Conquering the barriers to entering the global ACH market Jonathan Lear, Earthport Gregory Rettinger, U.S. Bank
2 Agenda What is global ACH Why every bank needs to offer global ACH U.S. Bank customer case study Common barriers and considerations banks face Current solutions available Future opportunities and challenges
3 What is global ACH? The ability to settle payments across borders using the domestic in-country, low-value clearing infrastructure. It is Complementary recurring high volume non-priority originated in batches electronically STP = no repair lower cost no bene-deduct fees It isn t A universal substitute for wires Enables banks to improve their margins on existing transactions; and increase transaction income from exploiting underserved market sectors.
4 Where do low-value international payments fit? Transaction Value $100,000 Transaction and correspondent banking services Global ACH Majority of cross border transactions are between $500 and $100,000 in value Majority of market is very interested in cross border payment solutions that connect local ACH schemes $200 Low Domestic retail banking services High Transaction Volume One could argue that this is the largest unsatisfied opportunity today in the payments industry Global ACH is ideally suited to the low-value ($200 - $50,000) high-volume, cross-border payments opportunity.
5 Four major categories of cross-border payments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 5% 5% 26% 64% Supplier Payments 40% 26% 14% 20% Payroll Payments 80% 10% 5% 5% Pension Payments 32% 25% 23% 20% Affiliate Payments Corporate Collecting Consumer Collecting Corporate Paying Supplier Payments Payroll Retirement Benefits Payments Consumer Paying E-Commerce Purchasing Payments International Remittances Source: Earthport / Glenbrook research Frequent Occasionally Very Rarely Never Approximately two-thirds of U.S. importers that conduct business overseas currently pay all or some of their foreign suppliers in their local currency..
6 Downward shift in value of payments Corporations making more cross-border purchases of services Global trade growth US exports grew by 15.4% in 2010 Structural shift to lower average value per transaction Increasingly mobile workforce Global migrant remittances create over 2bn individual transactions per annum with a value of > $50bn U.S. emigrants top 10 destinations: Mexico, Canada, Puerto Rico, UK, Germany, Australia, West Bank and Gaza, Japan, France, Philippines The number of international migrants has doubled in the last quarter of a century, to more than 200m Growth in e-commerce Forecast to be a $900bn category, requiring new forms of low-value payment services
7 The importance of global ACH to originators 40% of U.S. middle-market importers ($50 million - $250 annual revenue) have non-u.s. trading partners; approximately 78% of those businesses make international payments Source: Aite Group Approximately two-thirds of U.S. importers that conduct business overseas currently pay all or some of their foreign suppliers in their local currency.
8 The importance of cross-border payments to banks 45% 40% 35% In 3 years my cross-border payments volume will.. 40% 30% 25% 20% 27% 29% 15% 10% 5% 0% Significantly increase Modest increase About the same 4% 0% Slightly less Much less Source: Earthport / Glenbrook research The average $ value per transaction is significantly higher for cross-border payments and originators expect a substantial volume increase in the future.
9 Originators and banks see the value of global ACH Both originators and banks see the value that global ACH can play in meeting the cross-border payments challenge.
10 Key benefits of global ACH Improved growth and reach for banks, enabling the innovation of new services and improving access to local markets worldwide Transparent, reliable, predictable and secure payments leading to outstanding customer satisfaction and retention Increased profitability due to the cost-effective processing of high-volume, low-value international payments Unparalleled end-to-end processing efficiency Key component in delivering full suite of treasury management service
11 U.S. Bank customer case study Background: U.S. Bank corporate originators utilize global ACH as an easy, safe and known payment channel for payroll, pension, vendor payments and inter-company transfers They choose international ACH as an option due to customer dissatisfaction with foreign drafts, international Wire Transfer fees, and beneficiary deductions Client: Problem: Solution: International educational organization. High cost of wires for teacher salaries. Global ACH. Customer benefit: 86% savings in transaction fees. Bank benefit: Customer retention and increased satisfaction.
12 Customer feedback and key learnings Like: Speed of payment (parity to wire?) No beneficiary deductions Cost savings to the originator and receiver (can exceed $20) Dislike: Limited pre-notification capabilities Truncated return and NOC information available Key learnings: Dedicate extra time to the initial payment instruction setup phase IAT is more complicated then domestic ACH, not due to software, just the additional wire-like variables Ability to see real-time rates online at initiation and approval Integrated International ACH functionality within standard domestic ACH workflow
13 Global ACH: entry options Build versus Partner Pros Proprietary bank solution Full integration with other systems Pros Leverage specialism and local expertise Globalise payments out of the box Rapid ROI Leverage proven expertise Immediately meet unmet client demand Cons High capital requirement = low ROI Time-consuming process (24 months) Significant on-going support overhead Nostro network management overhead Cons Need to identify expert partners Evaluate partners against your needs Partnering with a proven global payments expert offers the fastest, most capital efficient way of meeting your global ACH requirements.
14 Global ACH: partnering options Option View Pros Cons Correspondent banking Quick time to market Safe (effective?) potential solution Lower STP = higher costs Requires investment in technology? Use a global bank Limited counter-party risk Adequate country coverage Non-specialized/inflexible? Multiple technology / support interfaces Exposes your customers to competition? Share/dilute FX revenue opportunity Exploit scheme based rules Common, documented standards Gaining broad-based industry support Still need underlying clearing relationships Still requires operational overhead support How is the FX opportunity impacted? Partner with expert iach provider High degree of focus and expertise Highly efficient = faster ROI FX agnostic = higher bank income Dedicated customer support Requires vendor evaluation Ongoing vendor management Additional technology integration?
15 Outline Global ACH delivery model Segregated Accounts NO: NOK FI: EUR UK: GBP SG: SGD SG: SGD Bank Payment Instruction Payments infrastructure Payments operations Compliance Connectivity US: USD US: USD PL: PLN JP: JPY AU: AUD PH: PHP Segregated Accounts
16 Key selection criteria in choosing a partner Criteria Objective 1. Overall solution Deliver an end-to-end global ACH solution. 2. Country coverage Capture maximum payment flow. 3. Foreign Exchange Maximize FX income opportunities. 4. Technical and implementation Low-cost, high-impact implementation. 5. Compliance Highest possible compliance processes. 6. Customer support Parity to other payment methods. 7. Return on Investment Low CAPEX (if any), rapid ROI.
17 Overall solution considerations Objective: To identify a global ACH partner that provides the best end-to-end global payments solution which complements my existing processes/requirements Checklist: Which discrete parts of the payments process will I do and which will the partner do? Does the partner have the capability to meet all my requirements end-to-end if needed? Beneficiary account validation Compliance and sanctions screening File transformation Payment operations and settlement Real-time FX quotes Reporting Liquidity management Exception handling and management Identify up-front which parts of the payments process your global ACH provider will undertake and which you will retain in-house.
18 Country coverage considerations Objectives: To have the broadest possible reach of settlement countries To have the ability to expand to new countries effortlessly as your needs evolve Checklist: Does the partner offer global ACH delivery to key regions (Europe, Asia Pac, Lat Am)? Has the partner created and properly resourced a dedicated network expansion team? Is the partner flexible so that I can influence their future network expansion to meet my future requirements? Select a partner who has a well established global payments network and the resources, passion and flexibility to expand this to meet your needs.
19 Foreign Exchange considerations Objectives: Maximize the Foreign Exchange (FX) revenue opportunity for the bank Be flexible in how best to achieve this Checklist: Am I obligated to universally use a partner s FX service as part of their global ACH solution? Does the partner have FX capabilities I can selectively use (e.g. exotics)? Is the partner fair and transparent to both the bank and my customers on costs, risks and rewards if I use their FX service? A global ACH partner should enhance and complement your FX offering so that the bank can maximize its FX revenue opportunity.
20 Technology and implementation considerations Objectives: Deliver a fast, low-cost, high-impact technical implementation Checklist: Does the partner offer a range of technical solutions (e.g. API, Batch, teller) which meet my requirements depending upon the environment (online banking, branch, corporate bulk payments)? Does the partner support open industry accepted technologies/file formats (e.g. web services, XML; ISO 20022; IAT) or will they expect me to write to their technologies? Will the partner provide dedicated technical support before, during and post-live? Focus should be on using proven
21 Compliance considerations Objective: To ensure that all global ACH payments are executed to the same standard of compliance as all Checklist: Does the partner offer robust banking-grade compliance capabilities that fit my risk tolerance? How will sanctions, AML, KYC or CTF hits be managed from a customer experience standpoint to limit improper disclosure? Will the bank continue to screen the transactions as well as the processing partner? Bank s can outsource the sanctions screening process to a partner, they will always retain the liability and thus need maximum confidence.
22 Customer support considerations Objective: To provide the same levels of customer support and service for a global ACH transaction as for domestic transactions Checklist: Does the partner provide strong levels of tier-2 customer support so that they remain invisible to my originator but provide the necessary support when needed? What kinds of reporting is available (web, phone, ticketing, API, on-demand) and how will it be used by the operations group within the bank? Will the partner provide in-depth training to the bank s operations group during the golive phase? Each settlement country has differing levels of transactional reporting available and this should be normalised for consumption by the bank.
23 ROI considerations Objective: To provide a rapid ROI to the bank while meeting my clients global ACH needs Checklist: What is the cost model to the bank (CAPEX, transactional etc)? How fast can I implement the global ACH solution (typically 4-6 weeks) so that I can begin accruing the benefits to the bank? Can the partner support my near and long-term growth aspirations? Global ACH is straightforward to implement with the right partner and a clear project plan which in turn should deliver rapid ROI.
24 Future opportunities and challenges for U.S. Bank Opportunities Provide non-urgent international payment capabilities to corporate originators Ability to perform foreign exchange Utilize International Payments Framework Standards and Rules Adding more countries to reach will position U.S. Bank for continued growth in International ACH and support customer needs Challenges Considerable effort to build multiple correspondent relationships Training corporate originators on nonurgent payment routing rules (IBANs, BIC, CLABE, etc) and specific rules and guidelines for specific countries Managing and mapping multiple incountry formats New regulations on foreign remittance payments Going forwards, U.S. Bank is working with a specialized partner to expand our global ACH offering which will remove many of the challenges above.
25 Final thoughts.... Dodd-Frank 1073 key provisions Full fee disclosure at the point and time of origination Guarantee of amount of final funds delivered, to be delivered at time of origination Guarantee on when funds will be received Right to cancel a transaction up to 30 minutes after its submission Does global ACH provide a significant part of the solution to the upcoming 1073 consumer remittance regulatory requirements?
26 Key takeaways Global ACH is becoming an integral part of originators global payments tools Global ACH creates an opportunity for banks of all sizes to compete globally Banks can either build or partner to deliver a global ACH solution Partnering typically offers the fastest, highest impact and biggest ROI for a bank In evaluating a partner, a bank should consider seven criteria (solution, country coverage, FX, technology, compliance, customer support, and rate of ROI) Global ACH offers a significant part of the potential solution for Dodd-Frank 1073