Innovation at the periphery includes PayPal, Google Checkout, BillMeLater, and so forth,” he said. “Most of us don’t need to worry about them for a while because they all are on the same ‘set of tracks’ – they still flow through the ACH system.”
Disruptive innovation includes biometrics, but that won’t be common for 10 or 15 years, Littman said. “E-commerce payments systems are niche products,” he added. “PayPal may be large, but it is still a niche product. Revolution Money doesn’t even have a niche.”
Even cash, the ultimate mature payment method, is undergoing core innovation, Littman argued. Cash recyclers are new-fangled smartsafes that have all the functionality of smartsafes but also put the money into cassettes for the retailer to recirculate. “It’s a revolution because nothing has happened to cash since the ATM in the 1970s and it lets retailers divorce themselves from local banks.”

IBAN, or International Bank Account Number is required for payments to Europe. “We are hearing of truly exorbitant fees if you don’t have an IBAN account.”
Lifting fee: “This is a very common term in Europe. It’s the fee for touching the transaction and it can be hefty. By the time the beneficiary gets a payment of $50 it could be reduced by $15 because of lifting fees. With international ACH there are no lifting fees.”

Hennessy, Exec VP & Manager of Strategy & Marketing at Wells Fargo, also provided an update on the International Payments Framework, the member organization that was created a few years ago to improve cross-border payments. The IPF hopes to begin a pilot program of sending non-urgent, cross-border credit transfers to and from the UK by December 31, 2009, according to Hennessy. ACH rules and formats are not impacted by IPF rules and procedures. “We are not creating a new system,” said Hennessy, whose employer Wells Fargo, is a member of the IPF. “We are using an existing structure to enforce commonality. We’re doing this because so many companies are going global.”

Three quick questions for Jane Hennessy, EVP and Manager, Strategy & Marketing:

What’s the most common mistake corporate treasury professionals make when selecting an international payments method?

They might not think through all the options — the risks and possible ways to alleviate them — because they might not be familiar with the latest methodologies. Utilizing a bank specialist to help them review factors and options will help them avoid making what could turn out to be a costly choice. For example, there are trade-offs between sending an international wire in U.S. dollars versus the local currency. On the trade side, it might be the choice between open account relationships and a letter of credit.

–What’s the biggest challenge corporate treasury professionals face regarding international payments?

Understanding the complex and changing global environment. Rules, regulations, processes, and payment infrastructures vary by country and are constantly in flux. Building a process that works with internal accounting and reporting systems but is also flexible enough to handle the regulatory and system capabilities/requirements of suppliers, vendors, and payees in multiple countries can be daunting. Trying to keep abreast is a significant challenge.  Examples include  SEPA, UK Faster Payments Service, and ubiquity of mobile payments in some markets.
In today’s environment, risk mitigation is more important than ever — this may affect established buyer-seller relationships, and current payment approaches might no longer be viewed as acceptable.

–What advice would you give corporate treasury professionals who need to make the business case internally for switching to a different international  payments method?

Consider all the alternatives and analyze them carefully, taking into account risk and return,  speed and certainty of payment considerations, currency, country specific requirements, counterparty needs, and readiness. Seek the advice of international payments experts who can assist in the evaluation and ensure you are making the best choices. Consider your current internal processes and account structure/banking relationships to identify opportunities for simplification and cost savings. Talk to your vendors/suppliers, and make sure that you understand their needs and preferences.

Michael Connelly, VP and Treasurer, Tiffany & Co., sums it up nicely: “Cash is king and liquidity is the crown prince.”
Patrick McGuiness, SVP Finance, Tiffany & Co., opened the first full day of the forums with a presentation titled “Finance’s Role as Business Enabler.”  His fundamental question: How can finance make an impact on an organization above and beyond payments? “How do we reach out beyond our division, our fiefdom?”
Tiffany’s Finance Division is involved in strategic planning, annual operating and financial plans, managing the debt/equity mix, ensuring liquidity needs, and supporting cash management, credit management and receivables, and more.
The key is plenty of training and then quarterly follow-up to review financial results and tie them to the training.
“Finance is typically seen as the necessary evil that sits in the back of the house and doesn’t add value,” he said. “At Tiffany, Finance has a three-pronged approach: enhance the financial acumen of the operating unit leaders, embed key finance resources with the operating units for more informed decision-making, and building a sustainable learning environment.
“We weren’t trying to turn them into financial gurus. We were trying to equip them to ask the right questions.” What’s the ROI, for example.
McGuiness’ conclusion: Engage the organization around the development of core financial acumen. “If you have concerns about how these decisions are being made this is critical. It’s not just a matter of picking up the phone.”

Here’s a surprise: in a new McKinsey survey, consumers say merchant acceptance and preference is a top driver in the usage of use of debit cards. “Consumers understand that you pay high fees for processing credit cards. They’re pretty sophisticated. You have a really significant influence over the way consumers can pay. Prompting does not drive consumers away. They understand it and they respond to it.”

Stewart concluded with some forecasts: Debit card and ACH growth will slow through 2012. We’ll continue to shift from check conversion to RDC.

Three more implications for corporate treasury:

Anticipate and adapt to ongoing liquidity constraints.

Continue to seek efficiencies in AR/AP.

Anticipate customer impact from reduced access to credit and manage the POS experience. “We’re seeing increases in alternative credit providers like Bill Me Later.

The changing landscape has accelerated market consolidation so Stewart believes we will see more stable and scale-driven pricing. The price of ACH origination and so on will continue to fall. The top five banks – J.P. Morgan, BoA, Wells Fargo, Citi and PNC account for 37 percent of domestic deposits.

As for maturation of the electronic payments market, image exchange is here, Stewart said. It’s allowed for product innovation and what Stewart has seen remote deposit capture emerge. “Suddenly the economics of RDC make sense.” It reduces costs and streamlines the payments process and it’s fueling competition among the banks. It’s allowing other banks to poach because it blows away the “footprint parameters.”

We are very likely to see incidents where consumers will be declined rather than use overdraft protection. “What are you going to do about that? That’s a significant experience that needs to be managed to maintain customer loyalty but also an opportunity to steer them to other options.