By Neil Smith, Head of Issuer Sales & Partnerships, EMEA and APAC at Verifi
It seems that there is always a new, disposable buzz word being thrown around in the finance sector, but PSD2 is definitely not one of them. The introduction of this new financial regulation is a rare example of one that’s impact will be felt extensively across Europe’s financial services industry.
Building on the foundation of the first Payment Services Directive (PSD), which was originally adopted in 2009, PSD2 aims to better protect consumers when they pay online, promote the development and innovation of online and mobile payments including open banking, and make cross-border European payment services safer.
By September 2019, all companies within the EU must adopt the new regulations, which will also lower fees for payment services while encouraging more frictionless payment methods, such as mobile, voice, and fixed internet payment services.
While frictionless payments and greater choice are obvious benefits to customers, fighting fraud is the most urgent issue facing issuers and merchants. In the UK alone, almost three-quarters of a billion pounds were lost to financial fraud across payment cards, remote banking, and cheques in 2018, according to UK Finance.
More specifically, the Home Office and its National Audit Office found that between 2011 and 2016 there were 1.4 million incidents of card-not-present (CNP) fraud. The Home Office has said that by 2019 it “wanted to see a very significant reduction” in CNP fraud, even though it has not been able to quantify what reduction will meet its expectations because “it depends on the solutions.”
Can PSD2 be the solution that the Home Office is waiting for? Broadly speaking, the answer is yes. Customer security is one of the cornerstones of PSD2, requiring merchants to implement strong customer authentication (SCA), such as two factor authentication (2FA) to verify transactions.
PSD2 and merchants
Merchants will now be able to take online or mobile payments by drawing directly from a customer’s bank account. Since merchants will be able to securely access the customer’s bank account for payment, complex authentication processes at checkout might no longer exist nor be easily circumvented by fraudsters.
Both Visa and Mastercard are strongly encouraging banks and merchants to implement 3-D Secure 2.0, which allows biometric authentication and meets requirements of PSD2. In 2019, Mastercard will dictate that merchants must use biometric authentication, known as Mastercard Identity Check. In fact, both Mastercard and Visa will mandate 3DS 2.0 on a market-by-market basis, which will force merchants to support 3DS 2.0. 
The time for processing customer complaints has also been cut from eight weeks to 15 business days, so we can expect increased pressure on the chargeback process.
PSD2 introduces opportunities for new payment initiation service providers (PISPs) to bring products to market. With PISPs, customers have the option to make payments direct from their bank accounts, rather than using a credit card or debit card as an intermediary. This means that they lose the protection that their card schemes afford them, so PSD2provides protections to tip the scales in their favour, including:
- Legislation around the unconditional refund right which applies under SEPA Core Direct Debit scheme
- With regards to pre-authorisation of card payments, when the final amount is unknown in advance, the payee will only be able to ‘ring-fence’ funds on the payer’s account when the cardholder has approved the exact amount to be blocked
- Payment Service Providers must introduce dispute resolution procedures and will be required to respond to payment complaints within 15 business days of receipt
- Member States are required to designate competent authorities to ensure and monitor compliance within PSD2 – this is the FCA in the UK
Retailers also will not be able to enforce a contract term requiring payment of a banned surcharge. In fact, they must repay it. This could well lead to customers initiating chargebacks for the excess amounts via their card issuer. Can we then expect an increase in chargebacks? As the Home Office insinuates, only time will tell.
PSD2 and acquirers
For remote electronic card payments, acquirers can avoid using SCA if their fraud rate (unauthorised transactions/total transactions) is below certain thresholds. For transactions up to €100, frictionless flow is allowed if the acquirers fraud rate is less than 0.13%; for amounts up to €250, the acquirer’s fraud rate must be less than 0.06%; while for transactions up to €500 require a fraud rate that is less than 0.01%
These are certainly stringent requirements and achieving such low rates of fraud can be a challenge for many acquirers that lack the purchase details needed to legitimise the transaction.Therefore, acquirers cannot easily discern “friendly” fraud from “true” fraud. Since only “true” fraud will be used to determine fraud rate, distinguishing “friendly” fraud from “true” fraud will be essential practice, since higher fraud rates will likely result in an increase in SCA demand and decrease the conversion rate for merchants.
If the acquirer uses a Transaction Risk Assessment (TRA) exemption, they have not attempted to validate with the issuer, but instead have opted to conduct their own risk analysis on whether the transaction was performed by the cardholder. As such, if the transaction is disputed, the liability is with the acquirer since they have not asked the issuer for this additional level of validation.
PSD2 and the industry
Card brands such as Mastercard, Visa and American Express have already made great strides towards implementing PSD2. Mastercard has already set out concrete plans, for what it calls a “world, not only beyond cash, but beyond cards as well”with Mastercard Send, an account-to-account transfer service that does not use its traditional card processing system.
But card issuers are only one side of the coin. Given the rapidly approaching PSD2 deadline, the entire payments industry needs to urgently double down on its efforts to improve education and collaboration. From the issuers’ side, it is very important to implement all the exemptions to help customers smooth their transactions.
Implemented correctly, PSD2 will completely change customers’ relationships with their money, through a multitude of new services including personalised financial dashboards, lifestyle payment apps, and uniquely tailored financial products and services for each customer.
This is a unique opportunity for the payments industry to make a drastic change to the way it operates, and it cannot afford to miss it. Ensuring that all involved know and understand the revolutionary potential that PSD2 can provide it paramount. This regulation will impact all parties involved in payments from sharing the data of those customers that consent with authorised third parties, to delivering more vigorous safeguards against fraud, it’s a win-win for everyone.
Preparing for the new normal and building a financial plan
By Donna Torres, director of small business at Xero UK
There is some light at the end of the tunnel for small businesses. As the lockdown continues to ease many retailers and hospitality businesses are now opening up again, or preparing to return soon.
Preparing for what’s around the corner has always been key to business success. Whilst there is still much uncertainty, it’s more important than ever that businesses get in control of their finances and create a solid plan.
Having a strong understanding of your cash flow and a plan for the months to come is vital to helping you prepare for what’s ahead. If you’re unsure where to begin, here are five ways to start:
Financial experts Lauren Harvey (Founding Director of Full Stop Accounts) and Jonathan Graunt (Founder of accountancy firm FD Works and Xavier Analytics) recently spoke with Xero about the uplift in businesses taking an interest in their finances and understanding their financial position.
Businesses should be using this time to review their processes and really understand their numbers. It can be helpful to reflect on your original statement – what do you really want your business to do? And has the pandemic changed this? Use this as the fuel to drive your business vision forward.
Consider the risks
The government has provided SMEs with a number of support schemes, but the conditions and capital being offered is changing.
For example, the Furlough Scheme will currently only run until the end of October and the deadline to furlough new employees has now passed. The government will also gradually be reducing the amount it pays under this scheme. Make sure you’ve accountanted for this in your financial plan so you have a clear picture of how furlough tapering off will impact your business and any adjustments you might need to make.
If you’ve taken out one of the Government backed loans, now is the time to start building repayments into your financial plan. Building a solid plan will also help to ensure that you use the money in the best way to support your business in the long-term. It can be tempting to fight the most immediate fires with your capital, but try to think about the longer term health of your business – and where the money is going to have the most impact.
Adapting to a change in demand
Covid-19 has forced businesses to adapt to a lot of changes and SMEs should be thinking carefully about how their customer demand has changed. What do customers expect from you now? For example, many are still apprehensive of shopping on the high street. This might mean some of the options you offered during lockdown like deliveries or online services should remain.
Communicate with your customers as much as possible to get an accurate view of what they need from you now and in the future. How can you fulfil this? Then it’s important to look at the numbers and scrutinise which areas are going to provide the most return on investment.
Financial Planning: where to start?
For financial planning to be effective, it’s helpful to get into habits that will provide an accurate snapshot of how your business is performing. Reconciling bank transactions daily, creating a daily simple cash flow check-in habit and examining your profit and loss statements weekly will give you a better understanding of where your business stands.
Apps like Float or Fluidly will help to give you an accurate look at your cash flow in an easy to read visual. And the recently launched Xero Short-term Cash Flow tool can help you project your bank balance 30 days into the future, showing you the impact of existing bills and invoices if they’re paid on time. You can then work out which invoices you should follow up on.
Some people can find this task daunting, but your accounts aren’t just being kept for reporting to HMRC, they are also there to give you invaluable insight into your business and to plan for the future.
Ask for help
Your accountant is there to help you to understand your finances. This is likely to be one of the biggest economic challenges you have ever faced as a small business owner. Now, more than ever, it is time to lean on your accountant to help create a robust plan.
If you do not understand something, or need guidance or clarification, get in touch and ask for their expertise and advice. If their advice doesn’t help, ask them to explain it again.
You can also check out Xero’s online guide to managing cash flow here.
The impact and implications of Covid-19 on financial reporting
By Mark Billington, Regional Director, Greater China & South-East Asia, ICAEW
The economic consequences of Covid-19 have been unprecedented, affecting activity in nearly every country in the world. Indeed, the latest forecast from the Institute of Chartered Accountants in England and Wales (ICAEW) projects that most economies in South-East Asia (SEA) would fall into recession in the first half of 2020 and Gross Domestic Product will contract by 1.9 percent over the whole year. Across the region, governments have had to bring in various fiscal stimulus measures to protect the economy.
Exceptional times bring tremendous challenges for businesses and requires leaders to have a clear view on the short- and long-term effects of Covid-19 on their businesses, and to respond accordingly. This starts with taking extra care to recognise the impact of Covid-19 in financial reports, especially of events which have occurred between the balance sheet date and the date when the accounts are authorised for issue.
Distinguishing between adjusting or non-adjusting events
As the coronavirus outbreak continues to evolve and more information comes to light about the nature of the virus and its impact, companies with 2020 year-ends need to consider how it has affected their business and how the effects should be reflected in the accounts at the end of their reporting period. This boils down to distinguishing whether Covid-19 should be accounted as an adjusting or non-adjusting event.
In December last year, China alerted the World Health Organisation (WHO) to several cases of an unusual form of pneumonia in Wuhan, central China’s Hubei Province. But it was only early this year when substantive information on what has now been identified as coronavirus (Covid19) came to light. As a result, for companies with a 31 December 2019 year-end, Covid-19 is generally considered to be a non-adjusting event.
This changes for companies which have early 2020 year-ends, who will need to consider the timelines more carefully to assess the conditions at the end of their relevant reporting period. For companies with 31 March 2020 year-ends, Covid-19 is likely to be considered a current-period event, which means that companies need to assess and record all events and conditions that existed at or before the reporting date. When it is determined to be an adjusting event, a business will need to review all areas of the accounts that might be adversely affected by the COVID-19 virus.
There may be a greater degree of judgement required when identifying the conditions at the end of the reporting period, and a closer assessment needed of whether developments are adjusting or non-adjusting.
Exercising judgement about conditions at the balance sheet date
Companies have to exercise significant judgement to determine the conditions that existed at the balance sheet date. This is heavily dependent on the reporting year end in question, the company’s own individual circumstances and the events which are under consideration.
A number of factors should be considered when making judgements about conditions at the balance sheet date. This includes the timing and impact on stakeholders such as staff, customers, and suppliers, of travel restrictions, quarantines and lockdowns, closure of businesses and schools; and government support initiatives. With each of these events, companies have to determine whether an event shines a brighter light on conditions at the balance sheet date or if conditions changed after the reporting date.
This evaluation in financial reporting is important because it affects the forecasting of future income and cash flows, which are based on conditions that existed at the balance sheet date. Estimating recoverable amounts might be very different for the same asset if the calculation was performed for a 2019- or 2020-year end.
Upholding values of corporate transparency and trust
In these times of uncertainty and crisis, it is even more important to be transparent about risks and assumptions used in financial reports, and to make disclosures as specific to the business as possible, to avoid the risk of financial reporting being downplayed. In fact, market regulator Singapore Exchange (SGX) and rating agency Fitch Ratings have recently cautioned companies against using alternative performance measures such as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports to flatter results, and stressed that “disclosures must be balanced and fair and avoid omission of important unfavourable facts”.
More than ever, businesses must continue to diligently uphold values of corporate transparency and trust and continue to disclose transparent and quality information to investors and other stakeholders. In order to do this, directors are tasked with the important responsibility to comply with various reporting standards and understand the circumstances of particular disclosures to provide a fair and balanced assessment of the company’s financial position and performance.
Covid-19 also has significant implications for audit reports on company financial statements. Preparing and auditing financial statements poses tough calls in difficult and unclear circumstances for directors and auditors. It is vital that these uncertainties are interpreted appropriately and in the context of the current unprecedented circumstances
As the business impact of COVID-19 continues to unfold and affect economies and the future of many organisations, businesses should continue to consider both their situation but also the wider economic landscape they operate in and reflect that in their financial reports.
 SGX warns against use of ‘earnings before coronavirus’ metric, The Business Times, 27 July 2020
Akerton Partners S.L. is a Spanish independent mid-market corporate finance advisor founded over a decade ago, in 2008, amid a global financial crisis. A group of professionals with extensive industrial and financial experience, decided to start providing clients with the value added necessary in situations where specialization, experience, commitment and know how make the difference. The firm specializes in providing financial advice to companies, their shareholders, investors, and lenders.
Akerton´s team has an extensive business background, which allows them to understand client´s needs as well as put itself in their shoes to reach the most appropriate solution under all available options in the market. Since one size does not fit all, Akerton tries not only try to find a good solution but ensure that it is the best one by performing a deep analysis of the company and its financial situation. Each case needs to be considered independently and from a variety of angles in order to identify and execute original and feasible solutions. A simple or single solution is not Akerton’s aim. Their independence and motivation for establishing long-term relationships with clients, allow them to always place their interests before their own, something that eliminates barriers and creates lasting relationships.
Currently, Akerton offers its services through the below business units:
Financing services to borrowers, investors, and creditors, on the design, structuring, negotiation, follow up, and control of long and short-term financing, including raising, refinancing, and renegotiating debt:
- Debt refinancing and restructuring.
- Finding and obtaining financing via debt or equity (corporate, leveraged, subordinated, mezzanine, direct lending, sale and lease back option, amongst others), Public incentives.
- IBR’s and NPL’s portfolios analysis
- Debt acquisition
Financing department represents 170 closed deals, 6 transactions under management and more than 2.272 M€ of debt amount.
Corporate finance, to corporates, private equity, family offices, and family businesses on all aspects of buy-side and sell-side, as well as the rendering of services related to financial strategy, business plan elaboration, business valuation and interim management in connection with budget and business plan compliance:
- Mergers and acquisitions (M&A): acquisition of company or asset, partners search, divestments of company, strategic alliances…
- Valuation: assessment of businesses or companies, earn outs and deferred payments schemes under a traditional process, valuation of companies in the framework of a debt portfolio acquisition process.
- Strategy: management continuity plans, strategic and business plans, management support to reach goals.
Corporate finance line represents 38 closed deals, 11 transactions under management and more than 570 M€ value.
Expert Advice and Due Diligence on processes and transactions requiring the verification and ratification of economic, financial, and accounting information including Financial Due Diligence in sale or purchase transactions (provided Akerton Partners is not the advisor of one of the parties to avoid a conflict of interest); as well as the elaboration of expert and economic reports in order to support law-suits and disputes:
- Financial due diligence for M&A transactions.
- Counselling for the defense and analysis of opposing expert reports, and elaboration of adversary expert reports.
- Economic reports for disputes and arbitrations and their ratification.
- Reports: validate CAPEX, economic ratios, PPA process, Impairment Test.
This line represents 196 closed deals and 9 transactions under management.
Real Estate and Infrastructures, for companies, investment funds, SOCIMIs and Family Offices to evaluate Real Estate assets by analyzing their portfolios and investment alternatives, granting differential and extra elements that add extra values:
- Analysis of Real Estate portfolios, projects and its development.
- Demand due diligence
- Market studies
- Operating and strategic planning and feasibility analysis
This business line represents 49 close deals, 4 transactions under management, 0,6M certified parking spaces and more than 1.2B€ revenue amount.
Public incentives, in the form of non-refundable grants, reduced or zero interest rate loans, as well as the application of deductions and exemptions in the Corporate Income Tax for R&D&I activities, transference of know-how or investments in assets, including those with an environmental improvement component.
- Grants/ subsidies
- Fiscal deductions
- Transfer of know-how: identification and quantification of R&D&I costs and design and implementation of transfer processes.
Team values are applied in every job, taking the best expertise of each individual to obtain a final global output. Counting on a multidisciplinary team enables to provide a global solution throughout the entire operation. Akerton’s professionals have developed a strong reputation based on experience, dedication and integrity, and its in-depth knowledge and longstanding experience in the industrial field allows them to have a rapid understanding of any client’s issues.
One of the main values Akerton owns is that its independence allows the company to put its clients’ interests first, above all other considerations, which let them remove any barrier and create continuous relationships with them. There are no restrictions, conflict of interest or other constraints to identify the best opportunity during the process in a closely and congruent way, in accordance with client’s objectives and until achievement of financial close (turnkey contract).
Routine is not an option at Akerton. Commitment is other of its main values that is important to highlight. The firm builds a differential relationship of closeness and trust with its clients, able to maximize process achievement. And success as advisors is closely linked to client success.
As previously stated, Akerton was born during a financial crisis and it is important to mention that the company is living a second one, despite its short life, as a consequence of Covid-19. Nonetheless, the firm has rapidly adapted to this new environment, implementing all necessary measures to avoid business interruption such as working remotely and supporting its clients through different alternatives such as measuring financial impact of Covid, analyzing short term liquidity, providing mitigating factors or identifying all available financing tools such as managing and requesting “ICO loans”.
Once more, and additionally to the above features of the firm, Akerton shows its strong spirit as a corporate finance company, able to successfully overcome financial crises and add value to clients.
In order to find out further details of Akerton Partners, the following website can be visited: www.akerton.com.
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