Spring/Summer 2010
Industry Trends 1
Welcome from Julie Monaco
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Transaction Banking: Meeting the Growing Demands of Emerging Markets and the Public Sector
Product Innovations 30
Regional Spotlights
Supply Chain Finance Thinks Small(er)
50
Outlook from Canada
54
RMB Cross-Border Trade Settlement Gains Momentum
Faizal Jiwa
Matthew Frohling
Interview with Paul Simpson
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Maximizing the Value of Your Treasury
34
Ron Chakravarti Cindy Gerhard
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After the Credit Crisis: 5 Emerging Trends in Trade Finance
Extracting Value Across the Entire Procure to Pay Continuum Deirdre Ives
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Best Practices in Prepaid Solutions, Partnering for Success
William Mor
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Drew Kese
Making Payments to Developing Nations Diane S. Reyes
John Ahearn
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Global Experience. Local Insight. Innovative Tools and Best Practices for North America’s Public Sector
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Kevin Fitzgerald William Borden
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Beast of Burden: As Cross-Border Payments Become More Complex Banks Take On More of the Heavy Lifting Sayantan Chakraborty
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Integrating Sustainability and Efficiency with Citi® Commercial Cards
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Making the Most of Your Investment Options in a Thawing Economic Climate Michael Berkowitz
On the Path to E-Payment Adoption, Billers Are Giving Consumers a Nudge
Mobile Banking Was Just the Beginning Tomasz Smilowicz
Doing Business in Russia
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After the Crisis, a New Landscape Emerges in LATAM
Natalya Belaya Julia Petrova
Hubert J.P. Jolly
David Kachoui
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Click here to visit Citi Global Transaction Services online
Valentino Gallo
Welcome Dear Valued Client,
Julie A. Monaco Region Head, North America Global Transaction Services Citi
Citi’s reputation is built on our ability to meet the comprehensive needs of the most sophisticated and demanding organizations across the globe—and your success continues to be our top priority. Throughout the last year-and-a-half, we have seen a fundamental paradigm shift in the strategies and priorities of our clients across the spectrum of industries. The credit crisis has played a critical role in substantiating the value treasury delivers, and as a result, Transaction Services has become an increasingly strategic business partner to our clients across the globe. As your needs have evolved to adapt to today’s new business environment, we have continued to invest in our capabilities to ensure that you benefit from the scope and strength of the most comprehensive suite of solutions in the market. Throughout the past year, we brought several innovative solutions to market that help organizations like yours reduce 10, costs, December 2007 streamline operations, mitigate risk and optimize December 1, 2008 working capital. Address Line 1 Address Line 2 Address Line 3 Address Line 4
Dear Valued Client, Dear Valued Client, Please take a few minutes to read this edition of Citi Perspectives. I am pleased to provide you with a copy of Citi Perspectives magazine. This magazine, which features articles onCiti Industry Trends, Product Innovation and You find insight from experts on latest solutions, global trends, As partwill of our ongoing effort to communicate and collaborate with our most Case Studies, distributed at this year’s annual AFP conferencemagazine. in Boston.This valued clients,was I would like to offer you a copy of Citi Perspectives industry developments, andonbest practices to help you navigate today’s issue, which features insightful articles Industry Trends, Product Innovation At Citi, we listen to what you tell us at about needs and strive build and Case Studies, was distributed this your year’s Association fortoFinancial global marketplace. innovative solutions that help you achieve your goals. Professionals Annual Conference in Los Angeles. II hope this stimulates your thoughts about how Citi can continue to hopebehalf youmagazine will of findthe this magazine useful asTransaction your organization strives to achieve On 6,000 Global Services employees across provide solutions meet your and I exploring look forward to the its goalsinnovative for the coming year.that We at Citi areneeds constantly ways to next opportunity to show you how our services can help you. improve innovativethank solutionsyou and world-class to best meet yourcan be confident Northour America, for your service partnership. You business needs. Sincerely, that today, tomorrow, and in all market conditions, we will remain You can rest assured that Citi will be there to support your business regardless of committed toeconomic helpingwinds youblow, achieve your business goals. which direction the and that you can rely on our global footprint, experience and capabilities to help you succeed in today’s highly Julie Monacoand challenging marketplace. competitive I look forward Managing Director, to the opportunities ahead of us. Global Transaction Services North America services can make a real I look forward to showing youHead how –our award-winning Citi Marketsfor & your Banking difference organization.
Best regards, Sincerely,
Julie Monaco Julie A. Monaco Managing Director, Global Transaction Services Head – North America Citi Markets & Banking
Address Line 1 Address Line 2 Address Line 3 4
Legal Entity Name
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TRANSACTION BANKING: Meeting the Growing Demands of Emerging Markets and the Public Sector In the wake of the financial challenges of the past few years, corporates, public sector organizations and financial institutions are demanding greater efficiency. Transaction banks are poised to meet these client demands in both the developed and developing world, offering solutions that satisfy their needs today and into the future. Paul Simpson, Head Paul Simpson Global Head of Treasury and Trade Solutions Global Transaction Services, Citi
of Treasury and Trade Solutions at Citi’s Global Transaction Services, shares his perspective on the key factors that will influence the direction of transaction banking in the year ahead.
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Q A
For transaction banks like Citi, sustainability boils down to being client-centric and remaining relevant to clients. There’s little doubt that 2010 will present its challenges, but we will continue to evolve to meet the needs of our clients. To that end, we are focused on the development of innovative, sustainable solutions through greater collaboration and partnership. As a result, we expect significant growth prospects, particularly in emerging markets and in specific sectors, such as public administrations and banks, along with industry verticals including wireless telecommunications.
Q A
What do you see as the primary role for transaction banks in emerging regions?
In developing markets such as Asia, Latin America and the Middle East, transaction banks have a critical role to play in facilitating the flow of transactions in and out of these markets, as well as the flows within the markets themselves. In countries like China, we see intra-regional investment and trade flows rising as new manufacturing capabilities are developed. The Middle East has also become a major investor in Asia. And in Latin America, large multinationals are executing acquisitions and investing in infrastructure projects. Citi is in 104 countries worldwide, which allows us to support flows from region to region. By supporting both sides of a transaction, we can condense cycles by as much as 60 percent.
Q I n d u st ry T r e n ds
Paul, what do you see as the challenges/ opportunities for transaction banking in the foreseeable future?
How can public sector organizations apply the same successes in productivity, transparency, and control of operations that corporations have achieved over the past few years?
Citi Perspectives
A
Governments are under the same pressures to reduce costs that corporations face, and they can achieve similar savings through improved efficiencies. By digitizing traditional paper flows, Citi is helping government administrations dramatically reduce expenses. Innovative solutions, such as the use of purchasing cards for procurement in place of cash or checks, and the use of prepaid cards to distribute social benefits, can improve controls. Electronification is making it possible for governments to gain real-time information and visibility into where their funds are at any given time.
Q A
Given the changing nature of the trade and treasury business, how much emphasis should transaction banks place on collaboration and partnerships?
At Citi, we are committed to innovation and continue to invest in technology to support our transaction services business. And because we believe great innovations don’t occur in a vacuum, we have placed a tremendous emphasis on development through collaboration. About 95 percent of what Citi does is the result of partnering with our clients. For example, we were one of the first international financial institutions to receive research, development and innovation financial assistance from the Irish government. In Hong Kong we worked hand-in-hand with the government and its suppliers on a procurement card initiative. Our partnerships also extend to industry specialists such as Ariba, who is working with us to provide “Order-to-Pay” products which are part of the payables continuum. Given the dramatic events of the past few years, the importance of striking creative partnerships to facilitate the development of capabilities and products that meet the changing needs of new markets is more crucial than ever. n
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S p r i n g /S u m m e r 2010
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TOP PRIORITIES FOR 2010
Maximizing the Value of Your Treasury
#1 Establishing the right level of liquidity
It’s indisputable and understandable: companies have been hoarding cash. The cash-to-asset ratio for the S&P 1500 hovered around five percent for almost a decade between 1994 and 2003, while in the last five years it hit nearly 10 percent.
• Manage capital planning aggressively, given interest rate volatility and expected rate increases over the next 12 to 18 months
#2 Releasing cash trapped in emerging markets
By other accounts, United States, European and Asian firms
Companies with extensive operations in emerging markets
collectively hold almost $300 billion more in cash on their
with capital controls, such as China or Brazil, face
balance sheets than in 2007.
continued pressure to get greater value from cash trapped in these markets. While they are more actively managing the
Economic windstorms that have swept the globe Ron Chakravarti Liquidity and Investments Global Transaction Services, Citi
over the past few years show signs of subsiding, although they continue to stir in certain pockets. Swirling market volatilities, vagaries in capital
Cindy Gerhard Liquidity and Investments Global Transaction Services, Citi
Looking forward, strong organic cash generation and liquidity
repatriation of profits, the best defense is a good offense.
positions will separate the winners from the losers—setting apart firms that are fueled for growth driven by capital
Putting in place accurate and efficient cash forecasting
investments and acquisitions.
systems helps avert costly missteps such as pumping liquidity into a country where it will get trapped. Active inter-company
For treasurers, 2010 is a critical time to get their shops in order.
netting programs and advanced treasury structures such as
markets access, bank defaults, and safeguarding
Toward this end, they must:
re-invoicing centers help restrain the build-up of cash where
cash buffers have shaped a full agenda for
• Understand how and where their companies plan to restart their growth engines, so they can plan liquidity
treasurers in 2010.
levels accordingly
Recent Citi research shed light on seven top treasury management priorities among major corporations as they shore up to seize growth
It also pays to work with relationship banks to get conversant in local regulations and liquidity management structures that
• Examine the global dispersion of cash across countries
can provide opportunities to release cash. Strong controls and
and currencies, as well as the degree to which associated
well-defined investment policies help ensure that trapped cash
inflows and outflows are well matched
is productive while onshore. >>>>>
• Optimize internal use of liquidity to fund activities and reduce reliance on external funding
© Veer Incorporated
opportunities that are lurking around the corner.
repatriating funds is a challenge.
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#3 Diversifying sources of funding
In addition, due to underlying business uncertainties, many buyers and suppliers have been forced to renegotiate contracts. In this environment, firmly committed FX exposures from contractual obligations in non-functional currencies are no longer so firm.
#6 Integrating global
banking partners who are employing the latest technology advances, companies can reap huge operational cost-savings
treasury processes
and control benefits. A sampling of developments that are reshaping the way companies manage treasury include:
Having faced issues with raising funds through the capital
To tackle this, treasurers should consider reducing hedge ratios
A continuing focus in 2010 will be further functional
markets, companies continue to diversify sources of funding.
to counteract risks in the underlying business transactions.
centralization of treasury to gain a “single” view of firm-
They are looking externally to tap a broader range of sources
Many companies may benefit by moving to layered hedging
wide liquidity and risk, which proved to be so essential in
treasury module across all treasury functions globally to gain
that include, for example, trade supply chain financing, asset
rather than a rolling 12-month hedging technique.
times of volatility. This requires establishing comprehensive
a consolidated view of liquidity, trapped cash, FX risk, and
policies, standardizing global processes, setting common staff
counterparty risk
securitizations, and local bank borrowing in certain markets. To deal with the myriad risk scenarios, many companies need
performance indicators, rationalizing and centrally managing
But there are internal sources to be tapped, too. Here,
to better integrate cash and risk management processes and
banking relationships, and a strong technology infrastructure.
knowledge is power. Global visibility of cash positions is critical
structures for more holistic approaches to identifying risk levels
to maximize the value of internal cash. Treasurers can reduce
and mitigating exposures.
operating cash required to run their businesses by setting up global liquidity structures to offset cash surpluses and shortages across subsidiaries. Prior to the credit crisis, the perceived cost of working capital was low due to abundant and cheap credit. Now, improved working capital management is a
By integrating global processes, treasury also gains scale and
#5 Proactively tackling changes in regulations and tax laws
flexibility to be embedded in working capital and supply chain management activities. Citi research indicated that, in 2009, only around a fifth of treasury departments provided advice to businesses on working capital management on a systematic
• Deploying a single instance treasury workstation or ERP
• Adopting standard global payments mechanisms to increase straight-through processing. By using global industry standards and connectivity, such as XML and SWIFTnet, companies can simplify information exchange and systems integration with their banks while retaining the ability to switch to alternate providers when necessary • Implementing automated procure-to-pay solutions, with
basis. However, a significant majority indicated initiatives for
features such as integrated supplier databases and electronic
top priority. Firms should dissect processes and policies across
Globally, many countries have stepped up legislative and
2010 to achieve this integration. The most common purpose
invoicing, to eliminate paper processes and streamline
their entire order-to-cash and procure-to-pay cycles to extract
regulatory activities that impact cash management,
was to equip treasury to provide state of the art support to
receivables and payables cycles
funds trapped in working capital.
weighing heavily on treasurers to assess pending changes
businesses towards achieving the firms’ commercial objectives.
#4 Improving risk
management practices
and take action. Multinationals that operate in-house banks in tax havens or concentrate cash in tax-favorable markets, for example, face proposed tax reforms by the United States and other
Risk management continues to be a top priority as
Organisation for Economic Cooperation and Development
companies deal with volatile FX and interest rates,
countries, in addition to increased scrutiny and changing
in addition to challenges in managing counterparty risks.
incentives to relocate these activities.
One of the most critical ingredients to improving processes and procedures is the technology that both drives efficiency and stitches together far-flung operating centers. Companies should stay current, investing in a well-designed
Capital preservation is the mandate for excess operating funds.
In Japan, for example, SOX-like legislation is forcing companies
During the credit crisis, firms focused on the safety of cash
to meet new compliance requirements. But, other countries are
and strengthened investment policies to guide diversification
dismantling capital and currency convertibility restrictions—for
and ensure scrutiny over bank counterparty exposures. In
example, within Asia, those imposed after the 1997 economic
2010, treasurers will need to expand focus to all counterparties
meltdown—to make it easier to do business and release
to which their firms have significant exposures—including
trapped cash.
key buyers and suppliers, outsourced systems and services providers, and partnerships and joint ventures.
#7 Investing in technology
Treasurers need to stay abreast of changing winds and
and integrated “technology topography” to coordinate global treasury processes across the firm. By also aligning with
Citi Treasury Diagnostics
Gauging Performance and Priorities
work with relationship banks’ in-country experts to reassess current treasury structures and take proactive action
Maximizing strengths, minimizing weaknesses The recurring themes for 2010 are not new. Treasurers’ top priorities continue to revolve around risk management and efficiency, as they look for more reliable ways to view and mobilize liquidity and fund their operations. What is new, however, is the need to position their companies for growth and new business opportunities as the global economy continues to improve.
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Citi, a treasury services provider to many of the most complex and demanding institutions in the world, captures comparative data to help treasurers measure and improve their operations. One of the tools used to do this is Citi Treasury Diagnostics. It benchmarks performance in six critical areas: liquidity; risk management; working capital; subsidiary funding and repatriation; policy and governance; and systems and technology. Our analysis of top treasury priorities for 2010 is gleaned from recent Citi Treasury Diagnostics results.
to capture opportunities, minimize risks and manage funds efficiently. 8
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S p r i n g /S u m m e r 2010
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After the Credit Crisis:
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Emerging Trends in Trade Finance
As the global credit crisis dissipates and the economy shows signs of recovery, the Trade Finance industry is undergoing a significant shakeup that is dramatically impacting both corporates and financial institutions. There are five key ways that the business has changed . . . and will continue to trend.
1
Back to the (conservative) future
of a pricing differential, and banks were willing, so Trade Finance products understandably fell out
Historically, Trade Finance products provided a good
of favor.
deal of value to lenders and clients, because they represented a segmented form of financing—short-term,
That was then. Now, the trend we’re seeing in
self-liquidating, and viewed as a true working capital tool
the markets is clearly a desire to return to more
through the 1970s, 1980s and early 1990s.
conservative lending, and again tie financing to a client’s cash flow and cash conversion cycle.
Then, of course, the financial world got a little crazy.
In that regard, Trade Finance has undergone a
More and more liquidity flooded the capital markets,
renaissance, and for at least the near term, it will
and banks started doing strange things with their
continue to be a very important product.
balance sheets. And suddenly, Trade Finance wasn’t
documentation or just request a working capital loan.
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Needless to say, the latter prevailed. There wasn’t much
Before the credit crunch, capital markets were wide
valued as highly, because clients had a choice: Request a trade loan of a bank, which required a variety of
Export Agency Finance following suit
Trade derivatives have gone through a similar cycle.
>>>>>
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S p r i n g /S u m m e r 2010
John Ahearn Global Head of Trade Global Transaction Services, Citi
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Export Agency Finance is one of the few,
open, and projects were financed that didn’t necessarily make economic sense. Bonds could be issued simply because there was so much liquidity out there. Now that many of those bonds have gone into default, the
long-term lending vehicles that is acceptable in the current fiscally conservative
Export Agency Finance business, which is really long-term capital financing, has come into vogue. It is one of the few, long-term lending vehicles that is acceptable in the current fiscally conservative environment. One interesting note about Export Agency Finance: Prior to aircraft, as opposed to true, long-term working capital projects. Today, however, reliance on the aircraft industry has fallen off dramatically, and major companies, like oil producers and telecoms, have begun to use this as the real form of financing
will continue to be very important going forward. Because of
The United States does not anticipate adopting Basel II until
bank mergers occurring around them, corporates may find
April 2011. And there are market rumblings about Basel III.
themselves over-exposed to one bank, or that their facilities
Each of these releases of “Basel” is about putting more
with those banks have been significantly reduced, impacting
and more capital against trade finance and this will impact
their ability to do business.
borrowers going forward—and one should expect the cost of borrowing to continue to rise.
Meanwhile, among mid-sized and smaller banks, there is a sense of “getting back to our core knitting.” In the earlier got into the trade business. But when the crisis hit, they
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Cash is, yes, king
Credit crises always shine the spotlight on liquidity, and this one
assessed their operations and realized that trade was not
was no different on the banking side. The typical global banking
and should not be a core business if one doesn’t have the
model has always been “borrow short, lend long.” Much of the
global franchise or the correspondent network to support it.
turmoil in the market stemmed from lack of liquidity; so there is
Those lenders are now retrenching, and relinquishing their
clearly a need to match the borrowing and liquidity terms.
trade finance business to larger global banks. That speaks very favorably for trade finance, because the
for their long-term capital projects.
3
A bank like Citi, for example, still operates under Basel I.
part of the 2000s, many small and mid-sized regional banks
the credit crisis, the product was used to finance things like
environment.
For this reason, diversification of banks by corporate clients
Trade banks merge and consolidate
The upshot of all this is that corporates, who were internally
business, by its nature, is short-term, self-liquidating, and
focused, have come to realize they need at least two types
works within the client’s cash conversion cycle. It is essentially
of banks: a good, strong regional bank with a local branch
180-day lending versus five-year lending.
presence, and a global bank for their credit facilities.
The global credit crisis prompted significant mergers among some very good trade banks. ABN, RBS and others have consolidated. And generally, when banks consolidate, 1 plus 1 does not equal 2; rather, it typically equals 1.2. So, for example, if RBS had a $50 million facility to a client, and ABN had a $50 million facility to a client, when the two merged, the new facility is perhaps 60, but not 100.
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If a company can reassess its borrowing needs and obtain
Borrowing costs on the rise
financing on its cash conversion cycle, it can borrow more cheaply than trying to get three- and five-year tenures.
Another trend that seems inescapable: Borrowing continues
As regulators focus on liquidity, there will be an impact on
to get more expensive. While there has been some relief in
pricing. So while ten-year and five-year loan capital will be
the cost of credit over the last few months, regulators are still
out there, it will be at a significantly higher cost than
apprehensive about the global credit crunch and don’t want it
short-term financing.
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to happen again. As a result, there continues to be a tightening of capital and asset level restrictions for banks. The addition of capital and regulatory frameworks will add to the banks’ cost of doing business. And that cost will be passed down to the client at the borrowing level.
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Citi Perspectives
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S p r i n g /S u m m e r 2010
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Global
Citi’s long standing partnership with the
Providing support for state and local government
public sector organizations is a source of
The economic downturn has presented several challenges
great pride for our company. Our rich history
for state and local governments. For these organizations,
of serving these organizations has afforded
their ability to serve their citizens. With the demand for
Citi the opportunity to partner on a variety
services rising and budgets and tax revenue falling, state
Local
Experience
Insight
Innovative tools and best practices for North America’s public sector
operational efficiency is especially critical because it affects
and local governments are tasked with cutting costs without compromising the quality and delivery of their services. Citi’s integrated solutions, from electronic payments to data analytics, have been instrumental in helping many of our state and local clients take a holistic approach to improving productivity and bridging part of the gap between revenues and expenditures.
of diverse, strategic initiatives. From working
Benefits distribution
with United Nations agencies to mobilize
The rising unemployment rate and the number of checks
aid for relief efforts in Haiti and Chile to improving the efficiency and convenience of the State of California’s tax collection system,
being distributed to claimants is reaching historic highs. One way governments are finding savings is through the use of electronic distribution of unemployment benefits. This technology can also be used for disability, pension and other benefits.
Citi continues to demonstrate its commitment to the public sector.
The implementation of an electronic distribution of benefits solution substantially cuts the state government’s costs. This is largely due to the reduction in paper-related and manually
Kevin Fitzgerald Head of North America Public Sector Global Transaction Services, Citi
Over the last century, we have had the
intensive processes, which decrease the level of employee
opportunity to work with public sector entities
resources required. Through automation, the benefits
across North America to drive significant
number of returned checks is lowered.
costs down and improve the way these organizations operate. From this experience,
©iStockphoto.com/Marcopolo9442
we have established a best-practice approach William Borden NA Public Sector State & Local Global Transaction Services, Citi
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distribution process is simplified, fraud is reduced and the
I n d u st ry T r e n ds
to developing and implementing customized solutions to support the complex needs of our public sector clients that is unmatched in the industry.
State governments are also finding that paying benefits electronically is more convenient for beneficiaries because it provides the flexibility to withdraw cash at ATMs or use cards at points-of-sale in stores. By eliminating checks, electronic distribution is especially attractive for beneficiaries without bank accounts as they are no longer required to pay expensive check cashing charges. Surveys, relating to Citi’s work with a Mid-Atlantic state, for example, have shown customer satisfaction is enhanced through the use of electronic distribution of unemployment benefits.
Citi Perspectives
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We are a committed, long-term partner for state and local government and are determined to help public sector organizations harness technology and financial innovation to successfully meet their future challenges. Tax collection
Supporting suppliers
Transparency
At the same time as governments look for ways to reduce
In the current economic climate, suppliers (many of which are
Now more than ever, leveraging business intelligence to drive
costs, they are also seeking ways to improve the efficiency
small- and medium-sized enterprises) are experiencing cash
operational efficiency and improve decision-making processes
of collecting their tax revenues. Their common aim is to
flow problems and tight credit conditions. The goal of many
is critical to success for government entities. However, many
save costs and accelerate the collection process to improve
suppliers is to receive faster payments. In an effort to reduce
organizations do not have the tools or capabilities to analyze
turnaround times. State governments also strive to simplify
process cycle times, build stronger vendor relationships and
raw data and translate it into actionable information.
the tax collection process for citizens and to improve their user
demonstrate their support for local businesses and the local
experience of using telephone and internet payment methods
economy, state and local governments are leveraging the
State and local governments in particular are searching for
to increase uptake of these channels.
benefits of electronic payment cards.
ways to make effective use of available data and closely
(LGIPs) for short-term cash management to increase the
monitor their account structures to generate reports for Citi has partnered with the State of California to support
Supply chain financing is a natural extension of this type
improved risk management and compliance. Moreover, they
its income and business tax collection, the bulk of which is
of support. It is an increasingly common financing tool in
also require the ability to create reports for external use to
collected by 12 state agencies. The solution? Citi partnered with
the private sector, which offers suppliers lower cost finance
demonstrate accountability to their electorate, who increasingly
the State of California to implement the largest program of its
than would otherwise be available. This is achieved by using
want to know more about the budgetary process.
type in the United States, handling up to three million ACH/wire
the superior credit rating of the buyer, in this case the state
transfers a month.
government. When partnering with clients, Citi serves as
Citi has partnered with several state and local governments to
an intermediary in the flow of payables and receivables and
integrate rich solutions that improve transparency and provide
provides the financing.
access to critical business intelligence. By leveraging this
Today citizens and businesses can submit their returns individually or in bulk through a secure Electronic Funds
information, our clients are able to optimize their operations,
Transfer system, which polls show increases customer
Supply chain finance delivers liquidity to suppliers who often
generate significant cost savings and position themselves to
satisfaction and improves user experience. The program has
have few financing options and helps to improve their working
provide long-term, sustainable value to their constituents.
also resulted in significant cost savings and the government
capital. It also provides an even more effective way for nations
receives funds faster, which has helped to improve the
to demonstrate political commitment by supporting the local
budgeting process.
economy—effectively creating jobs—without impacting the borrowing capacity or risk profile of the state government.
returns their combined funds can achieve. In doing so, state government investment funds are mirroring money market funds. However, the infrastructure associated with providing a money market fund, including back-office and transition facilities, is large and expensive. At Citi, we are able to bring these capabilities to state governments at an extremely competitive cost, compared to having to build them in-house by using our expertise as one of the world’s largest banks serving the mutual fund industry. An Eastern state government client that has 3,300 participants in its pooled funds was able to reduce the costs associated with running its fund by 35 percent. Our ability to reduce costs and improve efficiencies for state governments’ operation of pooled funds and enabling them to draw on knowledge and expertise in other national and global markets encapsulates the bank’s ethos in our work with the public sector in North America. We are a committed, long-term partner for state and local government and are determined to help public sector organizations harness technology and financial innovation to successfully meet their
Increasing the effectiveness of Pooled Funds Strategies
future challenges.
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States are leveraging their ability to pool monies from counties or cities by setting up Local Government Investment Pools
Did you
Know?
Our public sector business in North America: • Is a leading provider for the U.S. Treasury Department • Handles approximately 90 percent of the U.S. federal government cross-border payments traffic • Has the largest U.S. federal government commercial cards business • Processes all passport applications for the U.S. government • Provides services for United Nations peacekeeping missions in Darfur, the Congo and Lebanon
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I n d u st ry T r e n ds
• Handles payments for U.S. government military agencies in Iraq • Processes checks and money orders from federal agencies for the U.S. Treasury Department • Administered the $3 billion CARS Program, and served as Claims Processor for automobile dealers nationwide for the Department of Transportation
Citi Perspectives
• Implemented a new structure for the U.S. Auto Supplier Support Program; executed agreements, brought 1,400 suppliers online and went live in 45 days • Manages the largest electronic state tax collection platform in the United States for the State of California • Provides Purchasing Cards solutions for several states including New York, New Jersey and West Virginia
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There’s nothing like a global economic
Beast of Burden
Add the emergence of shared service centers in such wideranging locales as Mexico, Puerto Rico and India, and it’s easy
downturn for creating a tectonic shift in the business environment—prompting
to see that this is not your father’s payments environment. To mitigate the growing complexity and help close the payment/information loop, businesses are beginning to turn
companies to take a good hard look
to a trusted partner: their bank. (Who else would have a better understanding of the fundamental trends occurring in
As cross-border payments
in the mirror. Around the world, in nearly
the payments universe—trends that can color corporate decision-making?)
every industry sector, organizations are
become more complex,
CFOs and treasurers are asking their banks to do more for
assessing their internal operations with
them to keep the cross-border payments process running smoothly. At Citi, we are seeing three major trends in how
two overriding objectives in mind:
banks take on more
senior financial professionals want their banks to process payments in 2010 and beyond:
increasing efficiency and reducing costs.
of the heavy lifting
Many CFOs and corporate treasurers have identified cross-
1. Choices
border payments and payments processing as an area that is
To paraphrase a quote from an old World War I song,
ripe for improvement. No financial professional needs to be told
“How you gonna keep ’em down on the farm once they’ve
that the realm of global payments has undergone a dramatic
seen automation?” As electronic payments methods continue
evolution. Just a few years ago, the typical scenario would be
to supplant traditional paper invoicing, corporate finance
a U.S. buyer making a payment to an Asian supplier via a wire,
professionals want their bank to offer better processes,
simple bank draft, or check drawn in U.S. dollars. In addition,
more accountability and expanded choices in cross-border
that payment would likely apply to a single invoice, making for
payment options.
an easy match of payment advice and information. They want cross-border remittance information That was then. In the last several years, however, things have gotten a bit more complex. For one thing, global commerce isn’t nearly as U.S.-centric; buyers and vendors are spread across the globe. Payments in non-U.S. dollars are common. In addition, to reduce expenses, several
Sayantan Chakraborty North America Payments Head Global Transaction Services, Citi
invoices are now being combined into one
© Veer Incorporated
payment, producing potential confusion
18
I n d u st ry T r e n ds
on such matters as tax reporting, and generally creating a payments morass.
Banks are in a unique
packaged together with the remittance itself, and
position to understand
from multiple-invoices, one-payment transactions.
the fundamental trends occurring in the payments universe
to eliminate the current confusion that results
They want their bank to exhibit the flexibility to configure multiple payments formats to suit their unique commerce needs, whether it’s via traditional paper invoicing, electronic methods,
that color corporate
such as ACH transfers, or direct transmissions
decision-making.
mapping that still conform to basic standards.
from their ERP systems or custom files and
>>>>> Citi Perspectives
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S p r i n g /S u m m e r 2010
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Citi understands what businesses demand in cross-border payments— to increase efficiency and reduce costs by optimizing processes
And they want a channel-agnostic solution. Whether doing business via an online banking platform or a file-based application, all companies want the same set of payments tools, the same flexibility of format . . . and the same positive results.
2. Straight-through payments In many corporate payments platforms, the constructs and formats that were once relatively easy to understand in yesterday’s “domestic payments only” systems are not equipped to handle today’s more sophisticated global payments processes. Increasingly, cross-border payments sent to banks are not complete or formatted for straight-through processing, partly because of changing country rules. Those predicaments yield
In the burgeoning virtual economy, social networking members are purchasing goods, services, subscriptions and on-demand content online using a plethora of payment types: • Credit and debit cards for virtual goods such as video game subscriptions • Account-
unfavorable exchange rates and/or outsized tax payments. As a result, enterprises are demanding that their bank create a seamless link between corporate systems and the bank’s straight-through processing platform—complete with front-end rules and validation criteria to ensure that information is accurate and quickly processed. Many banks blanch at such a request; others have ample knowledge and expertise to structure corporate payments in a way that facilitates a smooth, painless transition to straight-through payments.
screens to pay utility bills • Virtual currency that enables members to pay each other or to purchase real or virtual goods online
• “Skin in the game,” making a continual investment in building smart solutions to help customers succeed and become more efficient • A demonstrated history of on-the-ground knowledge of local markets around the world.
Over the horizon
The company that isn’t keeping pace with these emerging
As dramatically as the cross-border payments market has
payment types is the company that is mired in 20th Century
evolved in recent years, one can rest assured that the changes
commerce. As a result, they are collaborating with their banks
have only begun. The way companies look at payments will
accounts • Bill paying via smartphone
to interact with consumers in myriad ways, and facilitating
continue to be driven by consumer behavior that simply does
multiple forms of payment in multiple countries around
not stop evolving.
screens • Virtual currency that enables
the globe.
funded formats for direct pay from bank
To remain current with today’s changes as well as the ones
members to pay each other online
The need that banks fill As companies continue to adapt to a rapidly changing cross-
delay payment. Depending on the bank, this can result in
Overall, this kind of breakdown can create exposure to risk of
from bank accounts • Mobile payments in which users tap their smartphone
a high incidence of invalid payments and rejects that, in turn, charges for exception investigations.
• Account-funded formats for secure, direct-debit payments
3. New payment types
to come, and to stay sufficiently connected around the world, companies require a solid banking partner that knows the landscape.
border payments paradigm, their banks need to step up to the
According to Piper Jaffray, an international middle market investment bank and institutional securities firm, total U.S. revenues from virtual goods will surpass the billion-dollar mark in 2010. In analyzing U.S. internet activity in January 2010 alone, The Nielsen Company, has tracked over 200 million active web users and a 10 percent increase in the average time users spend using social networking sites, exceeding seven hours. Clearly, this is not a trend to be ignored by the business universe. In the burgeoning virtual economy, social networking members are purchasing goods, services, subscriptions and on-demand content online. Similarly, corporations pay these members in real or virtual currency for filling out surveys and other services. And it’s all happening using a plethora of payment types:
plate and be smart about helping achieve client objectives.
Citi understands what businesses demand in cross-border payments—to increase efficiency and reduce costs by
Businesses are looking to their banks for advice and guidance
optimizing payment processes. Citi is a trusted, long-term
to make intelligent choices regarding consumer payment
partner to hundreds of today’s most success-focused
behaviors, as well they should. After all, payments processing
corporations.
expertise is not in the typical corporate DNA; but it is in banks’. And banks need to offer products and services that solve
How will global payments evolve in the future? No one knows
problems and create opportunities for new payment behaviors.
for sure. But it’s an excellent bet that businesses can trust Citi to recognize the next wave first—and to help them make
In selecting a bank to provide expertise and offerings that
the transition.
n
promote success in the new global payments environment, companies are generally looking for four key traits: • A proven track record of evolving, adapting and innovating to keep pace with, or ahead of, the market curve • The global scale to handle even the most wide-reaching
• Credit and debit cards for virtual goods and services such as
customer base
monthly video game subscriptions
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I n d u st ry T r e n ds
Citi Perspectives
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S p r i n g /S u m m e r 2010
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On the Path to E-Payment Adoption, Billers Are Giving Consumers a Nudge
David Kachoui Product Manager North America Receivables Global Transaction Services, Citi
Consumers have heartily embraced the switch from paper to
Baby Boomer and older consumers, who are slow to break old
electronic payments. According to financial industry research
habits and skittish about encroaching technology, perceived
and consulting firm Aite Group, electronic payments were
security issues, or both.
Priming the e-pump in 2 ways With such dramatic benefits to be gained by electronic billing and payment, businesses are not just standing by and waiting
on track to overtake other forms of payments in 2009. And within the next two years, nearly 65 percent of consumer bill
By and large, however, the steadily rising consumer adoption
for consumer adoption. They are priming the e-pump by taking
payments will be electronic, up from 49 percent in 2008.
rates point to an inexorable move toward e-billing and
two important steps.
1
e-payment into the foreseeable future. The younger generation
It’s been happening for several years now: the consumer trend away from traditional paper bills and toward electronic bill presentment and payment. The steady march toward electronic turned into a jog—now the jog has turned into a sprint. And today, the numbers are telling a powerful story about public acceptance and adoption of electronic bill payment.
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I n d u st ry T r e n ds
That upward trend brings a corresponding decrease in paper
is leading the switch and, as is the case with most new
The first is partnering with their banks to develop an e-billing/
bill payments. The Federal Reserve estimates that the volume
technologies, older consumers, while slow to dip their toes in,
e-payment system and infrastructure. There are two routes from
of checks paid in the United States peaked around 1995 at
eventually dive in after the first-adopters show the way.
which to choose: biller direct, which sets up a company’s website page where customers can view and pay their bills, and/or
49 billion and steadily declined to 30 billion in 2006,2 a
Benefits for billers
home banking, which links up a company with a consolidator
Big advantages
The advantages of e-billing/e-payment are even more compelling
bills from multiple vendors on a single site. One underutilized
for billers. It starts with reducing DSO (Days Sales Outstanding).
tool in both direct and consolidator models is electronic bill
It’s easy to see why the move toward electronic bill presentment
An optimized e-billing system can slash the time it takes to
presentment. Consumers who receive bills electronically are
and payment is so dramatic—both parties to the transaction,
forward bills to customers and elicit payment from them. With
more likely to pay bills electronically.
consumer and biller, see big advantages in it. From the
e-billing, funds simply become available far faster than
consumer’s perspective, e-payments are seen as easy and
by old paper check-is-in-the-mail methods.
downward spiral that is expected to continue.
network, giving customers the convenience of paying multiple
The second step companies are taking to accelerate e-adoption is launching robust marketing campaigns to actively encourage
convenient, while offering immediate payment confirmation. Customers can save a stamp (and perhaps a tree) by making
E-billing also means validated, error-free payments. Eliminating
customers to make the switch from paper. Citi is partnering
payment online or via phone, and pay by credit card, debit card
paper bills brings significant cost savings by making receivables
with companies to promote e-billing/e-payment using highly
or directly from their bank accounts.
operations more efficient, posting payments faster and providing
effective marketing strategies and tactics, such as statement
customers with multiple convenient payment channels.
inserts, newsletters, website banner advertising, call center and on-hold scripts, and more.
The newest method of e-payment is, of course, mobile phones, which are now carried by a remarkable 4.5 billion individuals
There’s another, perhaps surprising, e-billing benefit now being
worldwide. Now, users can pull up their mobile browser to view
realized by businesses: enhancing customer loyalty. According
Recently, a government agency developing a property
and pay bills with a simple tap of the phone screen. This is the
to a study by Aspen Marketing Services,3 “the manner in which
tax e-payment program decided to take advantage of a
convenience that time-constrained consumers need.
customers view and pay their bill has an important impact on
marketing toolkit to promote the initiative. The toolkit, which
their loyalty and profitability.” The study found that—after
encompassed a battery of customer promotion materials,
Of course, the number of consumers who cling to paper
correcting for contributing factors such as age, tenure, product
yielded an astonishing 75 percent increase in year-over-year
bills and paper checks is still high, owing to a few vestigial
mix, etc.—optimal bill presentment and payment combinations
electronic transactions and a 98 percent year-over-year
psychological roadblocks. The resistance is most acute among
can reduce customer churn rates by as much as 25 percent.
increase in electronically collected dollar volume.
Citi Perspectives
S p r i n g /S u m m e r 2010
Pay Online, Pay on Time Free up your schedule
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Secure Sign On
Utilities are enlightened
Citi on the forefront
Business adoption of e-billing/e-payment tends to vary by
By providing online bill payment services, businesses are
industry, with the most enthusiastic verticals being those
reducing their billing costs, accelerating DSO and funds receipt,
that send out large amounts of bills to equally large customer
and providing a valuable service that customers are requesting.
bases. Even billers within verticals can see dramatic increases in electronic penetration rates when they heavily promote
Citi is a leader in teaming with companies to develop e-billing/
e-billing/e-payment options.
e-payment systems—for both direct billing and home banking solutions—as well as creating successful marketing campaigns
Fitting squarely into that mold are utility companies, which
to speed consumer adoption.
are going all-out to not only adopt e-payment technology, but also to engage in aggressive consumer marketing. In
Spearheaded by its own electronic bill presentment and
New York, for example, a utility that services more than four
payment solution, Citi is at the forefront of the trend. Citi®
million customers devised a ubiquitous marketing campaign
Present and Pay eliminates inefficiencies associated with
promoting paperless billing as an environmentally aware “green” initiative (a natural message for an energy company seeking leadership in carbon footprint reduction).
Benefits of e-billing/e-payment for billers
The result: a 65 percent
Reduced DSO
Streamlined payments posting
increase in e-billing adoption
Validated, error-free payments
Multiple payment channels
More efficient receivables operations
Enhanced customer loyalty
rates in just 12 months. Meanwhile, across the country, a municipal utility in Washington State introduced
customers to e-bills by offering a $5.00 credit for signing
paper billing and payments. Businesses provide electronic bills
up. They promoted the offer via their website, bill inserts,
to consumers, who then make payments online, managing
newsletters, direct mail letters, and radio and T.V. ads. The
payments quickly and securely.
response was astounding. In a single month following launch, the utility enrolled 1,000 customers; after six months, 3,500
The results: a mutually beneficial solution to billers and
had enrolled. The 8.5 percent adoption rate was nearly double
consumers, with lower error and dispute costs, streamlined
the industry average.
review and approval, fewer days sales outstanding (DSO) and unlocked liquidity.
n
1. Aite Group, “Online Bill Payment: The Elusive Goal of Cost Recouping,” Sept. 2009. 2. Federal Reserve Payment Studies, 2001–2007. 3. “Research Study on the Impact of Bill Presentment and Payment on Retention and Profitability” for Qwest Communications,” Kirk Gripenstraw, Aspen Marketing Services, 2010.
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I n d u st ry T r e n ds
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Mobile phones and their role continues to evolve and include more and more impressive mobile-commerce capabilities
Mobile Banking was just the beginning beings on planet Earth. And 4.5 billion of them are carrying mobile phones. Yes, 4.5 billion. It’s safe, then, to anoint the mobile phone as the most commonly used communications device in the world.
The consumer appeal of mobile phones has been well
The evolution of the mobile phone into a consumer commerce
chronicled. For individuals, it’s all about any time, any where
tool—a phenomenon coined “mobile financial services—has
communications and connections, not only to stay in touch with
created a broad ecosystem of companies that are or will be
friends and family, but also to locate addresses, track expenses,
playing their own interconnected roles in the mobile economy.
make purchases, play games, and more.
These companies generally fall into various verticals: • Mobile network operators (MNOs), such as AT&T, Verizon,
Mobile phones’ combination of ubiquity and interactivity had forward-thinking CEO is looking to capitalize on an easily
• MNO interconnectors, such as Sybase, Syniverse, Mach, etc.
accessible consumer device that can instantly deliver multiple
• Device manufacturers, such as Samsung, Nokia, LG, etc.
kinds of information, received by the beneficiary wherever they happen to be at the time. It’s also a way to stay on top of, and
While those verticals cover the bulk of the mobile
perhaps cultivate the loyalty of consumers.
infrastructure, many other companies and industries across
In fact, it might even be stated that the mobile phone is the world’s number one personal effect. Think about it: You may occasionally forget your wallet at home or in your coat pocket, but nearly everyone has their mobile with them at all times.
the globe are understandably boarding the mobile train, and
Mobile financial services
working on leveraging the benefits of mobile financial services.
“Remarkable” is the best way to describe how quickly
traditional providers Visa and MasterCard, alternate providers
the mobile phone has evolved from a mere personal
such as PayPal and Google, and emerging players such as
communications device into a commerce vehicle. Just a
Facebook, Playspan and Spare Change.
I n d u st ry T r e n ds
Among them, for example, are payment processors, including
few years ago, the primary reason to own a mobile was for conversation. That quickly turned into text messaging.
With that kind of corporate commitment and investment,
And today, with the advent and advancements in smartphones,
mobile financial services as a category is destined for even
mobiles are also used for accessing the Internet and utilizing
more explosive consumer growth than it has experienced
the thousands of different types of “apps” created for
to date.
the Apple iPhone and others like it.
Tomasz Smilowicz Global Head of Mobile Solutions Global Transaction Services, Citi 26
Telefonica, America Movil, etc.
the corporate world salivating from Day One. Nearly every
The evolution of the mobile phone into a consumer commerce tool is a phenomenon coined “mobile financial services.” Citi Perspectives
© Veer Incorporated
There are about 6.5 billion human
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S p r i n g /S u m m e r 2010
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Banks playing a key role
The truck driver and the store owner
The “mobile wallet”
Among the key players in the mobile financial services arena
Mobile financial services can play a significant role as a
Businesses are using mobile financial services to interact with
making it work for them and their citizens. Within a year,
are, not surprisingly, banks. One of their most important
financial transaction settlement platform—specifically, enabling
their employees and their customers. For the former, workers’
some government bodies will have implemented systems that
roles: ensuring data security. In fact, in many geographies
large companies to make settlement with smaller-company
mobile phones are being used as a payroll delivery device.
allow citizens to use mobile phones to pay their taxes, school
local regulators actually require that banks be a part of the
customers.
Each employee creates a “mobile wallet” that lets them send
fees, hospital service charges, and even parking fines and
and receive money through their phone. Their employers then
traffic tickets.
It didn’t take long for national and local governments to take note of the mobile wallet concept, and express interest in
payment infrastructure to safeguard transactions. Its logic is sound: Banks are already experts in ensuring that financial
An example: A large beverage distribution company
transactions are reliable and conducted by a trustworthy
sends its drivers out every day to deliver product to small
source. And they are now working with clients to ensure that
markets, delis and convenience stores. Currently, payment
This capability is especially valuable in markets where only
Global partnership, global leadership
all mobile commerce transactions are, at a minimum, as secure
is made C.O.D. to the driver by the store owner/manager.
a small percentage of the population has bank accounts. In
For companies seeking a banking partner to jump-start or
as transactions made through traditional channels.
Now consider this alternative: Upon delivery, the driver
some African countries, for instance, the largest volume of
burnish their mobile financial services capability on a global
uses his mobile phone to transmit a simple invoice to the
transactions is conducted not by traditional banking services,
scale, the search can be challenging. Since each country
Today’s most commonly used mobile financial services
owner/manager’s own mobile. She compares the goods
but via mobile phone.
typically has its own standards, approaches and requirements
application is mobile banking, which takes everything that
delivered to the invoice on her mobile, then initiates
people had been doing on their desktops to their mobile
payment via a touch of a button. No cash changes hands;
The mobile wallet is also being used for business-to-consumer
is to develop multiple banking relationships across the multiple
phones. (And, to be sure, mobile banking itself is experiencing
the entire transaction is electronic. That creates a loop that
transactions. In such countries as Kenya and Austria (where a
regions they enter.
enormous growth. A recent survey revealed that U.S. banks are
is not only quick, but also much more secure than having
significant percentage of the population has a mobile wallet),
rapidly installing mobile solutions for their customers, reporting
a truck driver holding substantial cash, and much more
consumers are using their phones—in Kenya to send money to
There’s a better way: Choose a bank with on-the-ground
growth of 44 percent in 2008 and doubling again last year. )
efficient than waiting for the driver to deposit that cash
friends and family, and in Austria to pay for taxi rides, market
presence and expertise in more than 100 countries—Citi,
into company coffers at the end of the day.
purchases, and other services. And in eight cities in Poland, you
whose global footprint bests the second largest player by
can pay for city parking, subways and bus tickets by phone.
a wide margin. Citi already has cooperative agreements
1
Yet banking alone doesn’t scratch the surface of the potential
simply transmit their salary electronically to that mobile wallet.
for mobile transactions, the default response by corporations
opportunities that mobile financial services hold in store. Here
The example above is in varying stages of development around
are other areas that are either emerging now, or on the very
the globe. In countries such as Korea and Poland, for example, a
Another popular and prevalent consumer application of mobile
world, putting it squarely in the center of the mobile financial
near horizon.
number of distribution companies are already putting a mobile
financial services is for so-called “location-based services.”
ecosystem. Today and tomorrow, Citi is well-positioned to
payment plan in place with small and midsize stores, and first
Today, mobile phones that are connected to the network can be
be one of the most important mobile financial services
transactions are expected to begin by the middle of this year.
easily located. So, when consumers are in close proximity—say,
players in the world.
After those first-adopters see success, the rest of the world,
500 or 1,000 yards—of a specific store or restaurant, they
including the United States, is expected to jump in soon after.
could be notified and incented with a promotional offer. It’s
with governments, corporations and individuals around the
1. “The Mobile Transaction Landscape: Mapping New Territory,” Aite Group LLC, May 2009.
direct marketing taken to the most immediate level.
Citi is well-positioned to be one of the most important mobile financial services players in the world
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I n d u st ry T r e n ds
Citi Perspectives
29
S p r i n g /S u m m e r 2010
Return to Main Menu
Critical to economic recovery Traditionally, supplier finance programs have been utilized by large suppliers with substantial cross-border business. But in the
Supply Chain Finance Thinks Small(er)
The trend is toward supporting small- and medium-sized suppliers who don’t necessarily ship their goods across oceans
wake of the financial crisis, more and more small- and mediumsized suppliers have begun using these programs. A recent Citi analysis indicates that about 60 percent of the suppliers currently participating in a large corporate’s supplier finance program are classified as small- to medium-sized businesses (SMEs) as defined by the U.S. Small Business Administration. Recognizing that increased advocacy of SMEs is critical to global economic recovery and to the long-term health of the financial markets, Citi has provided about $700 million in small business financing, supporting over $4 billion in sales. Through Citi® Supplier Finance, SME suppliers can obtain funding at very competitive rates, compared with their usual
©iStockphoto.com/susaro
cost of funds, to secure financing options at very attractive
I
n today’s market, companies are
about the health and viability of their vendor and supplier base, and are seeking solutions to maintain supply chain stability.
hitting a wall in their search for liquidity.
Matthew Frohling Global Product Manager Supplier Finance Global Transaction Services, Citi
As small- and medium-sized enterprise (SME) suppliers are
And ironically, it’s coming at a time
when they can ill afford disruption to their cash and revenue flows.
impacted by the credit crunch, they continue to face difficulty
prices. By doing so, they can conserve their working capital, access early liquidity, and rebuild inventory.
Sixty percent of suppliers participating in a large corporate’s supplier finance program are small- to medium-sized businesses. From cross-border to in-country
obtaining loans. Meanwhile, their corporate buyers need to
Today, about 4,500 suppliers are using Citi® Supplier Finance to
ensure an uninterrupted flow of components and materials
streamline working capital flows, reduce their borrowing costs
from these suppliers. After all, failure of a critical vendor
(and improve their financial health), and simplify administration
can impact production and shipment of goods to the entire
to reduce expenses.
distribution network, and ultimately stall economic recovery.
With the cost of borrowing on the rise, companies have
Moreover, these smaller suppliers are using the programs not
sharpened their focus on optimizing working capital and finding
This challenge has brought to the forefront the value of
only for international flows—as has historically been the case—
alternative funding sources to reduce reliance on capital
supplier finance programs, which allow vendors to efficiently
but also for intra-regional (such as Asia-to-Asia), and even
markets. In addition to credit capacity, firms are concerned
monetize receivables from their larger, stronger buyers.
in-country (such as domestic U.S.) commerce. >>>>>
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Citi Perspectives
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In the Asia-Pacific region, for instance, where the International
purchase their suppliers’ receivables. The program allows
discounting, letters of credit financing, pre-and post-export
Monetary Fund (IMF) projects economic growth of 5.75 percent
the suppliers to select either credit protection or liquidity
financing, and payables and receivables financing.
in 2010, much of that expansion is attributable to growing
(i.e., “quick pay”) options to better manage exposure to OEMs
purchasing interest from within the region itself. While already
and optimize working capital. Citi on-boarded 1,000 Chrysler
Whether used individually or together, each is designed to
an established manufacturing hub for global demand, Asian
and GM suppliers in an extremely condensed timeframe and
help companies improve financial flexibility, increase supply
manufacturers are finding an increasing number of Asian buyers
is acting as paying agent, service provider and collateral agent
chain liquidity, and reduce trade-flow risk. Both in-country and
on their books. As this intra-regional trend continues, so does
for the program.
internationally, Citi offers its clients financing at a lower cost
the need for a smooth-running supply chain. Citi’s presence
than other banks. Among Citi’s trade finance solutions are:
across the region facilitates trade and helps sustain the
The Auto Supplier Support Program has proven to be so
availability of credit for small and medium-sized suppliers there.
successful that other governments, the U.K. among them,are now exploring this model to initiate similar supplier finance programs in their own countries.
Help for U.S. auto suppliers As popular as the Supplier Finance program is with SME suppliers, it is just as appealing to their large corporate buyers.
Enhanced Open Account. Importers and exporters who regularly conduct business with each other can reduce the time and expense associated with letters of credit and documentary collections with Citi’s electronic “dataenriched” open account trade process. Citi not only effects
About Supplier Finance
During the past year’s “flight to quality,” companies turned to experienced leaders in global trade.
payment for open account purchases, but also transforms and streamlines the entire reconcilement process between
Locally and globally, a win-win As recent gyrations in the global markets continue to drive down trade flows and increase the cost of borrowing, Citi is there for trading partners and financial institutions who have intensified their focus on security and working capital management. During the past year’s “flight to quality,” those
Those corporates have turned to Citi to develop specialized
Citi® Supplier Finance is a powerful tool that provides early
finance solutions to support their key suppliers’ working capital
liquidity to suppliers and enables Citi’s clients to improve
needs while ensuring an uninterrupted supply chain. The Citi
working capital by enhancing their leverage in days payables
program is designed to keep supply chains moving, production
outstanding (DPO) extension negotiations. It provides a
benefit from Citi’s knowledge of local trade practices,
intact and suppliers liquid, even in difficult markets. Buyers are
web-based technology platform for managing receivables
regulations, market risks and documentation. As a high-
able to consolidate payment processes while strengthening
and facilitates communication between buyers and suppliers.
volume processor of trade transactions, Citi also can provide
What sets Citi apart from other providers is its ability to manage
relationships with their suppliers, and even in some cases,
Corporates can use this platform to better manage their DPO
cost-effective straight-through transaction processing.
end-to-end flows, whether they are cross-border, intra-regional
extending payment terms.
and receivables discounting, while providing their suppliers with early payments, the liquidity to fund large orders, and
Citi® Supplier Finance has also caught the eye of the U.S.
reductions in financing costs.
trading partners virtually anywhere in the world. With Enhanced Open Account Trade Processing, clients
Receivables Portfolio Finance. With this integrated product offering, Citi purchases receivables from suppliers, advancing funds to them and collecting payment from buyers. The pur-
Government, which is working with Citi on programs to support economic recovery and growth involving a broad base of SMEs,
The system features multi-location, multi-lingual, and multi-
both internationally and domestically.
currency functionality, and can link directly to organizations’ ERP systems to automate file processing and reduce input
chase price is largely driven by the buyer’s credit quality and the quality of underlying trade receivables. This solution can be customized to meet specific financing needs, offering an efficient method for generating cash and enhancing liquidity.
companies have turned to experienced leaders in global trade, such as Citi, to better meet their trade financing and working capital needs.
or in-country. Citi’s access to and experience in local and global markets, as well as its integrated trade platform technology, are unparalleled. In fact, the bank provides trade services on the ground in 80 countries worldwide. Around the globe, Citi’s supplier finance solutions have provided the stability to help companies balance optimization of working capital with the soundness of their suppliers. Citi
An example: The Treasury Department selected Citi Supplier
errors. Through early-pay finance options, supplier payments
Finance technology platform and processes as the foundation
are not only efficient and effective, but also provide an
for its $5 billion Auto Supplier Support Program to help
alternative financing option that is critical in the current
solution automates the entire accounts payable process
and over 4,000 suppliers on its platform, and more than
stabilize the hard-hit U.S. auto industry. Particularly for parts
credit environment.
from purchase orders to supplier payments. Combining the
$1.3 billion in assets outstanding and $9 billion in annual
electronic invoicing and discount management engine of
payments processed.
®
suppliers and original equipment manufacturers (OEMs)— many of whom have encountered difficulty accessing credit post-crisis—the program has provided needed access to
Keeping the supply chain moving
Citi® Procure-to-Pay. This end-to-end financial supply chain
is an industry leader in supplier finance, with over 40 buyers
partner Ariba with Citi’s core payments, trade finance and commercial cards solutions, it offers increased operating
Supplier finance programs from Citi increase efficiency in
loans to meet payroll, continue operations, and inject a level
Citi® Supplier Finance is only one way that the bank is
efficiency and integrated supply chain management. Moreover
corporates’ payments systems while providing their suppliers
of confidence that parts will continue to be manufactured
streamlining solutions that improve cash flow and minimize
Citi Procure-to-Pay is integrated with Citi Supplier Finance,
with affordable financing to ensure the uninterrupted flow
and shipped to the major auto makers, Chrysler and GM, with
risk. Clients come to Citi for cost benefits, as well as its ability
providing suppliers with easy access to an attractive source
of commerce across the globe. It’s a partnership that creates
support from Citi, have established special-purpose entities to
to handle complex types of financing deals, including bills
of liquidity.
a “win-win” solution for both buyers and suppliers. n
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P r o d u c t I n n o vat i o n s
®
Citi Perspectives
®
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S p r i n g /S u m m e r 2010
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investments have expanded and enhanced this infrastructure, delivering greater flexibility, consistency and scalability. Most importantly, industry-leading levels of management and control are possible with Citi’s richer, more consistent information in the most accessible and actionable format. With Citi’s online
Extracting Value Across the Entire Procure to Pay Continuum
reporting system, clients access the power of standard and customized reporting across over 600 data elements with consolidated global information. Backed by this powerhouse network and these rich capabilities, Citi’s experts are characteristically at the forefront of the evolving discipline of working capital analytics, enhancing data
Transparency evolves to reveal actionable information and maximize end-to-end value
granularity and putting critical tools and analytics at clients’ fingertips. These powerful analytical tools allow Citi to consult with organizations on their future commercial card programs as well as to optimize their current program. The organization’s payables data will speak volumes about the opportunities at hand for incremental value through cost savings and revenue share. The ability to benchmark organizations’ spend data and operational metrics against best-in-class organizations allows them to identify current strength and identify opportunities to maximize working capital.
The Citi® Program Dashboard
The new face of transparency In today’s environment, treasury professionals are faced
© Veer Incorporated
Deirdre Ives North America Commercial Card and Procure to Pay Head Global Transaction Services, Citi
strategies—reducing costs by automating business processes,
methods to best achieve their strategies for growth. This
eliminating paper, capturing vendor discounts and extending
breakthrough requires full information transparency, and the
days payable outstanding.
knowledge to act upon it.
However, commercial card programs are only the tip of the
In short, it takes the right tools and the right banking partner.
iceberg. Organizations that look at spend beyond commercial
Citi’s leading Commercial Card and Procure to Pay solutions are
cards for both operational efficiencies and working capital will
well positioned to provide organizations with the solutions and
drive tremendous organizational value.
the advice they need.
with increasing pressure to find affordable funding. This has forced them to begin looking inward at their organization’s supply chain management and payables processes to identify opportunities to drive efficiency and optimize working capital. In doing so, they often uncover previously neglected
One example: Citi’s Program Dashboard, embedded into the reporting system, provides dynamic, graphically presented information based on user-driven parameters. The program dashboard moves far beyond the scope of traditional reporting and information management. Instead of generating large reports and then searching for exceptions or trends, the tool allows clients to drill down into specific transactions, cardholders and vendors, and allows the user to change parameters, such as time sequence, hierarchy and vendor base and see results, in real-time. Clients gain the power to make informed decisions.
inefficiencies and, as a result, are able to unlock immediate cost savings. Most importantly, for those with the tools at their disposal, they can achieve sustained efficiency to forge a platform for long-term growth.
Topping the forward-thinking treasurer’s wish list is complete transparency into end-to-end purchase activity. A discipline of working capital analytics is evolving to meet this need.
Partnering with Citi, clients customize a highly effective
Transparency… and actionable advice A leader in commercial card services, Citi has led the way
As part of this strategy, many organizations work with bank partners to design commercial card programs that not only integrate data reporting, but also align with their policies and
34
At the leading edge, treasury professionals are taking
by empowering clients to improve business efficiency. With
advantage of full visibility into their organization’s data to
Citi’s global platform, clients manage a single, consistent card
improve spend impact and to diversify their balance of payment
program across 30 currencies and 20 local languages. Recent
P r o d u c t I n n o vat i o n s
Citi Perspectives
commercial card program that enables them to reduce costs while increasing control over spending, both locally and globally, and analyze business performance against strategic objectives to make corrections where necessary. Treasurers gain vital information to better equip themselves to analyze business performance against strategic objectives and to fine tune their strategies. 35
S p r i n g /S u m m e r 2010
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Today’s market offers better data and better analytical tools to improve the end-to-end financial supply chain. By moving beyond commercial card programs, organizations can streamline the entire payables and working capital process with advanced market solutions that offer a consultative approach and expertise for realizing greater efficiencies.
The next step: transparency across the accounts payable process
of the project to deeply embed a sense of ownership for all
with world-class settlement systems, Citi Procure to Pay helps
Citi offers a vision of what’s possible with true data
stakeholders, which include Procurement, Accounts Payable,
organizations automate inefficient, paper-intensive activities
transparency and marries strategic recommendations to
Shared Services, IT and Treasury.
across the full “order to pay” cycle. One comprehensive
clients’ specific business goals, internal controls, and industry
solution delivers value to both sides of the supply chain. As
best practices. Citi recommends optimal payment methods
Historically, challenges have prevented organizations from
a result, organizations have an advantage when managing
for each supplier as well as the most favorable working capital
implementing automated supply chain solutions. Barriers have
suppliers, ensuring compliance for procurement, reducing IT
tools based on supplier relationships, payment requirements
included integration with existing accounting systems, vendor
costs, and extending the capability of their ERP systems.
and cash flow benefits.
So what’s the next step for treasury professionals determined to unlock the full power of transparency? Once again, choosing the right partner is critical. With Citi’s client-focused consultative approach and enhanced technology, there are no limits to data visibility, and the consultative advice to make the most of it. Furthermore, when it comes to implementing a solution that will deliver longterm value, Citi helps organizations keen to take advantage of
acceptance, managing the supplier enrollment process and delivery of remittance data. In response to these challenges, Citi designed a comprehensive portfolio of trade services and financial products that integrates seamlessly with clients’ existing systems.
with stakeholders to gain internal buy-in, and implementing the solution. A successful solution selection process brings together all key departments and individuals from the start
Citi’s unique approach ensures that our recommended solutions are the right solutions for our clients. And when it comes to return on investment, operational cost savings alone can often
Once the Citi team has a chance to review a client’s AP file and
be sufficient to justify moving forward with the project. What’s
run analytics, we interview stakeholders in the AP process then
best is that the working capital opportunities revealed in these
Citi Procure to Pay empowers businesses to realize
provide them with detailed recommendations. We uncover true
intensive consultations often promise a value three to four
incremental value through operational costs savings, working
visibility and provide actionable advice.
times greater than these operational savings. n
working capital analytics at the most critical steps: developing a compelling business case, strategically communicating
Actionable advice to meet your specific goals
®
capital optimization and improved audits and controls. Bringing together the upstream purchase order and invoice processes
Procure to Pay Cycle Purchase order sent
Invoice matched with purchase order
Invoice received and routed internally
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Invoice info entered into ERP
P r o d u c t I n n o vat i o n s
Payment authorized/initiated
Payment and remittance received
Remittance attached to payment
Citi Perspectives
Remittance info reconciled
Remittance info entered into A/R
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Best Practices in Prepaid Solutions
Applying the corporate
Partnering for Success
The widespread benefits a prepaid program provides, almost instantaneously upon launch, have resulted in leading companies
prepaid solution strategy
across all sectors coming to rely on Citi Prepaid to cut their
that led the industry
payments. These programs provide a win-win payment solution
in North America, Citi
beneficiaries, sales professionals, distributors or customers.
drives global expansion
Citi Prepaid designs and powers unique payment solutions
payment costs and improve the speed and experience of their for both organizations and their recipients, who can be employees,
based on a winning formula of the four “C’s”: client focus, customization, cardholder experience and communication.
T
Client focus
hrough the tumult in the global economy
Citi Prepaid remains the prepaid leader through a highly
over the past two years, some things have
specialized method of solution design. Citi Prepaid starts
not changed. One case in point is the power
by identifying the client’s need and, in turn, shapes a unique
of prepaid solutions. To do more with less,
product solution that addresses the client’s current payment
forward-thinking organizations, both public
challenges, industry nuances, operational goals and desired
and private, are employing prepaid solutions to
recipient experience. This focused approach has positioned
replace inefficient payment methods, including
Citi Prepaid as the prepaid card expert across nearly every
paper checks. The benefits are clear—enhanced
industry segment.
return on investment, greater efficiency and an improved user experience, with immediate
Citi Prepaid’s continual focus on both client and recipient
impact on the bottom line.
ensures that they receive a product that alleviates expressed “pain points” and promotes positive returns. In turn, Citi Prepaid
While acceptance of prepaid continues to
gleans the knowledge to stay ahead of both a maturing com-
surge, the critical mass of competing electronic
petitive landscape and increasingly sophisticated consumers.
payment offerings, coupled with the widespread emergence of new applications, puts the burden on prepaid solution providers to identify points
Customized solutions
of differentiation to optimize results for the
An early entrant in the prepaid industry in 1997, Citi Prepaid
client as well as the recipient.
became the preeminent prepaid card provider by allowing clients’ needs to shape solutions. Listening to clients helped
Having proven itself a leader in the highly
Citi Prepaid pave the way for precise solution design, new
competitive, ever-evolving North American
product applications and an unmatched prepaid global
market, Citi is applying its expertise and
footprint. The goal is to arm clients with the tools to optimize
experience to new markets to expand globally.
their business performance.
Citi Prepaid Services’ proven methodology ®
Previously published in Euromoney, March 2010 38
P r o d u c t I n n o vat i o n s
©iStockphoto.com/pollux
Drew Kese Global Head of Prepaid Services Global Transaction Services, Citi
has helped launch successful programs for
Prepaid is not a one-size-fits-all solution. Every client faces a
more than 1,200 leading private and public
distinct payment challenge that is a product of their business
sector clients, including over half of the Fortune
environment. Citi Prepaid’s consultative approach uncovers
100 companies and government agencies at
meaningful learnings during key stages of the program lifecycle,
every level.
pre- and post-implementation, to empower clients with targeted and customized product solutions. >>>>>
Citi Perspectives
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Cardholder experience Citi Prepaid’s clients are just as concerned with the recipient experience as they are with operational efficiencies; Citi Prepaid has designed solutions to provide cardholders with convenience, security, support and control over their payments. Of course, this satisfaction often warms cardholder goodwill, translating into increased sales, decreased attrition, enhanced loyalty, reduced turnover or boosted revenue, depending on a program’s application.
At the heart of this expansion is a world-class team dedicated to the performance, optimization and growth of client
At a Glance
programs, drawing upon best practices and learning gleaned from a portfolio of over 1,200 global clients. Citi’s methodology
Custom prepaid cards
for ensuring clients’ success in these regions is based on “DRIVE,” or determine, review, innovate, validate and enhance.
Determine
The best time to communicate with a cardholder is when he or she is receiving a payment. Smart organizational leaders realize that aside from cutting costs and streamlining operations they must seize every opportunity to extend their brand, increase their impressions, and achieve their goals through more effective communications. Citi Prepaid’s solutions take advantage of customized branded communications, including client-branded card collateral, cardholder website and promotional marketing elements, that can help support business objectives, including improved education, increased sales, reduced costs, expanded market share, retention and referrals. Expanded communication channels give clients direct access to their cardholder base and greater transparency to support program metrics.
Driving global growth Building on its success in North America, Citi Prepaid expanded into new markets in Europe, the Middle East, Asia, Australia and Latin America in 2009. The one true global prepaid card provider plans to accelerate this expansion. To further this goal, Citi has developed an implementation process that can launch with minimal client requirements in about 30 business days, leveraging local resources and technology already in place to build efficient, streamlined processes.
• Greater financial and operational efficiencies
• Fully custom branded and personalization options
• Robust reporting and payment tracking
• Flexible fund access points
Communications package
Listening carefully to determine the true needs of a market
• Custom administrator web portal and cardholder web site
organizations and specifically for the payment process they
• Program announcements and marketing collateral
are looking to improve. Whether they are looking to replace
• Robust program reporting and secure online management • Opt-in email and text message account activity alerts
checks, replace vouchers, offer rebates, disburse funds to
Full program management
unbanked recipients or find new efficiencies, Citi Prepaid develops solutions that can drive benefits across operations,
• Comprehensive design, implementation and marketing support • Minimal IT integration to automate payments
marketing, sales or treasury. What are the nuances of local
For organizations
• Universal Visa® or MasterCard® purchasing power • Reloadable and reusable card options
is important. Citi Prepaid’s experts assess the pain points for
Communication
Versus paper
PREPAID SOLUTIONS
industry? Operational standards, recipient behavior, payment
• Toll-free 24/7 multilingual customer support
frequency and the regulatory environment are all factors that
• Dedicated ongoing program support team
• Improved program performance • Unique brand extension • Enhanced program communications • Risk and fraud mitigation • Enhanced user experience
For card users • Greater purchasing power • Immediate fund access • Better control over funds • Convenient and secure payment delivery • Comprehensive payment notifications • Dedicated customer support
can influence the design and implementation of the prepaid product. What is the desired recipient experience? For many reasons, this is the most important question. Clients who wish to motivate behavior or create an impression are driven to
Validate
implement a payment vehicle capable of prompting specific
Citi Prepaid’s proprietary client and cardholder survey and
action as it sustains operations.
segmenting applications ensure that its tailored approach to
At the heart of these enhancements is technology that
solution optimization continues long after implementation. Feedback obtained through these evaluations is used to develop
Review
product improvements and enhancements for both client With a deep understanding of the nuances of a market’s needs,
and cardholder, ultimately shaping Citi Prepaid’s offerings to
the Citi Prepaid team reviews its current solutions to match
stay ahead in the market. Most importantly, our cardholder
offerings to needs resulting in an honest and critical assessment.
surveys help our clients gather feedback straight from their constituents to help evaluate program performance.
Innovate
provides immediate payment delivery, flexible fund options and on-demand channels to view account information and provide complete control fund control. This DRIVE, with its laser-sharp focus on the needs of clients, will continue to help Citi Prepaid and clients alike stay one step ahead in the evolving global competitive landscape. If the global financial crisis has taught us anything, it is that our practice of listening to and then delivering on client needs will be successful in any environment. Our solutions have been battle-tested with a wide array of businesses, from
Of course, where current solutions don’t quite fit, Citi Prepaid
Enhance
has a proven track record of innovation, from developing more
Citi Prepaid places the utmost value on the cardholder
dependable delivery methods to designing solutions that will
experience, as it is directly tied to clients’ success. Citi Prepaid
be more likely to be adopted by large populations that may be
stays engaged to enhance the security, convenience and control
unfamiliar with cards and banking solutions.
of its prepaid programs and tools. To support this, Citi Prepaid
consumer and industrial companies to local and national governments. We’re working with leading organizations to help them not just focus on survival, but to help them achieve sustainable success.
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is continually reinvesting in features and functionality that will promote a premier user experience. 40
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©iStockphoto.com/georgeolsson
Integrating Sustainability and Efficiency with Citi Commercial Cards ®
Beyond helping an organization remain economically competitive, the right card program also demonstrates leadership in environmental sustainability
Commercial Cards: A Best Practice of Efficient Cash Management— and Sustainability
I
n the last 15 years, commercial card programs have become a widely accepted best practice of cash management,
making significant contributions to organizations’ productivity and efficiency through automation of business processes, elimination of paper and improved visibility into purchase activity. Beyond helping organizations compete economically, the right card program also demonstrates leadership in another strategic best practice that is becoming increasingly important to employees, organizations and governments— environmental sustainability. “For a successful enterprise, the reconciliation of expansion plans with sustainable use of resources is a daunting challenge,” says Francesco Vanni d’Archirafi, CEO for Citi’s
Hubert J.P. Jolly Global Head of Citi® Commercial Cards and Citi® Procure to Pay Global Transaction Services, Citi
Global Transaction Services. “Forward thinking companies are, however, integrating sustainability thinking into their business strategies, confronting questions of how to operate
As a global organization that does business with consumers, corporations, financial institutions and governments in over 100 countries, Citi is a significant stakeholder in the broader enterprise that encompasses our communities and our use of Earth’s finite resources. Responsible corporate citizenship is no longer an option. It is an imperative. Citi must be part of the sustainability solution. Just as Citi, with its global reach, unrivalled international network, award-winning customer service and the industry’s most advanced payment, reporting and expense management tools, continues to raise the bar for commercial card programs, our firm has long been a world leader in corporate citizenship. Our standards are unambiguous and grounded in recognition that waste and inefficiency, depletion of finite resources and initiatives that do not bring long-term value are indefensible. Since 2003, Citi’s rigorous Environmental and Social Risk Management (ESRM) policy has provided a responsible framework for our bankers, addressing environmental and social issues. >>>>>
in, and positively contribute to, a world where resources are constrained and expectations in society have changed.”
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Citi Perspectives
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Making Headway Driving Sustainability: Citi Commercial Cards Paper Free Strategic/Operational Objectives for 2010-2011 2010
2011
Online statements— commercial cards
Citi® Procure to Pay – 690,000 client documents eliminated
– Goal of 50% total statements generated electronically
86
– Reduction of another 3,881,475 paper statements
970
t re
es
Card carrier redesign/ improvements
PIN Mailers – Eliminating corporate and GSA PIN mailers
– Reduction of 444,000 pages
56
– Reduction of 155,760 PIN mailers sent to cardholders
t re es s aved
We have also been firmly guided by the Equator Principles
Case in point: Citi® Commercial Cards prints and mails over
since we helped found these benchmarks for managing social
10 million statements annually—equivalent to felling 1,250 trees
and environmental issues in project financing. Moreover,
each year. In response, we are preparing to launch paper-free
Citi’s position statements on climate change and human
client initiatives, proactively engaging clients in an integrated
rights serve as a solid foundation for screening transactions,
campaign designed to help them take advantage of value-added
advising our bankers and clients, and promoting innovative and
electronic alternatives to reduce our combined carbon footprint
environmentally sound ways of doing business.
and paper output.
C
As Citi begins to focus on paper-free initiatives, clients also enjoy significant advantages by receiving statements electronically along with the rich information that can be
iti Commercial Cards has begun to apply the same due
integrated with their internal systems to enable automated
diligence to ensuring that our own environmental house
reconciliation and faster, more efficient expense management.
is in order. By doing so, we can help our clients integrate
In addition to increasing efficiencies, these initiatives help to
environmental programs and policies into their organizational
reduce paper from the process. Of course, as long as plastic
structures so that the environment is integral to the way they
cards are in use, commercial cards cannot truly be called
do business. From a strategic perspective, sustainability and
carbon-free. Citi, however, has plans for further transformation,
efficiency are two sides of the same coin. Driving paper out of
exploring opportunities for recycled cards, should clients desire
the accounts purchasing and T&E processes, for example, not
them, and, more importantly, pioneering next generation
only leads to greater operational efficiency and control; it also
account-based solutions.
v s sa e e r t
868
175 ed
Looking forward to “cardless” card programs
A
lways looking to offer next generation solutions, Citi® Commercial Cards is accelerating an innovative shift from
only be enjoyed by treasurers who select a banking partner with the technology, scale and forward-thinking focus that Citi offers.
plastic cards to an account-based paradigm.
Sustainable business is profitable business
Here is how: Transactions navigate Citi’s world-class card
G
transaction platform, with the same cutting-edge payment solutions and customizable, online reporting tools that help clients achieve greater integration, efficiency and control, without swiping a plastic card. In addition to well-established electronic payment channels, Citi solutions working for clients today include virtual card accounts, Procure to Pay, prepaid “stored value” solutions for government agencies automating all payments to both banked and “underbanked” recipients, and Citi’s innovative mobile payment solutions. Companies interested in remaining competitive on the sustainability and
ood citizenship benefits an organization’s bottom line through responsible use of valuable resources as well as
the promotion of new business opportunities and identification of potential cost savings. But there is one more critical resource to be discussed—people. Embracing sustainable business practices can be essential to attracting and retaining not only clients but also employees who are the lifeblood of any business. At Citi® Commercial Cards, that is one more reason why sustainability is integral to the way we do business today and is at the forefront of how we will continue to do business in the future.
n
efficiency fronts are starting to see that enterprises bound to traditional plastic cards are missing opportunities and running the risk of being left behind. Of course, these advantages will
helps to realize greater environmental responsibility.
44
– Additional reduction of 3,474,600 paper statements
– 1,400,000 client documents eliminated
(with an estimate of 2 pages per statement)
(with an estimate of 2 pages per statement)
®
Citi® Procure to Pay
– Goal of 75% total statements generated electronically
19
ed sav
Citi® Commercial Cards: paper-free initiatives
Online statements— commercial cards
P r o d u c t I n n o vat i o n s
Citi Perspectives
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Making the Most of Your Investment Options in a Thawing Economic Climate
Yet during the global economic crisis that has unfolded
In Canada, where there were far fewer sub-prime mortgages
over the past two years, uncertainty has been a close but
than in the United States, confidence during the period
unwelcome companion. In recent months, investors have
remained higher. Even so, Canadian firms felt their neighbor’s
regained some sense of confidence and assurance as global
hangover, and the Bank of Canada responded with reductions in
recovery becomes more entrenched.
interest rates, bringing the overnight rate down to 0.25 percent. bank deposits, as access to credit fell.
occurring now, and begin planning for the opportunities ahead.
Confidence shaken, investment stalled
Signs of life return There are signs of thawing in the global economy, though the melting is taking place at different rates in different nations
Though the crisis evolved differently in the United States
and regions. For example, this thaw began in Asia before it
and in Canada, the confidence of corporate investors in both
did in North America, with Europe trailing behind. In North
nations in certain investment vehicles was profoundly shaken.
America, a rebound appears to be further along in Canada than
As early as 2007, auction rate securities and commercial
in the United States.
paper, once popular components of corporate investment
©iStockphoto.com/nazarethman
P r o d u c t I n n o vat i o n s
Canada avoids the worst
It’s time to look back at what happened, observe what is
As options begin to widen, how can you be sure to make the right choices?
46
F
Corporate investors increased cash balances, particulary in
There are signs of a thaw in the economic landscape. As conditions in financial markets evolve, making the right investment decisions continues to be a difficult balancing act.
Michael Berkowitz North America Liquidity, Investments & Information Services Global Transaction Services, Citi
or treasurers and CFOs, uncertainty is never a friend.
strategies, became substantially less liquid and attractive.
Those countries with low debt, but that have enacted
As the crisis exacerbated in late 2008, preservation of principal,
aggressive stimulus programs, appear to be best positioned for
always a priority, but previously an afterthought with most
a recovery. In the Asia-Pacific region, Australia and China, for
money market instruments, became the top focus. Treasuries
example, have had relatively tame downturns. Through fiscal
stockpiled cash as a hedge against constricted credit markets.
and monetary stimulus programs, along with maintaining its
Investors fled to quality. Cash balances poured into Treasury
currency level, China appears to have withstood the global
Money Market Funds, T-bills and insured bank deposits, to the
recession. Australia has already raised interest rates and China
detriment of direct instruments and Prime Funds.
is ending its stimulus measures.
The global economy along with investor confidence began to
By contrast, recovery is not yet fully in sight in much of Europe,
stabilize after governments and central banks stepped in to
predominantly due to worries over high debt levels in southern
shore up markets. In the United States, the Treasury, Federal
European countries, such as Greece. While many nations will
Deposit Insurance Corporation (FDIC) and Federal Reserve
likely need to halt fiscal stimulus programs, central monetary
intervened to protect investments in money market funds,
stimulus measures in the form of low interest rates are likely to
enhance bank deposit insurance and restore liquidity in the
continue. The European Central Bank is unlikely to hike its main
asset-backed commercial paper markets.
policy rate this year.
>>>>> Citi Perspectives
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To one extent or another, economies are on the rebound. Corporate investors are now beginning to reassess their companies’ liquidity needs. After . . . building significant cash reserves, many corporations are now looking at how best to deploy this cash.
SEC acts on money market funds
is to carefully examine new investment opportunities, while
Robust practices, robust technologies
maintaining sharp risk management and investment policy
Centralizing and rationalizing internal processes and
The Security and Exchange Commission (SEC) announced
discipline. Here’s how:
external banking structures greatly facilitates good
new money market regulations in January designed to increase
investment practices. By integrating operating cash
funds’ resiliency when impacted by economic pressures.
Balancing safety, liquidity and yield
management, liquidity management, and investment
These included tighter maturity and credit quality standards
This rapidly evolving environment calls for using prudent
processes, companies can obtain timely information on
and new liquidity requirements on AAA-rated money market
portfolio management practices to set the optimal balance
cash positions and make sound investment decisions.
funds. The primary goal is to reduce the risk of another fund
between safety, liquidity and yield.
This is critical for monitoring portfolio risks, compliance
“breaking the buck” or having its net asset value (NAV) fall
policy and investment performance.
below $1.00 per share. By ensuring higher credit quality and
Setting investment priorities
conducting periodic stress tests, SEC section 2a-7 is expected
In establishing investment priorities, treasurers must
Technology infrastructure is critical for automation
to renew investor confidence and draw more corporate cash
first assess the cash generation and usage needs of their
and control over processes and to free time to focus on
reserves from North American and multinational investors.
businesses, cash on hand, and the treasury resources
investment analysis and decision-making. Web-based
and infrastructure in place. With a recovery underway,
platforms, such as the Citibank® Online Investments
U.S. stimulus programs winding down
Caution for Canada
corporations are likely to have competing demands for
portal, have become key tools for centralizing investment
cash, in the form of different attractive capital expenditure
processes, from initial dealing to final settlement, as well
In Canada, more favorable underlying financial conditions
projects. Once a firm decides on its excess cash levels,
as for timely access to information, including portfolio
In the United States, industrial demand is strengthening and
continue to drive recovery. Industrial output in the fourth
the next step is to establish yield expectations within
holdings, rates, and research. Corporations can enhance
improved financial conditions support a modest recovery.
quarter of 2009 exceeded the Bank of Canada’s expectations.
appropriate risk parameters. This includes answering
visibility over global cash balances through multi-bank
Spending by Canadian households and firms, together with
key questions such as: What type of risk is acceptable?
balance aggregation services offered on platforms such as
Most of the special aids to the banking sector and to money
loose monetary and fiscal policies, have all been pivotal players
Preservation of principal is typically key, but what does
TreasuryVision®. For companies that have sizeable fixed
market options, such as unlimited deposit and fund guarantees,
in the turnaround.
this mean with respect to securities such as U.S. Treasuries
income portfolios, Citi also offers its Treasury Analytics
have expired with generally little impact to corporate investor confidence.
which lose value as interest rates rise? For what proportion
platform, which consolidates risk, compliance, accounting,
Low interest rates have fueled economic activity and affected
of the portfolio is daily liquidity necessary? What are
and performance analytics across all investment activities.
the housing market, leading to rising Canadian household
yield expectations?
Now all eyes are on the Fed, which is poised to tighten
debt. This has unsettled some investors, reminding them of
monetary policy first by draining excess liquidity from the
the dangers of financial bubbles. These risks point to a likely
Aligning investment policies
Conclusion
banking system and then by raising its target rate. The latter
increase in Canadian central bank rates in July 2010.
It is prudent to review investment policies on a semi-annual
Changes in financial markets have intensified demands on
basis, more frequently when there are significant changes
treasurers and CFOs. Making the right investment decisions requires building a sound investment strategy based on
is not likely to occur before the fourth quarter of 2010. Fed officials have taken tentative steps to halt monetary stimulus measures, such as increasing the federal funds discount rate.
Navigating the opportunities
in the market or in corporate circumstances. It is important to establish strong oversight of investment practices and
clear priorities and appropriate policies. It also requires
It is likely that we will see further increases in the discount
To one extent or another, economies are on the rebound.
processes to ensure alignment with objectives. In the
implementation of processes and infrastructure to ensure
rate, eventually reestablishing a 100-basis-points spread to the
Corporate investors are now beginning to reassess their
United States, many corporations have taken advantage of
maximum visibility and control over cash and investments.
federal funds target rate. The Fed is also likely to offer banks
companies’ liquidity needs. After sacrificing yield over
bank earnings credit rate (ECR) programs, which typically
Finally, investment portfolios and strategies must be
higher-yielding term deposits. This would likely steepen the
the past couple of years, and building significant cash
provide attractive yields in the form of fee reduction,
monitored and evaluated on an ongoing basis to ensure that
yield curve for all investors. Finally, the Fed is preparing to
reserves, many corporations are now looking at how best to
and allow for daily liquidity. As medium-term rates rise
they are aligned with business strategy and the changing
halt its $1.25 billion United States mortgage security purchase
deploy this cash. So, what are the opportunities for corporate
in Canada and the United States, corporations can also
market dynamics.
program, also driving up longer-term interest rates. Overall,
investors in this changing environment?
benefit from higher yields on term deposits and money
the Fed now appears confident enough in the U.S. economy to remove exceptional stimulus programs.
48
n
market deposit accounts. Similarly, suppressed rates on How can treasurers and CFOs best navigate risks and achieve
money market funds are likely to increase as rates rise on
their investment goals through this recovery? The answer
securities with 30- to 60-day maturities.
P r o d u c t I n n o vat i o n s
Citi Perspectives
49
S p r i n g /S u m m e r 2010
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The good news is:
Trade finance
There’s light at the end of the
tunnel. Industrial output in Canada exceeded expectations at the end of 2009, and commodity players are rebounding.
programs
Looking down the road, exports are expected to increase around 6 percent this year—a far cry from 2008 levels but
provide relief
a welcome and encouraging sign of smoother roads ahead. (See page 53.)
for companies
Stress relief for exporters and importers
hobbled by recession
As they plan for the future, companies in Canada, like those in credit-squeezed landscapes worldwide, continue to focus on much-needed credit capacity and liquidity. Among other
Canada
entire supply chain to both ensure its stability and increase the efficiency of their funds. With so many suppliers facing reduced working capital and limited access to credit, supplier financing, for example, is emerging as a viable and attractive solution. Citi offers supplier financing solutions and much more in Canada, where it has provided trade services for more than 50 years. In fact, with trade capabilities in over 100 countries © Veer Incorporated
Outlook from
things, they are taking a closer look at processes across their
It’s no secret. Faizal Jiwa North America Trade Head Global Transaction Services, Citi
around the world, Citi offers both sellers and procurers of goods in Canada one of the largest trade services networks in the world—across developed and emerging markets. More recently, Citi has expanded its capabilities to ease the
Exporters worldwide were hit
Growth resumes in 2010
hard by the global recession. Fiscal stimuli programs
In Canada, exports plummeted nearly 25 percent last year
have helped to prime the economic pump. However,
as demand for its high-quality products dried up in key markets
recovery is expected to be slow. In fact, only modest
such as the United States. With more than three-quarters
GDP growth—in the 2 percent to 2.5 percent range—
of its global exports headed to its neighbor to the south,
is expected this year across North American markets,
the health of Canada’s cross-border trade is closely linked
with a brighter outlook for 2011.
to U.S. demand and the gyrations of the U.S. economy.
For exporters, as balance is restored in their target markets, companies that get their house in order today will benefit the most from the surge in consumption that is on the horizon.
At the same time, Canada has fared better than many other economies and, by most measures, escaped the brunt of the recession. The country did not suffer the severe blow from sub-prime mortgages that plagued the United States and
credit stress faced by companies based in Canada and their trading partners.
Agency partners provide credit lifeline One aspect of our capabilities expansion includes Citi’s relationship with Export Development Canada (EDC), the government’s official export credit agency. Having partnered in the past with EDC on long-term project financing in emerging markets, Citi has strengthened its ties with EDC to include trade financing opportunities.
domestic demand kept its economy chugging along. >>>>> 50
Regional Spotlights
Citi Perspectives
51
S p r i n g /S u m m e r 2010
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Supplier Financing A Win-Win for Buyers and Sellers Throughout the credit downturn,
Streamlining and automating
operational cost savings and increased
the trend in Canada mirrored that
everything from issuing purchase
control over cash flows. Yet, just
of other countries. Agencies such as EDC took on greater importance
orders to making and reconciling
facilitating the flow of new liquidity
payments can yield big dividends
in trade finance markets worldwide.
. . . just as important, electronic
Citi has maintained long and deep
payment processes make it easier
affiliations with similar agencies
to capture and analyze data that
as important, electronic payment
Traditionally, working capital
In response, trading partners are
buyer’s payables system to Citi authorizing
processes make it easier to capture
management has been a
increasingly embracing supplier financing
payment to the supplier. Citi then notifies the
and analyze data that is so crucial to
zero-sum game. The buyer’s
structures, even where Letters of Credit
supplier electronically of the opportunity to
cash planning and decision-making.
financing is a possibility. These programs
receive an earlier payment at an attractive
goal is to minimize days
allow suppliers to access financing by
financing rate and terms. On the due date,
payables outstanding (DPO)
effectively selling their buyers’ receivables,
Citi debits the buyer for the full amount due.
Knowing how, when and where money is being spent also puts companies
by paying invoices as close to
in a powerful position from which
the due date as possible. The
to negotiate with vendors and reap
supplier’s goal is to reduce
Inter-American Development Bank,
savings from payment discounts and
and U.S. Ex-Im Bank. In fact, it is a
more favorable trade terms.
its days sales outstanding
around the globe, including the International Finance Corporation, European Bank for Reconstruction,
is so crucial to cash planning and decision-making.
leader in export credit agency (ECA)-supported loans globally, accounting for $23 billion in such loans between 2002 and 2008.
Citi offers a solution that can put them in this enviable position.
(DSO) and collect its payments as soon as possible.
Leveraging its experience with more than 60 export credit
accounts payable offering that connects buyers and sellers,
When suppliers have little access to working
agencies worldwide, Citi has aligned with EDC to structure
eliminates cumbersome manual processes, and provides higher
capital or poor access to bank credit, as has been the case for many companies over
transparency over payment transactions.
companies and boost their trade flows. For example, in 2009, Citi entered into a U.S. $100 million partnership with EDC
Citi® Procure to Pay is available as an integrated platform or
in order to provide preferential support to its customers.
as three distinct modules that work independently and can be
Citi is keen to build on that partnership in 2010.
incorporated into existing processes and ERP systems. They include purchase order and invoice automation, electronics
A better way to pay Supply chain financing is another way that companies are
payments, and working capital services, which automate early payment discounts, buyer-initiated purchasing card transactions, and supplier financing programs.
responding to today’s challenging market environment. to improve the way they do things to make the most of their
The road ahead
working capital.
Financing programs are typically part of a much larger effort
Sellers collect early payments, while buyers pay invoices on their due date and stabilize
their invoice value is eligible for financing. Plus, they are able to reduce their cost of
How it works
funds significantly while benefiting from non-recourse liquidity.
tool as part of its end-to-end Citi® Procure
For buyers, it enhances the efficiency of their
To Pay solution suite or as a standalone
payment systems, freeing up working capital,
module.
and also puts them in a better position to
Here’s how it works. Once a buyer approves a
demand on their buyers for quick payment.
supplier’s invoice, a message is sent from the
Exports are expected to increase around
the suppliers’ DSO and is more attractive than factoring because 100 percent of
their supply chain.
the past two years, they place even greater
Canadian Export Forecast by Sector
This automated financing solution reduces
Citi offers an automated supplier financing
Citi® Procure to Pay, for example, is a turnkey, end-to-end
financing programs that will inject new life into Canadian
creating a win-win scenario for both parties.
Main Sectors Agri-food Energy
CAD bn (2008)
negotiate favorable purchasing terms. n
% Share of Total Exports (2008)
2008
Export Outlook (% Growth) 2009 (f)
2010 (f)
42.7
8.1
20.9
–6
1
134.0
25.5
43.6
–43
9
Forestry
31.2
5.9
–10.4
–18
4
Chemicals and Plastics
37.0
7.0
–2.6
–18
6
8.6
1.6
86.5
–42
4
Metals, Ores and Other Industrial Products
Fertilizers
69.3
13.2
2.9
–31
11
Aircraft and Parts
10.9
2.1
–3.3
3
–11
2.4
0.5
12.6
–3
2
19.1
3.6
–1.8
–9
–3
6 percent this year—
Rail and other Transportation Equipment
The path to recovery will most certainly be bumpy. However,
a far cry from 2008
Advanced Technology
there’s no time like the present for companies to shore up their
levels but a welcome
Industrial Machinery and Equipment
29.0
5.5
6.1
–9
2
Motor Vehicles and Parts
55.2
10.5
–21.9
–26
16 –2
An area that is often ripe for improvement and automation
operations to take advantage of better times ahead. Those
and encouraging sign
8.2
1.6
–2.7
2
seeking to stabilize and, eventually, energize their supply chain
of smoother roads
Consumer Goods
is the procure-to-pay cycle. Streamlining and automating
Other*
7.8
1.5
2.1
–24
7
everything from issuing purchase orders to making and
can put in place new programs and processes that will yield
ahead. Forecasts call
Total Goods Sector
455.4
86.6
8.4
–26
6
reconciling payments can yield big dividends. These include
benefits today, but even bigger rewards down the road. n
for the motor vehicles, energy and metals sectors to lead the way.
Total Service Sector Total Exports
70.5
13.4
1.2
–4
3
525.9
100.0
7.4
–23
6
Memorandum 100.0
–6.5
–15
2
Total Goods Nominal (excluding Energy)
Total Volumes 321.4
61.1
–1.7
–19
5
Total Goods Nominal (excluding Autos and Energy
266.3
50.6
3.9
–17
4
Source: EDC Economics. 2008 is actual data, while 2009 and 2010 are forecast. *Other includes other industiral goods and special transactions.
53 52
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Citi Perspectives
53
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The majority of companies operating in
Since its launch, the RMB cross-border trade settlement program has progressed relatively quickly, extending rapidly to
China are now familiar with the Renminbi
the Association of Southeast Asian Nations (ASEAN) countries
foreign currency equivalent. Therefore, the RMB cross-border trade settlement program is in many ways a logical progression of business practices that were already accepted.
and across China to Tianjin and other cities. With more than
(RMB) cross-border trade settlement
the equivalent of USD 1 billion settled in RMB during the first six months of the program, expectations remain high for the future
pilot program designed for cross-border trade settlements. Launched in July 2009, the pilot program represents an important step towards liberalization of the RMB.
of the RMB cross-border trade settlement pilot.
can keep their receivables in RMB and use them for their RMB payables, creating a natural hedge for their FX position and protecting margins. From the perspective of foreign companies too, offshore sellers will often also prefer to settle in RMB in
The reality of RMB cross-border settlement
favor of other currencies, as the market predicts a long-term strengthening of the RMB until it reaches a stable level with no further political pressure to revalue the currency again.
For some time prior to the launch of the program, a number of large corporates in China with sufficient negotiating power had been pricing their sales in RMB. At the point of settlement, the buyer generally paid the amount in an agreed foreign currency
William Mor ECS Product Head, China Global Transaction Services, Citi
With the ability now to settle, as well as price in RMB, sellers
based on the exchange rate on the settlement. There are even letters of credit being issued in RMB, with settlement in the
As the global economy has changed over recent years, supply chain optimization (both financial and physical) has become critically important to companies worldwide. Maintaining a stable relationship between customers and suppliers, in which both sides understand and support the other’s cash flow needs
>>>>>
54
Regional Spotlights
Citi Perspectives
RMB Cross-Border
QUICK FACTS
©iStockphoto.com/Richmatts
RMB Cross-Border Trade Settlement Gains Momentum Trade Settlement
The Renminbi (RMB) cross-border settlement pilot program was first conceived in 2008 as a way of supporting cross-border trade transactions without creating currency risk issues for Chinese companies. The program was launched in July 2009 and supports two-way trade in RMBs, including both trade instruments along with letters of credit and open accounts. International banks such as Citi have now received Settlement and Agent Bank licensesand are actively conducting cross-border trade and opening accounts in RMB. Initially, the program applied to authorized companies known as Mainland Designated Entities (MDEs) based in five cities in China (Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai) known as Trade Settlement Enterprises (“TSEs”). Since the launch, two additional cities, Tianjin and Hainan, have been added to it. Trade with authorized entities, that is those which have demonstrated genuine trade transactions with Pilot Enterprises in Hong Kong and Macau was initially covered under the program, but this was quickly extended to the ASEAN countries (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam).
55
S p r i n g /S u m m e r 2010
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China is now firmly established as an economic power house, surpassing Germany as the world’s major exporter, with a robust, broad-based economy and strong foreign currency reserves. Consequently, we can expect to see China playing an increasingly important role in the global economy. The RMB cross-border trade settlement pilot program is a step towards the RMB becoming a fully international currency.
is crucial to increasing the resilience of the financial supply
The ability for these firms to switch the settlement currency
international trade. The RMB cross-border trade settlement
chain. When dealing with Chinese suppliers, RMB settlement
Looking to Hong Kong
from let’s assume USD to RMB eliminates this currency
program is an important step towards this, but there will
helps foreign buyers to cement their relationship and
In addition to the types of companies involved in RMB trade
risk, preserving margins and ensuring the future viability
continue to be short-term challenges as it takes time to
strengthen their supply chain.
settlement, Hong Kong is particularly worthy of note. In many
of the businesses, irrespective of currency volatility. From
build awareness and confidence in it. Although regulation is
ways, Hong Kong has frequently acted as a benchmark for
this perspective, therefore, the opportunity to settle trade
progressing, RMB flows cannot be restricted only to regulator-
However, the most significant portion of RMB cross-border
other countries participating in the RMB trade settlement
transactions in RMB is not simply a matter of convenience,
approved trades in goods or services. Major FX banks have to
trade to date has been intercompany transactions. Typically, it
program. Not only is it a part of the People’s Republic of China
but an important means of protecting profit margins and
be able to trade in RMB with market-driven exchange rates.
is easier for counterparties within the same group to make the
and party to the 2003 Closer Economic Partnership Agreement
therefore jobs in China.
decision to settle the transaction in RMB and to complete the
(CEPA) agreement, which is the regulator in Hong Kong, the
necessary documentation, while other companies may find this
Hong Kong Monetary Authority (HKMA) has been diligent in
process more time-consuming. This trend is likely to continue
publishing clear guidelines for market participants to help
in the near future, as it will take time to develop awareness and
them to take full advantage of the program while ensuring
confidence in the program.
compliance with its rules. These guidelines can be valuable for other participating countries, including the ASEAN countries, as they seek to support local companies and further derive value from the program.
With more than the equivalent of USD 1 billion settled in RMB during the first six months of the program, expectations remain high for the future of the RMB cross-border trade settlement pilot.
The future of RMB cross-border settlement China is now firmly established as an economic power house, surpassing Germany as the world’s major exporter, with a robust, broad-based economy and strong foreign currency reserves. Consequently, we can expect to see China playing
RMB settlement to promote industry security
an increasingly important role in the global economy. The RMB cross-border trade settlement pilot program is a step towards the RMB becoming a fully international currency. Although there is still significant progress to be made, the State
While all Chinese onshore companies have the potential to
Administration for Foreign Exchange (SAFE) is moving steadily
derive benefit from the RMB cross-border trade settlement
towards liberalizing the currency, and there is every reason to
program, those in low-margin, labor-intensive industries can
assume that RMB will, in time, become a major world currency,
gain the greatest advantage. As the largest exporting country in
rivaling the United States dollar as the international trading
the world, China has been renowned for its cheap and plentiful
currency of choice in Asia.
labor. However, since the RMB started appreciating in 2005, and the Labor Law was implemented in 2008, the business environment has become more challenging for exporters as labor costs have increased. As the RMB seems set to appreciate still further, these low-margin exporters are likely to be squeezed even tighter, which for many, could mean that their business becomes unsustainable.
56
However, as liberalization of the currency continues, we
Developing RMB as a successful global currency
envision an increasing number of firms in Asia will hold RMB as their alternate currency, which in turn will encourage financial institutions to hold it on their balance sheets. Ultimately, once fully convertible, we see central banks holding RMB as a reserve currency. Already, with RMB appreciation becoming a reality, we see more foreign companies willing to hold RMB than in the past. This will help to accelerate the RMB cross-border trade settlement scheme. The burden of regulation for both Chinese and foreign companies in the future will need to be light, so that companies can focus on commerce rather than compliance. However, we are confident that the initial short-term challenges can be resolved, and a longer-term strategy established to achieve truly international status for the RMB. It has long been predicted that the “Redback” will replace or at least rival the “Greenback” and the RMB cross-border trade settlement program brings this vision one step closer to reality.
n
The journey toward realizing world currency status, however, will not be a short or easy one. The RMB will first need to gain a strong foothold as a stable, reliable currency to support
Regional Spotlights
Citi Perspectives
57
S p r i n g /S u m m e r 2010
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For cross-border payments, no hurdle should be too high
Making Payments to Developing Nations
Making cross-border payments to
Challenging, Yes Impossible, No
beneficiaries in developing countries can present unique challenges. Although many emerging nations are expanding and improving their financial infrastructures, payment processing capabilities vary greatly from country to country. In addition, exchange regulations deter many emerging market currencies from trading freely and political uncertainty, economic weakness and natural disasters create yet other payment hurdles.
Smaller world, growing payments volume As technology and economic activity shrink our world, disbursements to payees in developing nations continue to grow. More and more companies, governments, nongovernmental organizations, educational institutions and individuals alike are making payments in these markets to support their interests and obligations. Keeping supply chain relationships healthy means making payments on time and with minimal or no deductions by correspondent banks. Moreover, many companies, in their search for greater efficiency, are also centralizing global payment and payroll processes. In addition, the immigrant labor force has never been larger or more important to so many economies. These workers are sending money home in volumes that are expected to total nearly a half trillion U.S. dollars by 2011. Developing nations in Africa, Asia, Eastern Europe, Central and Latin America, among others, also are important destinations for humanitarian aide and fieldwork by non-governmental
However, working with a banking partner that is experienced in disbursing funds in developing nations, makes it easy to
58
Regional Spotlights
©iStockphoto.com/Tyrannosaur
overcome these obstacles.
organizations and universities. Regardless of where they are posted, personnel for these institutions must be paid safely, securely, and on a timely basis. Plus, a growing number of retirees from North America and Western Europe are spending their retirement years in exotic but remote locations. In response, pension providers seek efficient and reliable ways to deliver benefits payments
Diane S. Reyes Global Payments Head, Global Transaction Services, Citi
>>>>> Citi Perspectives
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59
in places where global transactions are often difficult and costly to execute. Ensuring the consistency of their payments, eliminating lifting fees and minimizing foreign exchange-related costs are all ways they can do this.
We’re continually expanding
The changing face of global remittances
Moving money internationally, made easy
our presence, relationships
On the business-to-consumer side, our Remit as You EarnSM
No matter where in the world you need to send payments,
and expertise in developing
service allows organizations to broaden their employee benefits
no hurdle should be too high. A global provider with proven
offerings. Remit as You Earn provides a safe and convenient
solutions can:
Why finding the right partner matters
countries with currencies
way for immigrant and expatriate employees— even those
As companies operating in emerging markets know, choosing
that are rarely traded on
to send money home.
a large scale but are vital to
A company in Dubai, for example, offers thousands of
the right banking partner mitigates the uncertainties and risks associated with payments and remittances of all types.
the interests of our clients Citi processes nearly one trillion dollars in cross-border payments each year for leading corporations, financial
and their beneficiaries alike.
who work in remote locations, such as deep-sea oil platforms—
immigrant and contract workers the ability to send remittances home through paycheck deductions. Before Remit as You Earn, workers spent as much as eight hours during their day off negotiating a complex, often risky and unreliable
institutions and public sector organizations. Few institutions
remittance process. Today, deductions are made directly from
can match our in-country knowledge, clearing capabilities,
their paychecks and their funds are transferred automatically.
or familiarity with cross-border and exotic currency
The inconvenience of getting cash first or traveling to an
transactions and the rules, regulations and requirements
The elimination of multiple foreign currency accounts
agent location is eliminated. Citi helps handle the regulatory
that often govern them.
also streamlines reconciliations. Among its many features,
compliance and risk management requirements in both the
WorldLink provides comprehensive daily reconcilement of
sending and receiving countries.
The engine for our services is WorldLink Payments Services,
payment transactions and provides reports through the
a cross-border payments platform that facilitates transactions
Internet or via direct data file transfers.
®
payments and benefits for a government agency. Keen to
in more than 135 currencies and 190 countries through a single system and log-on. What’s more, there’s no need to hold an
Plus, we’re continually expanding our presence, relationships
account at Citi to take advantage of WorldLink’s many benefits.
and expertise in developing countries with currencies that are rarely traded on a large scale but are vital to the interests of
With WorldLink, organizations can issue checks in
In Europe, Citi streamlined domestic and overseas pension improve the payments experience for itself and its customers,
• Facilitate payments to developing and developed markets with the same level of security and ease • Manage remittance and clearing processes, end-to-end • Ensure the most efficient delivery of your payments— electronic, paper-based and cash alike • Streamline, automate and integrate your payment processes • Provide daily and on-demand online transaction reconciliation reports • Reduce the need to re-issue payments, by minimizing returns and rejections • Simplify approval and reporting processes to ensure compliance and reduce risk.
Bottom line
the agency chose WorldLink to make more than nine million
Choosing a financial partner who understands your cross-
payments each year to more than 200 countries.
border payment challenges, and has the global infrastructure and network to meet them, can cut your operating costs and
our clients and their beneficiaries alike.
simplify your payment processes.
32 currencies without having to maintain hundreds of local bank accounts. Checks clear locally against domestic bank
Today, Citi supports payments in an ever-expanding number
accounts, eliminating or minimizing the costs and delays
of difficult but important markets such as Venezuela, Korea
associated with international check clearing.
and South Africa, as well as in numerous exotic currencies. In all of these markets, we can help navigate infrastructure, liquidity and regulatory issues and provide efficient negotiation of local rules, foreign exchange rates and lifting fees.
Remit as You EarnSM provides
Citi is that partner. Each day, we process more than three
a safe and convenient way
governments and other financial institutions, in major
for immigrant and expatriate
trillion dollars globally for individuals, corporations, markets and remote corners of the world.
n
employees—even those who work in remote locations, such as deep-sea oil platforms— to send money home.
60
Regional Spotlights
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prices. Certain industrial sectors, including energy, transportation and telecommunications, also received financial aid.
Doing Business in Russia
Geography and society
steps to diversify the country’s economy going forward. The recently
Population: 140 million
reduced profit tax rate (from 24 percent to 20 percent) is among the
Population growth rate: –0.5%
lowest of the world’s major economies, and it is hoped that this will
Official language: Russian
encourage investment in certain industries.
Capital city: Moscow Coastline: 37,653 kilometers
Legal and regulatory requirements • Resident accounts in domestic currency (RUB) are convertible and can be held domestically and abroad. Likewise, residents can also have foreign currency accounts both domestically and abroad, provided that they notify the tax authorities. Non-residents are permitted to hold domestic and foreign currency accounts.
of international oil production takes place in Russia and more than 70 percent of Russia’s crude oil is exported. Russia is also responsible for about 20 percent of the world’s natural gas production.
residents and non-residents alike. All reporting is handled by the
in Russia’s GDP as the country underwent transition to a market Julia Petrova CIS Trade Head Global Transaction Services, Citi
economy. This led to fiscal imbalance and culminated in a banking crisis in 1998. However, a variety of factors, including the devaluation of the ruble, tax reform, and a tightening of fiscal policy, soon improved political and social stability. Those factors along with an increase in
CPI: 8.8% FDI: $32.2 billion
Financial capital: Moscow
History and politics
for the accuracy of the reporting.
Independence: August 24, 1991
Central Bank of Russia (CBR) has the power to intervene in the
Government type: Federal semi-presidential democratic republic
inter-bank currency exchanges and the OTC inter-bank market in
President: Dmitry Medvedev
the event of any major discrepancies in the ruble exchange rate.
Prime Minister: Vladimir Putin
• Foreign investment in a domestic project or company considered to sensitive strategic areas, this is further limited to just 25 percent.
Ruling party: United Russia
Country agency credit rating BBB
• The Federal Antimonopoly Service (FAS) regulates market competition by ensuring compliance with Russia’s competition law. Any state aid
Trading partners
granted to a commercial entity must first be approved by the FAS.
Top five import sources: Germany, China, Japan, Ukraine, United States
• Measures to tackle money laundering include the reporting
the price of Russia’s main exports (oil, petroleum products, gas and
of transfers between individuals exceeding RUB 600,000 and
metals), contributed to the recovery of the country’s economy.
transactions with immovable assets exceeding RUB 3 million to the Federal Financial Monitoring Service. In addition, the CBR keeps
Previously published in Treasury Today, March 2010
GDP per capita: $15,200
banks themselves; however, companies are ultimately responsible
be strategically important is normally restricted to 49 percent. In The dissolution of the U.S.S.R. in 1991 marked the start of a long decline
Currency: Ruble
Fiscal year: Calendar year
• Central bank reporting is applicable to all payments between
quotes for the RUB and other currencies against the USD. The
Russia’s leading industry sectors are oil and gas. Over 10 percent
Economy
Member of: UNCTAD, IMF, FATF, G8
• Exchange rates are announced on a daily basis and are based on
An economy in transition Natalya Belaya CIS Cash Management & Client Delivery Head Global Transaction Services, Citi
The government is also looking to invest in infrastructure and to take
Time zone: UTC + 2 to + 12
© Veer Incorporated
The largest country in the world, Russia is an economic power with which to be reckoned
Key Facts
While the Russian economy was hit by the global economic crisis in
a close watch on the banking system. Banks are required to keep
2008, the government took steps to mitigate the effects of the crisis,
track of all money transfers that take place without the opening
with a controlled devaluation of the ruble to respond to falling oil
of an account.
Top five export destinations: Netherlands, Italy, Germany, Turkey, Ukraine
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proof is on the authorities to provide evidence that the price used is not the market price.
Payments Systems Cash — Cash is still used for
• The general corporate profits tax rate is 20 percent Having
90 percent of all payments in Russia.
been reduced from 24 percent in response to the global eco-
• Thin capitalization rules apply to interest paid to a foreign
nomic crisis, the tax consists of a federal portion (2 percent)
parent who holds more than 20 percent of the capital of
Payment cards — These are the
and a regional portion (13.5 to 18 percent). Companies are
the Russian company under the following circumstances:
most common form of cashless
required to make monthly advance payments of profits tax, amounting to one-third of the quarterly advance payment for the previous quarter. Companies may choose to calculate advance payments on a monthly basis, taking into account actual cumulative profits from the beginning of the year to the end of the month in question.
– The Russian company is in debt to the foreign company
payment instruments. There are
– The Russian company is in debt to another Russian
around 119 million cards in circulation,
company affiliated with the foreign company – The Russian company has a debt for which the foreign company/affiliated Russian company act as guarantor
but their use is mainly concentrated in large cities. Credit transfers — These are the second most widely used cashless
If the loan from the parent company is more than three times
payment instruments. The majority of
paid by Russian companies to their foreign parent. Dividends
the Russian borrower’s capital, interest on any excess debt
transactions are carried electronically.
paid to Russian shareholders are subject to 9 percent
is not deductible.
Most credit transfers are processed by
• Withholding tax at 15 percent is applicable on all dividends
the BESP RTGS system or the CBR’s
withholding tax. All other types of income carry withholding tax of 20 percent, except for income from international freight, which is taxed at 10 percent. Withholding tax may be reduced under the terms of a double taxation treaty, of which Russia currently has more than 60.
Treasury activities public and private
net settlement system.
Local banking sector
most common form of cashless
Direct debits — These are the third payment instruments. There are two
The Central Bank of Russia (CBR) was established in 1990
main types of direct debit: payment
under the ‘Law on Banks and Banking.’ The CBR plays a
requests and collection orders.
business (including offices and branches of foreign
supervisory role over the Russian banking sector and is
The majority are processed by the
companies) registered with the Russian tax authorities,
responsible for maintaining stability of the rouble.
CBR net settlement system.
18 percent, although a reduced rate of 10 percent is applied
Within the scope of the CBR’s role are the following: It is the
Checks — Rarely used, there are
to certain foods, children’s goods and medicines. Certain
sole issuer of rubles and manages currency circulation; it acts as
no central bank rules as to their usage
activities are exempt from VAT including:
the lender of last resort to credit institutions; it issues licenses
and layout. Instead, checks are
to, regulates and supervises all credit institutions; it is also
administered by individual agreements
responsible for the continued functioning of payments systems.
between the credit institution and the
• Value added tax (VAT) is payable quarterly by all corporate
and individual entrepreneurs. The standard rate of VAT is
– The lease of accommodation/office space to accredited foreign representatives – Medical services and the sale of medical equipment
customer. There is no interbank check The Russian banking sector is characterized by a very large
clearing system currently in existence
number of small banks. During the early 1990s when banking
in Russia.
– Services of lawyer
regulations were looser than they are now, a large number of
Letters of credit — These are only
– Provision of loans and gambling
domestic banks were established.
used on a smaller scale.
– Banking and insurance service
>>>>> • Transfer pricing rules apply to related parties in accordance
The number of banking licences peaked at around 2,500 in
with arm’s length prices. The Russian tax authorities may
1995 and the banking sector has since continued to consolidate
review transactions between related parties; the burden of
to around 1,100. Nevertheless, a large proportion of the country’s banking assets (42.1 percent) is controlled by just
C A SE STU DY
Taxation framework
Diageo is the world’s leading premium drinks business and established its presence in Russia in the early 1990s An innovative receivables program that shares risk and improves working capital By Selim Baraz Finance Director for Russia and Eastern Europe Region, Diageo
The challenge In 2008, Diageo Russia decided that it wanted its 100 distributors to take early delivery of November and December goods (the drinks industry’s peak period) in September and October to mitigate some operational challenges. In return, it offered the distributors extended credit. As the financial environment worsened, the company became unwilling to assume a similar exposure in 2009 and sought an alternative solution to manage the risk while achieving the same operational objectives.
The solution Diageo Russia began negotiations with the Russian insurance company ROSNO (which is 97 percent owned by Allianz/ Euler Hermes) to insure some of its exposure to the distributors in summer 2009. We rapidly recognized that this insurance policy afforded us a greater opportunity than simply managing the risk of our distributors. In early 2008, we had talked to Citi, our main bank in Russia and a long-time partner domestically and internationally, about receivables finance. However, given the exposure to a number of small domestic distributors the only possible solution
at the time entailed full recourse, which failed to get the risk off our balance sheet, and was consequently rejected. The insurance policy made a nonrecourse program possible. Citi developed an innovative Credit Insurance Account Receivables program that more effectively leveraged the cost of Diageo Russia’s insurance policy with ROSNO. By combining ROSNO’s insurance with a factoring program to monetize Diageo Russia’s receivables and improve cash flow, the company was able to achieve two objectives at once: managing risk and reducing working capital.
The result A deal between Citi and Diageo Russia was signed in mid 2009 and on December 31, 2009, a first tranche of receivables were financed through the Credit Insurance Account Receivables program. The parties expect the program to be expanded during 2010 to a wider universe of distributors. Although documentation for the program was time-consuming in order to meet the needs of Diageo Russia, ROSNO and Citi, implementation went smoothly. Diageo Russia has improved its working capital, and offloaded its receivables from its balance sheet, through a receivables financing program that was feasible only because of Citi’s innovative risk sharing with ROSNO. Diageo Russia is currently considering whether the Credit Insurance Account Receivables program can be replicated in other CIS markets. n
five state-owned banks. 64
Regional Spotlights
Citi Perspectives
65
S p r i n g /S u m m e r 2010
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How clearing and settlements take place
Cash management practices evolving
Citi’s Capabilities in Russia
The Central Bank of Russia (CBR) oversees the country’s
Cash concentration, zero balancing and domestic notional
Citi has been present in
CitiDirect® online banking
ZAO Citibank offers a range
payment system.
pooling are offered to residents by a number of banks, subject
Russia since 1993 with
platform continues to represent
of trade solutions designed
to certain legal and currency control restrictions. Cash
the opening of its office in
the gold standard in integrating
specifically for the corporate and
BESP (Bank Electronic Speed Payment) RTGS (real-time
concentration structures are only available in RUB-denominated
Moscow. Citi’s St. Petersburg
online corporate and institutional
financial institutions in Russia,
gross settlement) system — This system was introduced by
accounts. There is currently no clear legal framework in this
branch opened in 1996. ZAO
banking services and web-based
delivering an array of trade
the CBR in December 2007 to manage the clearing of urgent,
regard, so independent legal advice should therefore be sought.
Citibank, a wholly owned
treasury management solutions.
finance and specialized services
Together with Speedcollect ,
from a simple LC confirmation
clients are able to integrate
to the most sophisticated and
the statements with their ERP
tailor-made financing structures,
system to automate reconciliation
including risk distribution
processes. Strategic alliances with
schemes, supplier finance and
correspondent banks and Russian
distributor finance programs. In
Post offers Citi clients extended
addition, ZAO Citibank is one of
collection capabilities across
largest arrangers of financing
Citi currently employs over
Russia. For those clients that
covered by export credit agencies
3,000 people in Russia and has
have significant sales volumes in
in the Russian market.
a distribution network comprising
cash, Citi provides cash collection
more than 55 retail branches and
services in Moscow, St. Petersburg
350 ATMs.
and other regions.
large value, RUB-denominated payments. Payment instructions
subsidiary of Citigroup
are processed and settled individually in real-time across
For non-residents, foreign exchange controls on the
Russia, holds a full banking
participants’ CBR settlement accounts.
cross-border movement of funds make cross-border cash
license to conduct banking
management difficult. Cross-currency cash pooling is not
activities in local and foreign
permitted.
currencies with resident
CBR automated net settlement system — The majority of non-urgent, low-value transactions are processed in batches in RUB by the CBR’s processing center several times a day.
Notional pooling between different resident entities is
There are 78 regional branches acting as processing centers,
permitted in line with Russia’s arm’s length transfer pricing
59 of which carry out settlements on a centralized basis
and thin capitalization rules.
(the remainder operate on a decentralized basis). Electronic banking is becoming increasingly popular in Russia, Other clearing systems — Transactions which are not
with international banks and leading domestic banks offering
processed by either of the above two systems may be
electronic banking services.
processed by one of the following: CBR correspondent accounts, correspondent accounts opened by credit institutions with each other, correspondent accounts at clearing non-bank credit institutions or intrabank settlement. The most popular is the settlement system of the state-owned Sberbank (Savings Bank of the Russian Federation), which is the country’s second largest clearing and settlement system. It operates the only national clearing system for bulk retail payments.
Some short-term investments are more demanding Bank demand and time deposits are popular short-term investment instruments with Russian companies. Government bonds, such as treasury bills (GKO) and federal loan bonds (OFZ) are issued by the Ministry of Finance through auctions held by the CBR; however, demand for these is low. Corporate bond issuance is on the increase. Zero-coupon promissory notes known as veskels are popular with banks, since they
and non-resident entities.
®
ZAO Citibank offers a wide range
Various liquidity solutions
of cash management advanced
are offered to help clients to
banking services, solutions and
use their excess funds more
products. Their objectives are
effectively, reducing banking
to optimize customers’ working
expenses and increasing work-
capital management and
ing capital efficiency. This
accelerate cash conversion cycles
efficiency is also supported by
to increase the clients’ efficiency
Citi’s TreasuryVision® cashflow
and competitiveness in today’s
forecasting and reporting
challenging and changing global
capabilities.
Citi offers the security, trust, and guidance necessary to navigate global trade finance.
n
Contacts: Natalya Belaya CIS Cash Management & Client Delivery Head Global Transaction Services Tel: +7 (495) 642 7676 Email:
[email protected] Julia Petrova CIS Trade Head Global Transaction Services Tel: +7 (495) 642 7667 Email:
[email protected]
business environment.
offer better yields than government bonds, corporate bonds and deposit accounts. Money market funds are not commonly available in Russia.
Key Websites
n
Parliament website
www.duma.ru
The Central Bank of the Russian Federation www.cbr.ru
Ministry of Finance
www.minfin.ru
Association of Regional Banks of Russia
www.asros.ru
Government website
www.government.ru
Federal Financial Markets Service
www.fcsm.ru
Federal Financial Monitoring Service
www.fedsfm.ru
National Taxation Service www.nalog.ru 66
Regional Spotlights
Citi Perspectives
67
S p r i n g /S u m m e r 2010
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After the Crisis, a New Landscape Emerges in LATAM Valentino Gallo, Managing Director and Americas Head, Citi, Export and Agency Finance, takes a look at the effects of last year’s dramatic shifts in the financial landscape and the way forward in 2010
©iStockphoto.com/
Valentino Gallo Americas Head Export and Agency Finance Global Transaction Services, Citi
W
ith the financial world still reeling from the global credit crisis in 2009, perhaps the
most visible effect was seen in the rising cost of credit, where losses on the consumer side (mortgages, auto loans, credit cards, etc.) rose to record highs, and non-consumer losses (commercial real estate, corporate loans) followed a similar upward trend. Equity capital became expensive as well as regulators and shareholders required banks to hold more equity
Amid this tightened credit environment, we witnessed
perhaps not substantial, has nevertheless been crucial to
bifurcating behavior between bank and non-bank lenders.
restoring market confidence. Export credit agencies (ECAs)
Following a period of weakness that occurred between
offered more guarantees to help national exporters defend
September 2008 and March 2009, the second half of 2009
market share and multilateral finance institutions (MFIs)
saw a spike in bond issuances. However, this leavened bond
introduced innovative liquidity programs for trade finance and
market became partially available for sovereigns, energy and
took greater risks.
mining companies, and other investment grade names; while the smaller economies in the region and lower-rated companies
ECA-backed loans extended by banks, which have adapted their
saw and continue to see limited access to external financing.
lending practices to a new credit environment, provided an attractive source of financing not only for emerging economies,
against loan commitments. Finally, the cost of funding was severely affected by the credit crisis as upward pressure exerted on deposit rates raised the cost of term debt dramatically. 68
Regional Spotlights
Official agencies step in to restore trade lines Generally speaking, emerging market economies weathered 2009’s credit storm. Support from official lenders, while
Citi Perspectives
but also for “graduated” emerging countries and some industry sectors in Organisation for Economic Cooperation and Development (OECD) economies. >>>>> 69
S p r i n g /S u m m e r 2010
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The vast majority of 2009 export financings, in fact, were
Latin America Issuance Trend
provided by the agencies of export-led economies of Europe
(US$ Billions)
and Asia. 27.0
33.6
In LATAM, with both capital markets and syndicated loan
17.6
markets essentially closed, ECA financings increased significantly, specifically from investment-grade names in the energy and telecom sectors of Brazil and Mexico, the two largest economies of the region. Among the most active names
41.0
Loans
13.0
13.0
International Bonds
43.0
37.0
Local Bonds
25.0
29.0
In LATAM, with both capital markets and
and AVIANCA—took advantage of ECA financing for the
2003
2004
several of LATAM’s most important airlines—TAM, LAN, GOL purchase of new Boeing and Airbus aircraft. Additionally, the
syndicated loan markets
34.9
67.8
19.8 65.0
42.0
2005
41.3
2006
2007
2008
22.6
5.8
2009
2010 YTD
Source: Citi, as of April 2010
most prominent project financing deal executed in the region was a large Official Agency-backed oil-platform financing
essentially closed, ECA financings increased significantly, specifically
for Odebrecht in Brazil. However, this was in contrast to the
alternative capital sources for corporate and project financing.
In credit risk, a reduced appetite for covenant-light loan
otherwise limited activity in the project finance segment
Corporates are also seeking additional methods of financing,
agreements—even for highly rated borrowers—has prompted a
in 2009.
such as ECAs, MFIs and local and international debt and equity
return to traditional credit metrics, as well as increased scrutiny
capital markets.
of contingent exposures, such as non-financial guarantees
A China connection emerges
from investment-grade
and derivatives. There is also greater focus on working capital Projects of strategic relevance, such as in-country development,
names in the energy and
2009 saw bilateral lending by emerging economies to each other take hold. Specifically, trade and investment flows
telecom sectors of Brazil
between China and Latin America grew in frequency, volume and importance.
and Mexico, the two largest economies of the region.
economies. The Chinese agencies and China Development Bank, in particular, extended large financings to actively support LATAM blue chips like Petrobras, Telemar and America Movil. One notable example: a U.S.$10 billion loan by China
©iStockphoto.com/Rob_Ellis
Development Bank to Petrobras.
management as a means of reducing cash flow volatility.
have attracted interest from both official agencies and banks. In determining priorities and resource allocation for these
In market risk, lenders are more sensitive to refinancing risk,
projects, a key factor is eligibility for ECA/MFI financing.
and are unwilling to accept large debt maturity towers or
Needless to say, greater collaboration among multiple financial
over-reliance on short-term funding. External risks such as
players is key to successfully executing well-structured deals.
market disruption and regulatory intervention are now keys
Chinese official sector lenders such as China Exim Bank became increasingly prominent as lenders to other emerging
70
39.3
47.0
64.0
repeatedly accessing the market with various agencies, were Petrobras, Pemex, America Movil and Telemar. In addition,
35.3
to assessing borrower risk. The syndication market is beginning to show signs of recovery, and, as it does, sizeable deals in project finance have recently
As the nature of these risks has evolved, so have strategies
been executed on a club basis. To improve returns, the focus
to mitigate them.
is on relationship names and shorter tenures. Banks are also focusing on “mini-perm” structures, with expected refinancing in the capital markets after project completion.
Outlook for the bank loan market
As banks re-evaluate risk management practices, corporate
As 2010 takes shape, large bank loans are being funded by
risk assessment has become more holistic and focused on
official agencies, capital markets and regional and
interconnection among risks. In fact, risks, and their relevance,
local markets—all of which have emerged as important
have undergone an evolution.
New collaboration between ECA and banks As a “new normal” emerges, collaboration between ECAs and banks is being updated accordingly. With the de-leveraging of the bank sector, ECAs and banks are now teaming to explore new ways to provide liquidity, all the while eyeing current guidelines and the imperative of protecting market competitiveness.
>>>>> Regional Spotlights
Citi Perspectives
71
S p r i n g /S u m m e r 2010
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The way forward, it appears, is an evolution from standalone
With bank balance sheets still under pressure, here is what
credit enhancement to “credit enhancement plus refinancing.”
corporates and ECAs can expect from their bank partners
Funded programs that facilitate liquidity and distribution,
in 2010:
such as the IFC global liquidity programs and the U.S. Ex-Im Put Options, prevent crowding out the banking sector. In addition, ECA-enhanced capital market solutions take advantage of capital market liquidity. A “last resort” option is direct lending by ECAs, with enhanced collaboration between ECAs and banks—the former as lenders and the latter as providers of loan administration/agency services.
• For corporate finance, bank funding is expected to remain scarce for the most part, for all but those with the best credits. Thus, firms should ensure that their financial strategies can accommodate sustained scarcity of bank capital. • With banks still adapting their lending practices to the new normal, firms should identify the operational areas where bank financing is of most value, and release bank
Outlook for 2010 and beyond What can the LATAM region expect in 2010 and beyond? Three key trends seem to be taking hold: • Demand for agency financing solutions will continue to be concentrated in the traditional industry segments. • Improved bank sentiments may lead to more significant
credit where feasible financing alternatives exist. Among the most valuable alternatives is agency financing, which can fund strategic capital expenditures of emerging markets firms, as well as for infrastructure and energy projects in such industries as oil and gas, power, shipping, aviation and telecom. • Finally, firms should review their bank group to ensure
project finance activity for well-structured, relationship-
that the number and mix is broad enough to achieve scale
driven transactions, benefiting from significant ECA support,
and diversification in accessing capital, yet narrow enough
complemented by bank loans.
to remain attractive to each bank in the group. Creating
• Finally, structures backed by multilateral agencies may attract interest from banks, due to financial institutions’ favorable capital allocations and preferred creditor status by the agencies.
With banks still adapting their lending practices to
such mutually beneficial relationships remains a key priority for 2010. Export credit agencies would do well to explore a new model of collaboration with banks on credit risk reviews, and support bank industry efforts to advocate favorable regulatory capital allocation treatment for ECA-guaranteed loans. They should also commit to engaging in continued dialogue on improving efficiencies in due diligence and application standards.
the new normal, firms should identify the operational areas where bank financing is of most value, and release bank credit where feasible financing alternatives exist.
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