By Lynn Sumlin, Director in the Financial Services division at Seal Software
As we begin to phase out Interbank Offered Rates (IBOR Benchmark Rates), including the London Interbank Offered Rate (LIBOR), the financial services industry faces a significant contractual shift. While there are numerous IBOR Benchmark Rates, LIBOR has been most commonly used interest rate benchmark in a wide variety of transactions, including credit agreements, bonds, and qualified financial contracts. As the reference rate for more than $100 trillion of financial products, LIBOR’s prevalence makes it a nearly universal contractual component. IBOR Benchmark Rates, including LIBOR, are being phased out by 2021 in favor of Alternative Reference Rates.
Unfortunately, the shift to the new rates is not a matter of simple substitution. The proposed Alternative Reference Rates vary from their IBOR predecessors in a variety of characteristics, including the existence of a robust market, tenor options, whether secured or unsecured and resulting accounting implications.
The IBOR phaseout is estimated to impact over $350 trillion worth of contracts. In order to effectively manage the transition, companies and financial institutions alike must review every aspect of their business that depends on any of the IBOR Benchmark Rates. Risk management and remediation are often time-consuming and costly, posing key challenges during the review process, however those processes will be crucial in the transition away from IBOR Benchmark Rates.
Contractual documents in the IBOR equation
Identification of transactions that are subject to the IBOR Benchmark Rates is the critical initial step. Companies and financial institutions must identify all legal documents with an IBOR Benchmark Rate implication in order to manage their transition. Importantly, some contracts may not include a specific IBOR Benchmark Rate reference but are related to an underlying IBOR Benchmark rate related contract. These contracts are important in the review because they often contain critical rate adjustment provisions. Financial institutions need to understand their contract landscape, in order to begin segregating contracts based upon factors such as expiration or tenor, identification of the form of IBOR Benchmark Rate, as well as potential rate adjustment or fallback options. The goal will be to segregate or triage existing contracts for risk prioritization review. Triaging the contracts into like groups will serve to streamline the remediation workflow.
A well-defined and cross-functional transition program is vital to remediation at this scale. Organizations must establish a governance structure across impacted business lines, allocate a budget, and identify clear workstreams for effective transition. Consequently, the success of an IBOR remediation workflow plan depends on an ability to clearly identify and understand the nature and scope of the impacted contract landscape, and the ability to efficiently take the steps needed to transition away from IBOR Benchmark rates. Organizations will be able to minimize risks and challenges through an established and clearly defined remediation program that allows for early engagement of contracting parties, regulators and industry associations.
As an example of the benefits of early review and triage, the identification and segregation of template contracts allows for an expedited and defined workflow to be put into practice. Template contracts, with and without modification, can be assessed now and pushed into defined remediation workflow process that can be implemented immediately. Expeditious segregation of those template-based contracts affords more time for dedicated review of contracts that require a unique remediation approach.
Each institution appears to have a unique approach to its remediation workflow. Some triage bucketing examples may include contracts expiring prior to 2021, meaning they will naturally go through remediation process prior to IBOR retirement. Additionally, contracts that identify a specific non-IBOR replacement benchmark, such as SOFR, SONIA or other Alternative Reference Rate, as well as those with a substitute rate determined by the administrative agent and borrower, must be evaluated. In some cases, contracts will specify conversion to a fixed rate, or they will be silent on determination of a replacement rate, and these also must be segregated.
Further, patterns may arise that will allow for a defined remediation workflow to develop. In order to have a successful remediation solution, institutions need a thoughtful remediation structure but will also need to be flexible to adjust as new patterns emerge and more clarity surfaces regarding use of Alternative Reference Rates.
Contract analytics in a well-managed transition
Contract analytics solutions, particularly those that employ advanced Artificial Intelligence (AI), accelerate contract review and remediation efforts of critical financial transactions. By identifying legal documents based on the presence of IBOR-related terms, these platforms can deliver insight and automation to streamline the IBOR review process. Best-of-breed solutions can identify and extract key IBOR-related topics from a wide range of financial transactions, including commercial credit agreements, derivatives and trading instruments, mortgages and bonds. They make it possible to recognize variance in standard contracting language, a capability that not only expedites the triage process, but also feeds directly into automated decision-making regarding replacement documents.
Moreover, AI can deliver additional critical insight with respect to the contents of financial contracts. For example, AI-driven contract analysis is adept at identifying contractual clauses and terms relating to the waterfall of rate adjustment provisions. AI can also be trained, in support of remediation decision-making processes in critical financial transactions, to find and extract organization-specific risk management terms.
By way of example, discerning whether an agreement contemplates an IBOR successor rate will allow management to quickly determine whether existing rate adjustment provisions provide sufficient guidance on replacement rates, or whether the contract must undergo an amendment or full repapering process. Another example of organization-specific terms relates to when that institution (or any of its related entities) serves as the Administrative Agent or Calculation Agent. This insight can provide further risk prioritization bucketing assistance as the institution is on notice that it has higher duties and obligations in those transactions.
The most effective AI tool for IBOR remediation will not only have a deep understanding of the key issues of concern and contract analytics in place for the IBOR remediation analysis, the most effective AI tool for IBOR remediation also will be flexible to incorporate new guidance, such as the ARRC or ISDA fallback language provisions as those provisions begin to be incorporated into relevant agreements. Additionally, the ability to create institution-specific contract analytics will significantly enhance the ability to efficiently review and triage contracts. An important goal of such a massive remediation effort is to tackle the steps to remediation in an efficient and clear manner.
Risk and opportunity on the horizon
While the phaseout of IBOR Benchmark Rates is clearly on the horizon, there is still much uncertainty about the use and effectiveness of the proposed Alternative Reference Rates. Even though the future of the rates and the related cost implications may remain unknown for some time, institutions are well advised to heed regulatory warnings to begin the contract landscape review now.
Beyond the contract landscape review, there are other widespread implications that each institution must assess, including customer outreach, information systems and strategies. Those assessments also will require heavy resources and time, thus another reason to make contract landscape exposure review as efficient and expeditious as possible through the use of AI contract analytics.
It is arguably mission-critical to build actionable insight from the data made available in the IBOR phaseout to minimize risk and maximize revenue. A smooth process, and one that avoids litigation or costly administrative burdens, will provide insight into contracts and lend certainty to the shift that lies ahead. Further, the work done today will better position the institution for the next regulatory shift. After years working in regulated industries, we can be certain that there is always another shift on the horizon.
Lynn Sumlin is a Director in the Financial Services division at Seal Software. With knowledge gained from more than 25+ years in the practice of law and the use of legal technologies, Sumlin has served in leadership roles as both an attorney and an expert in the use of advanced analytics for contract management and remediation. She is a graduate of the Fredric G. Levin College of Law at the University of Florida and Vanderbilt University.
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday
Mollie, one of the fastest-growing payment service providers, has revealed insights into the most popular payment methods used this Black Friday. The data, which provides a year-on-year comparison of 2019, shows that payment methods allowing customers to pay flexibly – like ‘pay later’ service Klarna – has more than doubled in 2020. The study spans 101,000 merchants across Europe, primarily from Germany, U.K., France, the Netherlands and Belgium.
Black Friday trends:
- In 2019, Mollie saw a 36% increase in the overall number of transactions on Black Friday versus the previous year. In 2020, this shot up to a growth of 56% on the 2019 numbers, representing a difference of 20%.
- And this year, even in the four days leading up to Black Friday, there was a 58% YoY growth in transactions.
- Use of ‘buy now, pay later’ services on Black Friday (such as Klarna or ClearPay) has more than doubled from 1% of all payments in 2019 to almost 2.5% in 2020.
- Use of mobile payment methods on Black Friday is consistent on the previous year – 0.20% in 2019 to 0.25% in 2020.
“There is a lot of pressure on consumers’ wallets at the moment, which is making people look to payment methods that offer them financial security,” said Ken Serdons, Chief Commercial Officer at Mollie. “It makes sense that fintechs like Klarna, who have performed phenomenally well this year, have been so popular this Black Friday. The increase is in-line with this growing trend towards more flexibility in how consumers pay for goods.”
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
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