key trends in treasury management mckinsey & company, global concepts office matt ribbens, ctp...
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Key Trends in Treasury Management
McKinsey & Company, Global Concepts Office
Matt Ribbens, CTP
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
September 23, 2010
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▪ The US payments landscape
▪ Key trends in treasury management
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- Bank of America
- Bank of New York Mellon
- Citigroup
- JPMorgan Chase
- Wells Fargo/Wachovia
Commercial DDA revenue accounts for 12% of total industry revenues
▪ 12% of industry revenues
▪ 16% of industry profits
▪ $18 billion in cash management fee-equivalent income
▪ $10 billion in NII
US payments industry revenues: 2008 1
100% = $277 billion
Other
Merchant
acquiring
Money
services
Commercial credit
card issuing
Commercial
DDA $3312%
Consumer
DDA
Consumer credit
card issuing
SOURCE: McKinsey US Payments Map, 2008-2013, release Q4-09
Quick facts
1 Cash management services are counted on a fee-equivalent basis; ECR expense has therefore been backed out of NII2 2008; in alphabetical order; based upon an analysis of ACH and wire origination and lockbox volumes
Top 5 cash management banks 2
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The distribution of transactions and dollar flows are very different; most transactions are cash, but most spending is by check and ACH 1
1Our model excludes the vast majority of wire transfer dollars in an effort to approximate customer payments activity rather than financial institution settlement transactions (e.g., broker-dealer settlement). Flows through Fedwire alone ($518.5 trillion in 2005) are more than seven times greater than all other instruments combined.2Reflects checks paid, not checks written. Checks converted to ACH are counted in ACH. This convention is used throughout3Includes wire transfer, book entry transfer, and electronic money transfer (EMT) via MoneyGram, Western Union, etc.
8
18
24
26
33
139
$1,277
$2,355
$40,533
$2,116
$36,089
$14,496
2008 transactions248 billion
2008 dollar flows$96,865 billion
Cash
Check 2
Credit Card
ACH
Debit Card
Other3
C2B84% B2B72%
SOURCE: McKinsey US Payments Map, 2008-2013, release Q4-09
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Contents
▪ The US payments landscape
▪ Key trends in treasury management
– Growth is slow (but returning)
– Banks are refocusing on client experience
– Security/Fraud Prevention is paramount
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Mixed signals about the economy continues to create uncertainty for both corporates and bankers
$1.84 Trillion in Cash: A RationalResponse to Challenging EconomicCircumstancesCHICAGO--(BUSINESS WIRE)--The Federal Reserve today reported corporate cash isstill hovering at record high levels of $1.84 trillion – almost identical to last quarter.However, cash remains 29% higher than it was just 18 months ago.
SOURCE: DigitalTransactions Newsletter, CNN, Sept 20, 2010.
News from the same week…
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As with corporates and banks, the biggest challenge continues to be topline revenue growth
SOURCE: McKinsey Quarterly Economic Conditions Snapshot, September 2010, BEA, 2010.
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Commercial customers are focused on safety of principal and the need for liquidity to fund operations
SOURCE: AFP Liquidity Surveys, 2007, 2008 and 2009; AFP Exchange, November 2009
1.9
9.2
27.1
31.830.9
37.2
+384%
+37%+3%
Most important cash investment policy objectivePercentage of organizations prioritizing each
24
23
7584
15 16Return
Safety of
principal
Liquidity
20092008
02
2007
61%
Profile of organizations’ short-term investmentsPercentage of total invested in each product
Bank deposits Treasury billsMoney market mutual funds
2007 2009 2007 2009 2007 2009
“It was all about saftey and liquidity this past year. Those investment vehicles that were perceived as safe and liquid were not as safe and liquid as we thought”- Assistant Treasurer of a manufacturing and distribution corporation
“..if you want to go for ultimate security you go for treasuries….(t)hey have virtually no return but you are not trying to get that last basis point of interest.”- VP Global Treasurer of a major retailer
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ESTIMATES
SOURCE: McKinsey US Payments Map, 2009-2014, Q2-10 Release
18 16 15 16 19 21 24
2322 23 23
2425
264
+7% p.a.
2014F
75
3
22
2013F
70
3
21
2012F
65
3
19
2011F
60
3
17
2010F
58
16
2009
56
4
15
2008
59
2
16
1 Cash management includes all commercial payment and DDA revenues for large corporate, mid-market, SME and public sector entities. Does not include private label cards and excludes merchant services
Commercial DDA (NII)
Cash management fees
Commercial card (NII)
Commercial card (fees)
3.1
-̀7
8.3
12.4
CAGR (’10 -’14)Percent
US cash management revenue1
$ Billions
Cash management has weathered the banking crisis well and is poised for several years of steady growth
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|SOURCE: McKinsey US Payments Map, 2008-13 Scenario 2, release Q4-09; McKinsey 2008 Corporate Treasury Needs Study
Commercial use of ACH has increased steadily over the past five years, and US firms plan to continue increasing their use of ACH
ACH’s share of Bus/Gov paymentsPercent
45%
40
35
30
25
0
transactions
$ flows
090807062005
US firms’ plans to adopt ACH credit useCAGR, 2008-10
B2B Payments 12%
Tax Payments 2%
Payroll 6%
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Commercial card use declined significantly during the recession, but growth will return in 2010 and beyond
SOURCE: McKinsey US Payments Map, 2008-13 Scenario 2, release Q4-09; Nilson; Team analysis
Commercial card spend Billions USD
20130
1211100908
200
070605042003
400
600
800
$1,000 ▪ Commercial spending slows: Share growth in commercial card spending has been insufficient to offset broad slowdown in B2B spending; commercial card spending dropped 10% 2008-09.
▪ T&E expenses evaporate: Easy targets for cost reductions travel budgets were slashed during the recession, dramatically reducing commercial card spend.
2008-10: Commercial card trends
Post-recession, commercial spending and access to credit will improve. Cards will continue to displace spend from other instruments. We forecast double-digit growth in commercial card spend 2010-13.
Futureoutlook
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TR
AN
SA
CT
ION
SIZ
E
Traditional
PCard
Programs
Straight Through
Card Payments
& AP Automation
TRANSACTION FREQUENCY
SP
EN
D P
ER
SU
PP
LIE
R
Ghost Card Programs
Commercial card solutions are moving up the AP spectrum to become more easily leveraged by companies for B2B payments
SOURCE: Global Concepts Cash Management Forum, 2010.
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In March, Global Concepts found that a majority of bankers thought that Reg Q repeal was unlikely to happen in 2010
SOURCE: Cash Management Forum Research, March 2010.
The reforming of a rule that does not allow banks to pay interest on commercial checking accounts does not seem to have much chance of being repealed in 2010; however, more banks see the liklihood “creeping up” in 2011.
How likely do think it will be that Reg Q will be repealed in 2010?Responses
00
1
0
2
10
4
31 2 6 74 5Won’t Happen
WillHappen
How likely do think it will be that Reg Q will be repealed in 2011?Responses
0
2
0
3
5
7
0
31 2 6 74 5Won’t Happen
WillHappen
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In July, the passage of the financial reform included the repeal of Reg Q which will impact corporate investment policies and commercial DDAs
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Key Provisions affecting cash management:
▪ TITLE III—TRANSFER OF POWERS TO THE COMPTROLLER OF THE CURRENCY, THE CORPORATION, AND THE BOARD OF GOVERNORS▪ SEC. 335. PERMANENT INCREASE IN DEPOSIT AND SHARE INSURANCE.
– Permanently increases coverage on demand deposit accounts to $250K
▪ TITLE VI—IMPROVEMENTS TO REGULATION OF BANK AND SAVINGS ASSOCIATION HOLDING COMPANIES AND DEPOSITORY INSTITUTIONS▪ SEC. 627. INTEREST-BEARING TRANSACTION ACCOUNTS AUTHORIZED.
– Interest can now be paid on commercial DDA accounts (fully repealing Reg Q)
SOURCE: McKinsey/Global Concepts, 2010.
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Due to a long-standing and now repealed prohibition on DDA interest, the US commercial DDA market has evolved differently than others
SOURCE: McKinsey US Payments Map, McKinsey Global Payments Map, Global Concepts
History & impact of Regulation Q
Commercial DDA revenue by source% of total; 2008▪ Unlike most other countries, the US does not allow
interest payments on commercial demand deposits
▪ The payment of interest is forbidden by the Federal Reserve’s Regulation Q, enacted in 1933
▪ However the Dodd act will enable banks to pay interest for commercial deposits
▪ Due to not paying interest on demand deposits:
– The opportunity cost of keeping excess cash in deposits is relatively high and corporate liquidity has been more likely to leave the US banking sector for secondary markets
– US banks developed a complex suite of cash management products and account types designed reduce the funds held in DDAs (e.g., sweeps, ZBAs, Repo’s)
Due in part to Reg. Q, US banks have tended to derive more revenue from fee income as corporate customers sweep balances into money markets and higher yielding time deposits
43%67%
56% 58%
57%33%
44% 42%
USA EUCanada Asia/
Pacific
100%
NIIFees
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The repeal of Reg Q will lead to three potential different scenarios based on the strength of the economic recovery
Low Moderate High
Lo
wM
od
era
teH
igh
Supply of funds
De
ma
nd
fo
r fu
nd
s
Status quo – commercial banks w/ deposits stockpiles; low demand for credit and risk averse lenders
Deposit boom – strong economic recovery; wholesale funding markets fail to rebound driving strong competition for deposit funding
SME shift – attacker funding demand remains moderate; incumbents willing to bleed off deposits vs. raising rates
DDA innovation – expanding credit demand drives broader competition for DDA pool beyond small business; funding keeps pace with demand, moderating interest rates
Industry’s relative supply / demand for funding ▪ With moderate recovery, the large un-deployed funding base among deposit rich institutions should meet credit demand; deposit rich banks are likely to bleed off excess deposits rather than raise interest rates in response to attackers.
▪ Strong economic recovery and growth in credit demand will increase demand for funding; if wholesale funding markets fail to rebound, strong demand for funding could push deposit interest rates up.
▪ SME shift is less contingent the state of capital markets and could happen with only a moderate recovery.
▪ DDA innovation and Deposit boom scenarios are both contingent upon the external environment and speed of recovery in capital markets.
SOURCE: McKinsey Global Concepts
Most likely scenarios in next 24 months
More likely scenarios in 2012 and later
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In July, the majority of bankers polled anticipate paying DDA interest due to the repeal of Reg Q but are uncertain of the post regulatory product mix
Do you anticipate paying interest on demand deposit accounts for business customers?
% of responses
SOURCE: Cash Management Forum Research, July 2010.
25
71
No
4Undecided
Yes
How do you plan to value deposit balances on interest bearing demand deposit accounts?
% of responses
50 50
Traditional Methods
TBD
56
40
41
What will be your default commercial DDA offering?
% of responses
Interest-only DDA
Undecided
Traditional DDA w/ ECR
Hybrid (ECR & Interest)
5633
011
New customers Existing customers
Do you plan to offer all three account types?
% of responses
46
46TBD
Yes
8
No
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Other regulations will also impact banks (as well as corporates)
SOURCE: McKinsey Global Concepts
Affects
▪ Regulated banks, brokers/dealers, and insurance companies with assets of at least $25B
▪ Value of commercial deposits much higher in terms of stability than other sources of market funding
▪ Operational costs of banks for gathering deposits
▪ Banks are able to pass along a portion of fees assessed by the FDIC for insurance (typically through account analysis)
Basel III
▪ Proposal to increase capital requirements for counterparty credit risk
▪ Internal models to calculate counterparty credit risk (CCR) exposures do not take into account sufficiently the potential volatility and illiquidity of markets
FDIC Insurance
▪ Unlimited insurance (TAG) on non-interest bearing transaction accounts
▪ Permanent coverage of $250K for all accounts
▪ Assessments of FDIC premiums will be assessed more heavily based on Assets.
Affects Affects
▪ MMF Funds and corporate investment policies
▪ Releasing the shadow NAV on a 60 day lag basis willhave an impact on organizations investment decisions
2a-7 Money Fund Change
▪ MMF must disclose the shadow net asset value (NAV) --basically mark-to-market value--of the fund
▪ Potential headline risk for a fund even after 60 days when the shadow NAV is released
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Contents
▪ The US payments landscape
▪ Key trends in treasury management
– Growth is slow (but returning)
– Banks are refocusing on client experience
– Security/Fraud Prevention is paramount
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Top 25% areas
Second 25% areas
Bottom 50% areas
In which of the following areas would you value improvements the most?% responding high or very high
$5–25m $25–100m $100-500m
Reporting capabilities
Intuitive, easy to use products and services
System availability and reliability
Data integration and ability to interact with your systems
Receivables
Liquidity and Concentration
Payables
International and F/X
84
82
84
83
74
57
49
53
30
90
88
86
86
80
65
67
62
42
87
89
84
82
75
71
67
60
51
86
86
84
84
76
64
60
58
41
Overall Breakdown by revenue segments
Online access
SOURCE: McKinsey Cash Management Survey
Providers need to be aware of:▪ The
difference between must-haves vs. nice-to-features
▪ How this varies by targeted segment
▪ How to prioritize investments
The most highly demanded product improvements for all market segments are related to online delivery systems
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Improving the onboarding/account maintenance process with self-service and more recently eBAM
• Slow • Low integration
• Expensive • Low satisfaction
Fax
Paper
Today
• Visibility & Control• Automate/STP
• Efficient Workflows• Security/Digital Signing
Tomorrow
ISO Std. XML messages & Supporting documents
Internet
Bank Portal
SOURCE: Cash Management Forum (Identrust & Bank of America), 2010.
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By the end of 2012, most banks intend to adopt new electronic products and channels
SOURCE: McKinsey/Global Concepts, 2010 Cash Management Forum TM Study.
Remote Currency Management Solution 32%
Positive Pay with Payee Line Detail 33%
Healthcare Lockbox Services/EOB administration 38%
Invoice Origination from online banking 47%
Payables Automation/Integrated Payables 50%
Web-based Cash Forecasting 53%
Mobile Phone Payment Initiation/Approval 60%
Mobile Phone Banking 60%
Products Banks “Plan” to Adopt by 2012Profiled Banks
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Corporate treasurers are showing a great interest in same-day ACH (debit origination), with over 2x the demand growth of any other product
SOURCE: Global Concepts Corporate Treasury Needs 2010
ACH debit filters 2555 45
Remote deposit 2651 49
ACH - converted checks 53 47
Purchase to pay automation 28
27
57 43
ACH - same-day debit 6683 17
Top 5 growth products: $100 - 499MM% of firms adopting in next 24 months;
Top 5 growth products: $500MM - 1.5B% of firms adopting in next 24 months
Top 5 growth products: All firms% of firms adopting in next 24 months
Top-5 products differ by size segment:
▪ $100 - 499MM: In addition to same-day ACH debit, payables and receivables electronification products comprise the top-5
▪ $500MM - 1.5B: “Next generation” treasury products dominate, including web cash forecasting and a variety of mobile services
54 46
53 47
ACH - same-day debit 66
Purchase to pay automation 28
82% 18
ACH - converted checks 24
Mobile - Approve payments 24
Remote deposit 24
46 54
47 53
Mobile - View balances 34
Mobile alerts 29
36 64
45 55
Web cash forecasting 35
Mobile - Approve payments 33
52 48
54 46
ACH - same-day debit 6282 18
0-12 Months
13-24 Months
Adoption timeline:
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Contents
▪ The US payments landscape
▪ Key trends in treasury management
– Growth is slow (but returning)
– Banks are refocusing on client experience
– Security/Fraud Prevention is paramount
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A multiplicity of threats requires a comprehensive approach to risk management
▪ Online fraud
– Phishing, spear phishing and malware
– Account takeover
– Man in the middle attacks
▪ Check fraud
– Check alteration
– Hybrid attacks
– The positive pay imperative
▪ Multi-channel risk
– Remote deposit, ACH origination, wire and merchant limits
– AML/OFAC screening
SOURCE: Global Concepts analysis
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|SOURCE: Global Concepts, Cash Management Forum 2010.
Spear Phising Attack: BBB
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Banking Platform Customer 1
2. Spear PhishingAttacks to executives(FDIC, IRS, Bank emails)
Keystroke
logging
Remote
access
Sess
ion
hija
ckin
g
Infectedemail
Customer 2
3. Account Access – Defeat Strong Authentication
Have your credentials Can use customer machine/sessions
• Look for peak balance• Evaluate account
privileges• Account processes
Cus
tom
er A
ccou
nt4. AccountReconnaissance Customer 3
5. ACH BatchMultiple <$10K payments to many mules across multiple financial institutions
Mule banks
6. Mules instantly wire money out
1. Fraudsters target and research your bank, your banking platform and your customers
Spear Phishing and Money Mules
SOURCE: Global Concepts, Cash Management Forum 2010.
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Initiate ACH and wire transfer payments under dual control
Online commercial banking customers execute all online banking activities from a dedicated, stand-alone, and completely locked down computer system from where email and web browsing are not possible.
Limiting administrative rights on users’ workstations to prevent inadvertent downloading of malware
Reconcile all banking transactions on a daily basis.
Financial institutions should also implement an awareness communications program to advise customers of current threats and fraud activities
FBI, NACHA, FS-ISAC recommendations to prevent online fraud for corporate users
SOURCE: Global Concepts, Cash Management Forum 2010.
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FIs implement appropriate fraud detection and mitigation best practices including particularly transaction risk profiling.
FIs consider using manual or automated Out-Of-Band authentication systems in concert with fraud detection systems.
Such OOB solutions many include manual client callback or automated solutions SMS text messaging, Interactive Voice Response system callback to a known phone number with a PIN code and similar solutions.
FBI, NACHA, FS-ISAC recommendations to prevent online fraud for financial institutions
SOURCE: Global Concepts, Cash Management Forum 2010.
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Predictive Behavioral Analysis for Each Account• Learns unique behavior of each individual• Raises alert when something unusual for that
individual occurs
Maximum detection, minimal alerts• Only get alerts when risk factors combine to create
high risk score• Looking at all attributes and activities – catch
account reconnaissance
Fast and Intelligent Forensics• Detailed behavioral history• Fraud matching across accounts
Low maintenance• No rules• No change to client experience• Don’t need to know fraud patterns
SOURCE: Global Concepts, Cash Management Forum 2009.
Transaction Risk Monitoring
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An Out of Band, Multi-Factor form of authentication that allows you to use your office, home or cell phone as the second factor of authentication.
When accessing on-line banking business customers receive a phone call asking the user to enter a security code or PIN into the phone that is displayed on the computer screen.
Entering a code into the phone makes OOBA a completely out of band authentication
Provides strong two-key authentication by requiring the use of two different networks to gain access; Internet & phone
Companies don’t have to spend time coordinating the issuing, mailing, and servicing a token or device
Instant attack detection
If account is comprised access can be immediately blocked and notify banks security department
Out of Band Authentication
SOURCE: Global Concepts, Cash Management Forum 2010.
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:09 P
MP
rinte
d 7/2
1/2010
9:41:2
5 AM
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Questions
Matt Ribbens, CTPExpert+1 (678) [email protected]