Seminar - Hot topics treasury

The future of payments

www.pwc.com

Strictly private and confidential

14 June 2018

PwC 14 June 2018

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Contents

2Seminar - Hot topics treasury

Appendices

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With you today

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4Seminar - Hot topics treasury

Marco van HartenSenior ManagerCapital Markets and Accounting Advisory ServicesT: +31 (0)88 792 61 22M: +31 (0)6 22 10 60 31 marco.t.van.harten@pwc.com

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5Seminar - Hot topics treasury

Treasury ImpactsNext Generation PaymentsDigitializationCentralization

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Agenda – The Future of Payments

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6Seminar - Hot topics treasury

Centralization

• Centralization, Automation & Efficiency

• PoBo & CoBo

• Virtual Accounts

• FX Platforms

Digitalization

• Industry 4.0

• FinTechs

• Platform Solutions

• PSD2

• Cyber Security & Fraud

Next Generation Payments

• Mobile

• Instant Payments

• RTP

• SWIFT GPI

• DLT Payments

Treasury Impacts

• Payment Strategy

• Role of Treasury

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Centralization

2 Centralization

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Payments & Cash Management evolution…

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Integrated Financial Shared Service Centre

with Collection Factory

Sophistication / Value creation

Basic Payment

Factory (PF)

Ca

sh M

an

ag

emen

t M

atu

rity

Decentralized Cash Management

Advanced PF + In-House Bank

and PoBo

Cash Pooling

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The most sophisticated cash management solution Payments on Behalf of (PoBo) & Collections on Behalf of (CoBo)

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Creditor(BU)

Collecting Entity(Treasury)

Collecting Account

Debtor

Invoice

€ Payment

Debtors(BU)

Paying Entity(Treasury)

Paying Account

Creditor

Invoice

€ Payment

Benefits

Liquidity Management

• Reduction in bank accounts at local level• Improved Cash Flow Forecasting

FX Risk Management

• Centralized view & control over foreign currencies• Netting of FX exposures

ReduceCost

• Account rationalization and reduction in banking charges• Reduce cross-border payments• FX bid/offer spread reduction

Improve Control

• Elimination of access to payments process locally

Considerations

• Regulations- Feasibility of PoBo (PINO) & CoBo schemes by jurisdiction- Regulatory compliance/requirements (opening non-resident account)- Tax considerations (WHT, PE, TP)- BEPS implications

• Payments & Collections- Payment types & instruments working using PoBo & CoBo schemes- Payments onshore vs. offshore

• Operational impact- Management of Bank Accounts- Central Bank Reporting- Requirements around supporting documents

• Technology- TMS/ERP to support IHB- IC Loans- Interest allocation/distribution

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Virtual Accounts – A liquidity solution…

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• Combination of Notional & Physical Pooling

• Never hold a balance• Transactions are reported in real

account grouped by Virtual Account• Corporate controls adding or closing

Virtual Accounts• Technically outsourcing IHB activity

Virtual Sub A

Virtual Sub B

Virtual Sub C

Virtual Sub D

Real Master Account

Virtual Accounts

• Requires IC Loan documentation• Bank holds only one balance• Really glues you in with a single bank

Pro’s Con’s

Cost of the solution No ZBA required No significant benefits compared

to physical account structure

KYC & account opening

+ Self-Service account opening without bank involvement

In most cases full KYC is still required

KYC process effort will depend on the bank chosen

Instant liquidity

+ All funds instantly on physical account (visibility)

+ Less physical accounts

Physical accounts: visibility can be obtained by checking the balances in the EBS

Real quantitative value of instant liquidity is limited

Legal requirements

+ No audit required+ Reduced regulations (e.g.

FACTA, FBAR)

AR reconciliation

+ Allow automated reconciliation per client/legal entity under single physical account

+ Reduction of # people working on the manual AR reconciliation process

Require change of billing process (one off)

AP process+ Easier as with physical

accounts

Does not support paper instruments (same as physical accounts)

Assess whether or not Virtual Accounts can add a real value in the AP process

Limited references or live use cases (piloting process)

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… that could help with your payment process

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1 2

Problem Statement:

Reconciliation issues for AR (e.g. missing or truncated data)

Segregation of funds required (e.g. Real Estate, Notary)

3 4

Problem Statement:

Various teams involved in reconciliation

Duplication of bank accounts per type of flow (e.g. Payroll, collection & disbursement -typical US bank account structure, one account per store, etc.)

Problem Statement:

No proper system in-house to track/manage intercompany position and associated interests at arm’s length rates

Problem Statement:

• Willingness to move to PoBo/CoBostructure but no proper system to track such transactions (as well as associated IC transactions) and reconciliation issues

AR Reconciliation Segregation of flows I/C tracking CM optimisation

Scope:

• AR

Maturity of the solution: Maturity of the solution: Maturity of the solution: Maturity of the solution:

Scope:

• AR & AP

Scope:

• IHB role

Scope:

• AP/AR and IHB role

Virtual Accounts solution:

One central treasury account (physical account) per currency

o Instant cash concentration

o Access to domestic clearing

Virtual Accounts solution:

“Internal” virtual account(s) per entity

Virtual Accounts solution:

One entity multiple virtual accounts per type of flow

Virtual Accounts solution:

One entity / multiple virtual accounts per client/business divisions

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FX Payments – Where and when to open accounts?

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Use a LCY account In the Country In the Currency Centre In the Treasury Centre

No

• No additional bank account

• All with same bank

• Bank dependency for the FX spread applied (could be mitigated by pre-agreed spread)

• More expensive cross-border payments / collections

• Earlier COT

FX Platform ?

+

-

• Same bank as for LCY account (same customer service, connectivity, relationship)

• Easy to execute transfers from LCY to FCY accounts

• Earlier COT

• More expensive cross-border payments / collections

+

-

• Lower fee for domestic transactions

• Better COT

• Non-resident account not always allowed

• Potential additional bank

• Remote relationship (language, time zone, … )

• Cross-border transfers from LCY to FCY accounts

• Not always access to same interest rates

+

-

• Potentially same bank for all• All FCY accounts in same location• Easier sweeping to Treasury

accounts• Harmonised conditions for all

entities

• Non-resident account not always allowed

• Potentially additional bank• Remote relationship (language,

time zone, … )• Cross-border transfers from LCY

accts to FCY acct• Different conditions on credit

balances• Earlier COT • More expensive transfers

+

-

Yes. Where?

Influencing factors to decide where and when to have FCY accounts

1. Volume and value of the transactions in the FCY

2. Both payments and collections or only payments/only collections

3. Origin and destination of the flows: inside or outside the currency centre?

4. Type of flow: IC vs. External

Open a FCY account?

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Digitalization

3 Digitalization

13Seminar - Hot topics treasury

Centralization

• Centralization, Automation & Efficiency

• PoBo & CoBo

• Virtual Accounts

• FX Platforms

Digitalization

• Industry 4.0

• FinTechs

• Platform Solutions

• PSD2

• Cyber Security & Fraud

Next Generation Payments

• Mobile

• Instant Payments

• RTP

• SWIFT GPI

• DLT Payments

Treasury Impacts

• Payment Strategy

• Role of Treasury

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Industry 4.0

3 Digitalization

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Industrial Revolution

• Steam Engine

• Factories

2nd Industrial Revolution

• Steelworks

• Electricity

• Combustion Engine

3rd Industrial Revolution

• Computers

• Automation

• Internet

• Digitalization

• Internet of Things (IoT)

• Data exchange & integration

4th Industrial Revolution

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Evidence of change…

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Source: Gardner, Statista

The shift in the largest mobile phone manufacturers…

…demonstrates the speed of change

Nokia

Motorola

Ericson

Siemens

Panasonic

Samsung

Apple

Huawei

Xiaomi

Oppo

2000 2018

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… but I not all bad news

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Be more efficient

Add value

Become more strategic

Digitalization brings huge changes and will disrupt Treasury through process efficiency, enhanced compliance & control, and increased treasury/business insights.

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The banking landscape has been impacted…

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Banking challenges

Macroeconomic environment

• Low/negative interest rate environment• Slow economic growth• Political instability

Regulation

• Increased liquidity, funding and capital requirements (e.g. Basel III, IV)

• Fines for legacy misconduct issues (e.g. Libor rigging)

• SEPA• MiFID II• PSD2

Legacy operations & technology

• Fragmented and decentralized systems• High IT replacement costs• High cost to income ratios

Disruption & Innovation

• New channels (e.g. Mobile and Digital Platforms)

• Disintermediation by technology (e.g. Robo-advisors, Trading Platforms, P2P)

• Market consolidation

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… and the digital world creates a threat to Banks

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Which entities are likely to be the most disruptive in the next five years?

Source: PwC Global FinTech Survey 2017

‘FinTechs are attacking most

profitable income streams of Banks

fee based income like Payments which

account for 47% of Banking revenues BUT are 65% of the profits and 20% of

their ROE’

Traditional FIs need to be the most concerned as they are not seen as a disruptive force, but they are best to leverage FinTech innovation

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But FinTechs and Banks are coming together as well

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• Agility• Expanding global footprint• UX and ease of use• Easier for merchants• Wealth of data, less reluctant to use

• Customer base• Customer trust• Knowledge of regulations• Large quantities of data• Less settlement risk

Traditional Banks FinTechs FinTech has evolved from startups that want to take on and beat incumbents,

to a broader ecosystem of different businesses

looking in many cases for partnerships.

Source: PwC Global FinTech Survey 2017

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The operating model of the future will be based on a platform solutions connected to best in class service providers

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Payment providers

P2P lender

Robot-advisory

International transfers

Customers

Flow of capital

Flow of data

Key technologies

Digital Banking PlatformPlatform connects to best in class service providers (Platform as a Service)

Software as a Service (SaaS)System/application development outsourced to specialized ‘best of breed’ banking technology providers

Application Programming Interfaces (APIs) – Technology platforms are able to plug into the Third Party Providers (TPP) via standardized protocols

Third Party ProvidersBest in class providers connecting into the digital banking platform to utilize banking infrastructure and customer base

CustomersConnect via technology (e.g. mobile devices, API) providing the bank and service providers with access to their data which in turn allows banks to offer tailored products and services

Digital Banking platform

(PaaS)

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PSD2 forces Banks to open their infrastructure

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Payment Services Directive 2

European Directive to increase competition and innovation

PSD2 requires banks to open up their data to regulated TPPs but not build on clearing system or impose API standards

Open Banking is the UK version of PSD2 and dictates they do so in standard format

Enable regulated TPPs to access bank accounts (XS2A) through open APIs (Application Programming Interface)

Introduce new and regulated account initiation (AISP) services and payment initiation (PISP) services

AISP: aggregation of multi-bank balances (real-time), enhanced transactional data & analytics

PISP: initiate payments via a TPP (e.g. sweeping)

Some EU Member States still to transpose into local law

PSD2 will accelerate Instant Payments as businesses can become PISP

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Cyber Attacks are the new reality

3 Digitalization

22Seminar - Hot topics treasury

Cyber Security Risks

Financial loss

Reputational damage

Identity theft

Compromised personal information

Unauthorized charges

Operational shutdown

73% of organizations experienced actual or attempted payments fraud

61% of CEOs view cyber security as a key risk to the organization

Recent SWIFT and other incidents heighten the importance for revisiting cyber risk management approach

Facts on Cyber crime

Source: PwC Annual Global CEO Survey

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Next Generation Payments

4 Next Generation Payments

23Seminar - Hot topics treasury

Centralization

• Centralization, Automation & Efficiency

• PoBo & CoBo

• Virtual Accounts

• FX Platforms

Digitalization

• Industry 4.0

• FinTechs

• Platform Solutions

• PSD2

• Cyber Security & Fraud

Next Generation Payments

• Mobile

• Instant Payments

• RTP

• SWIFT GPI

• DLT Payments

Treasury Impacts

• Payment Strategy

• Role of Treasury

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Topics shaping the payment industry globally

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Customer experience Innovation & Technology New Entrants Regulations & Standards

Shifting consumer mind-sets and preferences

Evolution of Technology Increasing pressure from non-banking competitors

Enabling development in regulations and standard

“Digital Natives” will be the majority in 2020

• Anytime, anywhere access

• Informed decisions• Personalized offers

Shifts in consumer and business mind-sets are influencing priorities in making payments

Commoditization of sophisticated infrastructure required to support increasing volume of payments (e.g. contactless, biometrics, etc.)

Adoption is not slowed down by cost but starting with incremental nature of technologies

Technology advancement exposing security issues with traditional methods

Several new players are encroaching on Bank’s traditional ‘payment-facilitation’ space, e.g. FinTechs, PSPs, retailers

This has placed significant pressure on Banks to act quickly

Banks, in turn, will place pressure on the remainder of the value-chain to adopt new payment methods (e.g. contactless)

Protection of data through authentication rules and security standards

Industry and government regulatory bodies driving development of technical payments standards

Further downward pressure on Debit and Credit Card interchange fees & usage

AML and Screening regulation enforcing “KYC” protocols

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Mobile Payments (1 of 2)

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2 main solutions exist for mobile payments

How it works

• Codes displayed at registers in stores (need POS with software to generate and read QR codes)

• Customer scans code with phone’s camera and connects to the payment system via its own wireless network. QR pays retailer’s digital wallet from customer’s digital wallet

• Used for instance by WeChat Pay and AliPay

Pros & Cons

• Can be used on any device with software to display/read QR codes

• Requires outside wireless signal, not built-in solution in payment systems

How it works

• Radio connection between devices: NFC sends wireless signal to cash register connects to payment system via retailer’s network and pays the register directly from a digital wallet

• 2-way real time communication between devices (payment & acceptance)

• Terminals to be EMV compliant (EMV chips/magnetic strips)

• Used by Apple Pay, Android Pay, Samsung Pay

Pros & Cons

• Easy to use, available solution (built into many payment systems)

• Security concerns: direct access to retailer’s computer systems via NFC signal risk of data theft

QR codes NFC

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Mobile Payments (2 of 2)

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26Seminar - Hot topics treasury

Attached card readers – Device attached to a smart phone or tablet, turning them into a card accepting terminal

eWallets / Mobile Wallets –Electronic device (smart phone) that allows you to make transactions and store currency

Mobile P2P payment – Peer to Peer payments using phones

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From Batch to Instant – Instant Payments becoming the new norm

4 Next Generation Payments

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Immediate

Irrevocable

24/7/365

Richer Data (ISO 20022)

No truncation

SCT Inst Payments up to EUR 15,000 Live since November 2017 34 European SEPA countries TIPS live November 2018

SWIFT GPI No value-dating Transparent fees Track & Trace Unaltered remittance info

UK FPS UK Faster Payments

Payments from up to GBP 250k to GBP 1mio

Countries where IP is live

Countries where IP is planned/likely

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Quiet revolution: Request To Pay or RTP

4 Next Generation Payments

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What is RTP?

‘New’ way to collect directly (real-time) from consumers or businesses, retail eCommerce focussed

Emerging around the World, PSD2 and Open Banking facilitating in Europe

Potentially replacing Credit Cards and Direct Debit as service is reducing cost, fraud and chargebacks

Drawbacks:

No standards imposed yet, fragmented services

SCA (Strong Customer Authentication) or 2-factor authentication requirements making solution less seamless (deadline Sept ‘19)

Not working in case final amount is unknown (e.g. rental)

Not all RTP schemes multi-currency as with Credit Cards

37%Expected decline in card payments by 2027 due to PSD2

70%eCommerce payments in The Netherlands captured by iDEALSource: RTP Revolution – Citi 2017

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SWIFT GPIHow it works

4 Next Generation Payments

29Seminar - Hot topics treasury

Source: SWIFT

Objective of SWIFT GPI is 3 fold:

Support the user experience of cross-border/international payments, by creating transparency

Create tracking and traceability of cross-border payments (via MT199s or API’s and not only for SWIFT GPI Banks)

Increase the information carriage of cross-border payments

On each GPI payment instruction 2 basic elements are added:

Unique End-to-end Transaction Reference (UETR) which will allow the bank/corporate to track and trace the payment

SLA code which guarantees execution according the GPI rules (i.e. fee transparency, same-day execution & no truncation of data)

In p

ra

cti

ce

Ob

jec

tiv

es

Wh

y s

o d

iffi

cu

lt?

OrderingParty Debtor Bank (France) Bene Bank (UK) Beneficiary

Debtor Bank’s Corr. Bank (US)

Bene Bank’s Corr. Bank (US)

Clearing House(CHIPS)

USD Invoice

Instructions Credit advice

MT103 MT103

• The most traditional way of effecting cross-border payments is via the correspondent banking route;

• As such, each bank in the chain needs to process the payment instruction:

Applies costs

Potentially truncates data

Requires time to execute

According to SWIFT, 1 cross-border payment out of 200 is not processed as it should

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DLT Payments

4 Next Generation Payments

30Seminar - Hot topics treasury

77%Expect to adopt blockchainas part of an in production system or process by 2020

Banks and FinTechs exploring DLT for cross-border payments to solve current inefficiencies, reliance on correspondent banks and high cost

DLT cross-border payments model is expected to provide increased efficiency, speed & security and substantially lower the cost

Credit beneficiaries within seconds, not days

FinTechs as BTL, Wyre and Ripple have built cross-border payment and settlement platforms based on DLT

Many Banks partnering with FinTechs or collaborate with SWIFT to experiment with DTL for cross-border payments

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Treasury Impacts

5 Treasury Impacts

31Seminar - Hot topics treasury

Centralization

• Centralization, Automation & Efficiency

• PoBo & CoBo

• Virtual Accounts

• FX Platforms

Digitalization

• Industry 4.0

• FinTechs

• Platform Solutions

• PSD2

• Cyber Security & Fraud

Next Generation Payments

• Mobile

• Instant Payments

• RTP

• SWIFT GPI

• DLT Payments

Treasury Impacts

• Payment Strategy

• Role of Treasury

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How to develop an integrated Payment Strategy

5 Treasury Impacts

32Seminar - Hot topics treasury

Assess current payment profile

Define opportunities for improvement & innovation

Define a long term Payments Strategy & Roadmap

• Partner with the business to understand strategy and needs• Develop a holistic perspective of the payments process from initial

customer payment touch point through to reconciliation of vendor payments

• Understand customer experience and supplier dynamics

• Assess different payment options which can enhance the customer experience and improve processing at an optimal cost

• Consider speed of funds transfer, costs per transaction, infrastructure requirements, longevity, etc. versus effort required to change

• Define the company’s risk tolerance level• Evaluate risk versus reward of different payment types (monetary,

reputational, etc.)• Assess regulatory risk and requirements for compliance

• Determine changes to payment types used and/or accepted• Establish change management strategy for vendors and customers (i.e.,

communicating security and benefits of new payment types)• Define a roadmap for short term and longer term changes

Evaluate payment opportunities

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There are many benefits of a holistic Payment Strategy

5 Treasury Impacts

33Seminar - Hot topics treasury

Corporate

RevenueGrowth

Cost Containment

Compliance

Operational Excellence

• Payment features resonate with the customer, building upon the brand experience

• Accelerate cash collections

• Leverage payment vehicles across multiple customer channels

• Capabilities and scale for new distribution channels

• Leverage Big Data

• Lower transaction costs

• Fewer FTEs required

• Reduce float costs

• Reduce number of banking partners

• Full awareness of applicable regulations

• Sustainable and proactive compliance program

• Minimize risk of security breach

• Avoid surprise audits

• Standardized processes reduce inherent risks and inefficiencies

• Reduce integration costs and time-to-market in event of entry

• Increased control over outgoing funds

• Great visibility into cash flows

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