Andrew B. Busch
Global Currency & Public Policy Strategist
BMO Capital Markets
On October 26th, the members of the Euro Zone agreed to three major structures to reduce credit stress within the union. First, there was an agreement to increase the losses to private sector Greek bondholders from 21% to 50%. Second, there was an agreement on the need for bank recapitalizations of 108 billion EUR. Third, there was agreement to expand the size of the bailout facility to enhance its ability to cover larger nations. All are important and all are related. Let’s review the structures to gauge if they will be successful and to gauge what additional measures need to be taken to contain the crisis.
Greece was the initial infection for the European debt crisis and therefore resolving this country’s issues were seen as critical for containing the problem. Clearly, this was a nation that needed a severe restructuring of not only its fiscal spending, but also its economy. With one out of five workers employed by the government, the public-private balance was out of balance and encouraged the electorate to vote for legislation favorable to government spending. With the economy contracting 7.4% in 2010 and expected to contract 5.5% in 2011, the country’s tax receipts continue to shrink and their ability to service their debt has decreased significantly. Greece has a debt-to-GDP level of 145% and their tax revenues can support less than a third of that load. In July, Euro zone members agreed to a 109 billion EUR loan to Greece as well as a voluntary (to avoid triggering CDS) private sector 21% cut to face value of Greek bonds.
Clearly, this reduction in debt load was not enough to set Greece on a sustainable fiscal path. At that time, the markets were pricing Greek bonds at only a 30-40 of face value and reflected what they believed was sustainable. In October, the Euro zone nations acted again to reduce the 21% haircut to 50% for private sector bondholders. While this is closer to a level they can support, the problem is that cut is only for the private sector holders and it will only reduce the debt-to-GDP levels to 120% by 2020. Greece needs to have this level reduced to 60% for a true sustainable debt load. Therefore in the medium term, the Greek issue will not be resolved by further austerity measures or by a new Greek government. It must restructure its debt with losses for all bond holders, both private and public including the ECB.
With this in mind, the progression of the European debt crisis has been that the contagion moved from the periphery countries into the core countries into banking system. It’s this third stage of infection that has expanded the crisis into an acute stage which had to be addressed expeditiously. Sadly, the debt crisis has been dragging on since November of 2009 and through 13 meetings of European leaders to no resolution. This has exacerbated the downward spiral of confidence leading to US money market funds not extending credit to European banks and creating a potential funding crisis. It didn’t help when the EBA (European Banking Authority) did a stress test recently that gave Dexia a passing grade only to see the bank collapse and have to be broken up. The IMF has calculated that European banks need to raise E200 billion to plug a hole in bank balance sheets created by sovereign debt write-downs with other estimates as high as E275 billion. Unfortunately, the October Euro zone agreement was underwhelming in that it asked Europe’s big banks to find only 108billion EUR infresh capital by June 2012 to strengthen the banking system. The EBA ran new stress tests and this higher level of capital would make lenders to reach a 9% threshold for their tier one capital ratios. Europe missed their opportunity to shore up their banking system quickly and take a major step towards providing certainty to investors over the entire banking system.
One of the unintended consequences of simultaneously putting the Greek bond haircuts on the private sector and asking banks to recapitalize is forcing owners of all sovereign European debt to sell. With only the private sector bondholders taking the Greek haircut and the haircut not reducing the debt-to-GDP down enough, the perception is that more will be needed and it will fall on the private sector. This encourages bondholders to sell now or take more losses. Also, this structure may be used on other nations like Ireland, Portugal, Spain or Italy and further encourages selling of those nations’ debt. Finally, banks can raise their tier one capital ratios by either issuing more stock or by reducing the assets on their balance sheets. With stock prices already extremely low, issuing stock is not only dilutive, but won’t raise capital very efficiently and therefore will not likely be done. However, banks will be incented to reduce their balance sheets by selling assets like sovereign debt and by reducing their lending. Both of these outcomes are negative for European growth (and tax receipts) and for prices of sovereign debt.
Finally, the expansion of the European Financial Stability Fund or EFSF is seen as critical for dealing with the contagion that has now engulfed Italy. The European Financial Stability Fund has been underfunded since its inception due to constraints over the AAA ratings of the bonds it issues to fund itself. The original lending facility was under E250 billion, but was just boosted to E440 billion under the July 21st agreement. With Italy now sucked into the vortex of the downward debt spiral, this fund needed to be expanded to be able to cope with the size of Italy’s debt at around E1.8 trillion. As we learned from the 2008 US crisis, there are numerous structures that can be used to expand lending and help foster confidence in the financial system (ex. TALF). The October 26th Euro zone agreement focused on two leveraged paths that are intertwined: a special purpose investment vehicle(SPIV) and an insurance model. The SPIV would be mandates to invest in sovereign bonds of a country in both the primary and secondary markets. The insurance model appears to be able to absorb first proportion of losses incurred by the SPIV up to 20%. Both structures were deemed necessary, but both structures could “statistically increase member states’ gross debt” and thereby also potentially create conditions for a member country downgrade. The goal was to eventually boos the EFSF lending by approximately E1 trillion.
The concept was to have the EFSF buy the bonds of Italy at auction and thereby significantly reduce Rome’s borrowing costs. To raise capital, the EFSF would issue bonds and have these insured up to 20% of first losses. However, the capital markets appetite for these types of bonds has shrunk due to the volatility in the markets. This means that the leverage for the EFSF would need to be reduced to increase the insurance component to 30% to incent investors to buy these bonds. The new EFSF structure is expected to be in place by the end of November, but remains a question mark until the final structure is presented.
Given the state of the Greek bailout and the form of the private sector haircuts, the inadequate bank recapitalizations and the still unformed, levered EFSF fund, it should surprise no one that the October relief rally in risk assets has stalled and volatility has remained. There are many unanswered questions that need to be resolved and structures that need to be concretely put in place to create the conditions for a stable and sustainable European fiscal environment. Going forward, this translates into continued uncertainty for the financial markets. However, the fact that Europe has moved this far is a welcome sign and bodes well for containing the debt disease to allow enough time for a cure.
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Corporate treasuries under pressure need multi-banking trade finance technology
By Andrew Raymond, CEO, Bolero International
The pressures on corporate treasuries in global trade have continued to mount since an HSBC survey last December found many felt ill-equipped to meet the demands placed on them.
Since then the pandemic has caused massive disruption and has overturned many carefully-laid plans. The same pressures identified in the survey remain, but have intensified. Treasurers still face ever-more complex flows of information from multiple systems while relying substantially on manual processes. At the same time they are expected to drive change and provide strategic insight.
It was no surprise then that two-thirds of treasurers in the survey were planning changes to the technology they used as part of transformation programmes to increase efficiency and bring greater visibility to treasury operations.
Reliance on manual methods and paper documents makes little sense and is unsafe
As we move through the pandemic, pressure on cashflow and working capital remain potent factors. Many treasurers working for enterprises engaged in global trade know that continuing to use manual methods to manage credit lines, and important trade finance instruments such as letters of credit (LCs) or guarantees is hard to justify in an age of digitisation and multi-banking trade finance solutions.
Not least because of the constant problem of fraud and forgery in relation to paper documents, which has led some banks to withdraw from involvement in commodity trade finance. The allegations of prolonged major fraud against the oil trader Hin Leong in Singapore are a case in point, sending tremors through the trade finance world. Court documents reportedly allege the fraudulent use of 58 import letters of credit that were not supported by any underlying transaction. Forged bank statements, bills of lading, sales contracts and invoices are also allegedly involved in very substantial fraud designed to cover losses and give a false impression of liquidity.
The case has not just exposed the susceptibility of paper trade documentation to forgery – it has also prompted some well-known European long-term commodity finance banks to withdraw or review their activities in this field. None of this makes everyday operations any easier for corporate treasuries still using paper in trade finance.
Reducing fraud through digitisation of trade finance
With fraud such a substantial problem, treasurers need to think hard about digitisation and how it reduces the risks. Paper documents can be forged when out of sight while being couriered around the globe. Once a document is digitised, however, fraud or forgery become extremely difficult because of encryption and audit trails. The electronic document remains completely visible at all time, but only to those engaged in the transaction and only the legitimate holder can amend it.
Increasing the efficiency of each trade transaction through digitisation
Digitisation substantially reduces the chances of fraud, but it also transforms how treasuries manage credit lines, letters of credit and guarantees, vastly increasing the speed and efficiency of transactions. It also maintains relationships with preferred banks.
In a digitised workflow, automation takes care of the data-uploading for LCs, while transfer between parties is at the click of a mouse across secure digital networks. LCs are notoriously complex instruments requiring close attention to detail and strict compliance with the rules governing their use. Compliance-checking can also be automated to reduce the administrative burden on treasuries and increase accuracy.
These advantages are important because the use of paper under LCs can imperil a transaction at many potential break-points. Documents must be presented physically, often to a prescribed location. Yet being time-limited, LCs (and bank guarantees) often expire before they are used, or their presentation periods are found to have been exceeded. Prevention of these problems requires constant supervision and many hours of work. When lines expire, new and potentially more expensive credit must be negotiated, while failure to present on time threatens transactions, leads to substantial extra costs, delays in releasing cargo and poor relationships between counterparties.
Consolidating credit lines and trade finance on a single, easy-to-use platform
The most effective form of digitisation for corporate treasuries is through a multi-bank trade finance platform which will slash the time involved in supervising credit lines, LCs and guarantees. An exporter may have thousands of LCs and guarantees with dozens of different banks. Optimising their use still requires laborious logging in and out of banking portals. Finding a single LC or guarantee relating to a transaction can be very difficult.
If treasuries implement multi-banking trade finance solutions, they will eliminate the need to toggle between different bank portals. They gain quick and easy access to all their banks, along with far greater visibility and control of all their credit lines and individual LCs. From a single platform they can manage and edit all their trade finance documentation and electronic presentations, as well as open account transactions and electronic bills of lading. All tracking and reporting is accomplished with a few mouse-clicks, while communications with banks remain secure. This is a major advantage when remote working is on the increase in so many areas of the globe.
As the world changes, but the pressures intensify, there is an urgent need for treasuries to grasp greater efficiency and visibility in their management and optimisation of credit lines and trade finance. It makes the adoption of multi-banking trade finance solutions an obvious first move.
How can financial services companies deliver great customer service and retain customer loyalty?
By Chris Angus, Senior Director, 8×8
The reality many banks are facing now is that given Amazon Prime can deliver goods to our doors in less than 24 hours, even during a pandemic, consumers expect the banks they use to keep up with their needs.
People want to be able to access their bank accounts, services and speak to an expert within a matter of minutes, whether it’s via an app on their device, web-chat or over the phone – their expectations are high. Adding to this, the World Health Organisation has advised consumers to use cards instead of banknotes during the Covid-19 pandemic – changing the way consumers pay for products.
With the recent health crisis forcing contact centres to shift to home working, collaboration can be more challenging, especially without the appropriate IT systems and applications in place. A delay in communication or unavailable information can, over time, cause reputational damage.
According to Deloitte, the bank of 2023 will look very different from today, making it clear that financial institutions should consider how they prepare for the future.
- Review your business communications strategy – both inside and out.
A crucial part of this preparation needs to be on reviewing business communications – both internally and externally – ensuring that employees can seamlessly collaborate and connect regardless of their location.
And technology is key to this movement, not only between teams, but also with customers. With the right communication tools in place, employees can gain better insight and deliver services that meet customer expectations. This results in not only satisfied customers, but also happier, and more motivated employees. All of which goes towards truly building a solid foundation for business recovery and continuity.
For many businesses right now, the future feels uncertain, so it’s important to consider the flexibility of solutions before deployment. Cloud computing, for example, allows businesses to stay nimble, scaling up and down their requirements to reflect the needs of the business and their customers.
- Implement an ‘Operate from anywhere’ strategy
The first half of 2020 was defined by the need for agility, an adjustment in how we operate our day-to-day lives and how we communicate both professionally and personally. The remainder of 2020 and beyond will focus on the application of technology to define how we reinvent working and connecting with each other, our customers, partners, and beyond.
To deliver great customer service, while ensuring employees are happy, productive and most of all safe, businesses need to be able to operate from anywhere. Yet, for many with contact centre requirements, this is not an easy transition. Enabling contact centre agents to work flexibly and from remote locations is now a critical component of business operations that must be top of mind for the entire C-suite.
Agents need to have the right tools to ensure they can continue to provide the same level of customer service, from any location. For an operate-from-anywhere strategy to be effective, organisations should consider how they can combine voice, team chat and video meetings on a single technology platform.
The use of multiple apps for multiple purposes can have the opposite effect than intended. Unifying communication channels enables collaboration and productivity while minimizing complexity. It also means a more streamlined and efficient experience for both employees and customers aiding great customer service.
- Meeting expectations is key
Not only have recent events affected contact centres operations, but the traditional, in-person branch experience has also been significantly impacted. Bank branches can now only accommodate a small percentage of customers. These restrictions have accelerated the impetus for businesses to meet their customers’ needs online, but also, the expectations of customers have also evolved rapidly. Virtual instant communication between businesses and consumers is now becoming a basic customer need. For financial services, this means considering digital-first applications, such as chatbots or instant messaging, where possible.
Businesses now also need to be where their customers are and offer them an omnichannel experience. Via the cloud, businesses can continue to serve customer needs through multiple channels such as voice, video, email, SMS and more.
While meeting expectations needs to be a priority – it’s not enough. Financial services institutions need to ensure they meet those expectations at speed, being the new battleground for competition. When it comes to finances, consumers expect their problems to be dealt with at speed and to the highest standards.
In summary, taking a technology-first approach which enables both employees and consumers to operate and access their data and communication tools from anywhere is the defacto business priority. Helping the financial services industry empower employees to better serve customer expectations with speed and accuracy – and ultimately delivering great customer service.
How payments can help streamline operations and boost customer satisfaction in the vending industry
By Darren Anderson, Business Development Manager, Self Service, Ingenico Enterprise Retail
The COVID-19 pandemic has had an astounding impact on the payments industry, causing cash usage to plummet as contactless and card-not-present volumes soared. Of course, this phenomenon was not unforeseen by payments professionals, who had predicted such a movement away from cash, but not at the speed the virus guidelines facilitated. In fact, due in part to the hygiene perks of contactless payment methods increasing its adoption, 50% of customers think that cash will disappear completely at some point in the future.
The unattended market was ahead of the pandemic in terms of contactless alternative payment method (APM) adoption, and it continues to upgrade its offerings to suit a wider range of industries. Nevertheless, the pain point for vending operators is that they’re often not sure exactly how these technologies work, or how to implement them. And with payments offerings constantly evolving, it’s becoming harder for vending operators to know which solution would be the best fit for their business.
As such, one easy way for vending operators to ease this load is to partner with a knowledgeable payments advisor who can not only provide the best solutions for their business, but guide them through the process and any need-to-knows. It’s also important to investigate the payments trends across the vending market, what the future might bring and what vending operators need to know about newer payments technology and the value it can bring to their unattended retail business operations.
Vending through the pandemic
Coronavirus has impacted the unattended market in various ways. In some cases, vending machine use has decreased as a result of lower footfall and closed premises. However, the nature of vending being self-service, for many it’s just been a case of upgrading systems to meet new guidelines and hygiene recommendations to start boosting their usage again. As cash usage decreased over the course of the pandemic, cards and APMs stepped in to provide a host of benefits, and as customers use and enjoy these seamless technologies, they are fast becoming the preference.
These developments have provided the opportunity for vending operators to embrace newer technologies which, although ultimately positive, can prove daunting if such retailers are not accustomed to working closely with payments. Fortunately, the vending market is in a great position to take advantage of new contactless technologies, being already low on human interaction and having 24/7 capabilities.
What’s more, the market can not only cater to consumers’ evolving needs, but it can also provide the flexibility and reliability that consumers are relying on as the world around them is changing. Many new technologies can also improve the general operations and management of vending, offering features such as easier on-the-go stock management and maintenance notification technology.
Keeping the consumer in mind
Consumers today want to enjoy the latest innovations and best-in-class customer experiences. These shoppers believe that self-service is a time-saver, and they also view cashless and contactless as faster and more seamless ways to pay – a fact which is reflected in the recent consumer demand for a wider variety of APMs. Customers now expect even more options to pay for their goods and services, from QR codes, to in-app payments and more.
Alongside the cashless trend, data-security and customer experience are two other factors driving the vending market evolution. With constantly evolving fraud developments in the online world, good security is more pertinent than ever, and has to be a central consideration to vending operators – as well as ensuring a seamless customer experience.
From a customer usage standpoint, mobile payments are becomingly increasing popular, as driven by the Gen Z market. According to our research, 63% of Gen Zers have said they would pay more for a mobile experience.
Trust and a good experience are also considerable factors across all customer groups, with 95% of customers claiming their loyalties lie with a company they trust, and 86% willing to pay more for a positive experience.
To appeal to ever-hungry consumers, vending operators need to provide the options they want. In the unattended market, this is relatively simple – not only do they provide a convenient and reliable method of payment for customers, but they also avoid face-to-face interaction. They can also supply a range of different products and accept a variety of payment methods to appeal to all customers, no matter their preference.
Using payments to drive revenue
Driving revenue is a two-pronged approach – you need to appeal to customers to keep them coming, and streamline operations to reduce overheads. In order to meet both parties’ expectations, it’s important to respond well to new vending challenges, taking note of the solutions that enable merchants to provide their customers with the payment methods they prefer.
Payments are complicated, so there’s no need to worry if you’re not hugely familiar with the offering out there, or unsure where to start – that’s where a payment service provider (PSP) can assist. With the expertise that a PSP brings, along with the technological solutions they offer, vending operators can improve customer journeys in all unattended environments.
Such technological solutions are flexible and can cater to specific business needs, while providing easy, quick, and secure payment methods that protect both the business and the customer’s personal data. They can also improve operational efficiency, increasing business performance with features such as real-time reporting and smart transaction management, to provide a best-in-class customer experience.
With smart devices, a secure gateway and advanced acquiring capabilities, PSPs can help vending operators design a flexible vending solution tailored to their individual and specific needs. To find out more about unattended retail and how your company can benefit from Ingenico’s unique expert knowledge, get in contact with Ingenico Enterprise Retail today at www.ingenico.com/smartselfvending.
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