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The Next 5 Years: Innovation in Treasury and Finance, "Where are the Dragons?", Bank of America Merrill Lynch

Patrick Peters-Buhler, Director of GBS at Bank of America Merrill Lynch, gave a presentation on the future of cash management over the next five years. He discussed two main trends - developments in innovation including increased use of mobile payments, straight-through processing, and decisions around centralization and outsourcing. The second trend is developments in regulation such as SEPA standardization, digital invoicing, and increased IRS oversight of cash management. Peters-Buhler said treasurers should not be intimidated by the uncharted landscape and that opportunities exist within regulations to drive efficiency and add value.

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Financial Forecasting and Planning Summit, IE Group Patrick Peters-Buhler, Director GBS, BofAML Omni Hotel, 24 February 2012, San Diego, California
2 Hic Sunt Dracones
3 ….Hic Sunt Dracones… … Here Be Dragons! Why Dragons? In Medieval Times many navigational maps were intimidating their users not to go beyond the known by writing : Hic Sunt Dracones: or “Here be Dragons” on the corners of the map… …to warn the users of the maps that they might be entering in unchartered and dangerous territories… For treasurers… the same will happen…the next five years will be unchartered terrain and often involve incomplete maps…but rather than finding dragons, we will find innovation, more controls, regulation and compliance, but even in regulations there will be opportunities for efficiency, and for adding value…
4 What are we talking about today? Short Introduction – Speaker and GBS Where is cash management heading in the next 5 years? Two Broad Trends in Treasury ….(and many imaginary Dragons) Trend 1. The Developments in Innovation I.  SWIFT… the internationalization continues, II.  Mobile Payments & Receivables III.  STP and HTH IV.  Decisions on Centralization and Outsourcing Trend 2. The Developments in Regulation I.  SEPA and other standardization II.  Digitalization and Electronic Invoicing III.  The IRS enters Cash Management Managing the Future … is Managing Innovation and Managing Regulation. Don’t be intimidated by the unchartered roadmap of the next 5 years!
5 Introduction Patrick Peters-Buhler Patrick has been involved in treasury management and capital markets for over 15 years. His experiences includes positions as a CFO, Director of Finance, Interim Manager, General Manager and as a Corporate Treasurer in 8 countries in global industries including Pharmaceuticals, Food Ingredients, Consumer Products, (Retail and Direct Selling) Manufacturing, and Financial Services. Patrick joined BofAML in 2011 after a Career in the US and several Latin American Countries, Including Mexico, Argentina, Uruguay, Peru, Chile and Colombia. He is a Certified Treasury Professional by the AFP. He has been chairing and participating in Conferences in LATAM, USA and Europe on issues of Treasury, Liquidity Management, Cash and Risk Management, among others with Eurofinance, EI Group, FIBA and IQPC. He is a Senior Tutor for Eurofinance for Treasury and Risk management Courses in the Americas and Europe. He was a contributor to the Economist Intelligence Unit (EIU), and taught at Universities in New York, Lima, Buenos Aires and Mexico City. He has been the President of the Latin America Treasury Association. Patrick, a native of the Netherlands, has lived 25 years abroad, holding Degrees from The Free University of Amsterdam, Johns Hopkins University (SAIS - School of Advanced International Studies) and has attended Post Graduate Studies at the London School of Economics, London, UK, and The “Instituto Universitario Europeo in Florence, Italy. He is based at the Miami and Mexico City Offices of BofAML.
6 Introduction GBS Patrick works for the Global Business Solutions Group of Bank Of America Merrill Lynch.   What is Global Business Solutions? -  A value added offering for select strategic clients beyond products and services -  Focus on client’s strategic priorities, core business processes and significant pain points -  Something we do with clients instead of something we do to clients   What it is not: -  A traditional fee based consulting team -  A focus on products and services Combining Process Improvement, Practitioner and Industry Expertise, the GBS team focus on strategies and processes to optimize Client’s working capital objectives Practitioner Expertise Global Business Solutions   Client Benefits:   Objective, fact-based, process improvement approach   Integrated solutions including infrastructural process improvements, not just products and services   Advice and counsel — a partner and trusted advisor   Improved operating efficiencies and cost reductions   Bank of America Merrill Lynch Benefits:   Build stronger relationships with clients   Gain knowledge of client’s business and needs   Strengthening and differentiation of BAML brand   Catalyst for new product innovations and industry leadership
7 Where is Cash Management heading in the next 5 years? … more Innovation and Regulation.
8 Where are we? Where are we Going? Traditional Business ModelTraditional Business Model Business Transformation Globalisation Centralization Treasury and Business Functions ■  Global / regional treasury centres ■  Shared services centres ■  In-house banks ■  Payments factory Technology Initial Business Integration ■  Overlay cash concentration structures ■  Local pooling Centralized Management ■  Integrated information delivery ■  Cash forecast and requirements ■  Asset tracking and investment ■  Credit performance Optimal Working Capital Mgmt ■  Receivables management ■  Accounts payable financing ■  Tax efficiency ■  Outsourcing Towards a World Class Treasury…
9 The Aite’s Top 10 Trends in Wholesale Banking for 2012: 1.  THINK GLOBAL 2.  Increased investment in cash management and supporting technologies 3.  Implementation of next-generation corporate portals 4.  Supply-chain-finance automation and the role of banks 5.  Focus on the customer experience 6.  New treasury management systems (treasury intelligence management systems) 7.  Connecting with small-business customers 8.  Improvement of the payments process 9.  Continuation of business-financing challenges 10.  Concerns about liquidity management Source: Aite Top 10 Trends in Wholesale Banking, 2012. Aite is an Independent Research Firm Six of them are directly related to Core Cash-Management and Treasury
10 Trend 1. The Development in Innovation, (and the transformation of Communication. We see several tendencies in innovation that will become important for Treasury over the next years. The main ones are : 1.  SWIFT … the standardization continues. 2.  Mobile Payments and Receivables 3.  STP and HTH 4.  Decisions on Centralization and Outsourcing
1. SWIFT … the Standardization continues.
12 What is SWIFT? A co-operative organization serving the financial industry A provider of highly secure financial messaging services The financial standardisation body
13 e-banking Y host to host X e-banking Z VAN “fax-banking” Internet leased line PSTN Corporate Accounts payable Accounts receivable Treasury Other Typical corporate-to-bank messaging
14 SWIFT: A secure, standardised global window Accounts payable Accounts receivable Treasury Other CORPHRFF Middleware SWIFTNet
15 Who participates in Swift and Where?
2. Mobile Payments & Receivables
17 A. Mobile Payments and Alternatives to Receivables  Every day we will see more mobile transactions, different types of interfaces and we will move away from the traditional Bank Branch into cheaper, faster and less manual solutions. Many of these solutions will be mobile. Cost savings will be a main driver for change.
18 B. Non-traditional plastic will bank non-traditional groups… We will see the development toward alternative plastic solutions. Even those who have no traditional bank account will receive plastic rather than paper or cash. The digitalization of payments and receivables will increase in the next years. Everything that requires manual handling will become (relatively) more expensive. Pricing of bank products will reflect more the underlying cost. This includes disposable cards, gift cards, stored value cards, payroll cards and Direct Debit cards. This tendency is still lagging in the US, but becoming evident world wide. Most European Countries no longer accept checks as legal tender.. In the US the check overstayed is economic life cycle due to the absence of a high volume system for low value electronic payments, and cross subsidies in the consumer market.
19 C. Cash & Check Deposits will be automated… We will see more intelligent “Inverse ATM’s”, Cash deposits will not only become mobile, but “Mobile” receipts & deposits will become the dominant payment format.
20 … Innovation or Creativity?
3. Straight-Trough-Processing and Host-to-Host
22 How do we improve security of transactions and obtain better information? What is Straight Through Processing? “To Functionally link two or more systems, so that they transparently behave as “one” to the End User” STP Concepts are applied beyond Trade Execution • Improve Efficiencies – shorten processing cycles • Reduce Operational Risk • Minimize Operational Costs To better plan and feed the data in the banking system, and initiate payments, it is preferable to use Straight-Through-Processing (STP) from the ERP rather than manual payment file entry. This way the information quality improves. Companies often use a single-file to transmit multiple batches of multi-currency instructions to the bank and receive corresponding electronic delivery acknowledgements and statement information. STP allows: •  Efficiency– Expedite file integration and improve STP •  Standardise – Adopt one global standard (ISO 20022 XML) for payments and receipts •  Leverage SSC processes and control systems •  Control – Allow file authorisation direct from SAP or via a web browser. •  Perform – Execute all foreign exchange payments/settlement efficiently 22
23 The keys to the Money... With all their security risks
24 Retail broker HTML/XML, Streaming, Wireless Private investor Corporate treasurer Clearing & settlement Order mgmt Market data mgmt Accounting Trade capture Proprietary systems Risk mgmt Credit mgmt Portfolio mgmt In-house dealers Typical situation … Before BPM
25 … and the STP Vision with BPM Enterprise Application Integration Portals B2B Integration Business Process Management Sales, Customers, etc. Front / mid / back office ERP, manufacturing, Databases etc. Accounting, Payment CRM etc.
26 Enterprise drivers for STP: FAILS RISK COSTS Improving Control •  Reduced operational risk •  Reduced capital allocation •  Greater understanding of Issues & hotspots Reducing Cost •  Reduced manual effort •  Increased effectiveness Enabling Delivery of Great Customer Service •  Provide greater accuracy •  Increase customer satisfaction •  Improve customer relations
27 The STP Vision  Seamless communication among parties  Concurrent, not sequential, exchange of information  Significant real-time processing, less batch processing  Virtual processing, not physical processing  Reduces operational risk   Reduces settlement risk   A catalyst for change  improvement of lower cost structure  more efficient market process and infrastructure
4. Centralization and Outsourcing
29 Companies have to define the “Culture” of their Treasury “Business” Model ”A Treasury Model” is often their definition on Centralization and Outsourcing What is the tendency among MNC? Centralization. •  ”Payment On Behalf Of” •  ”Receipt In Favor Of” •  ”Sender” and ”Ordering party” not necessary the same legal entity •  Central responsibility for bank interfaces Outsourcing. •  ”Shared Services Center”, •  ”Payment Center” or •  “Treasury Center Standardization • Common in this process: • Standardized payment process • External format (different internal) • External communication and security solution Central administration Central Processes Central bank interfaces
30 Models: Centralisation vs Decentralisation CentralizedDecentralized Decentralized Centralized Responsibility Transactionexecution Infrastructure & Organization central Decisions and processes are decided locally Full autonomy Central policies and Directives mandatory Local processes To comply with central policies and directives Full centralization of Policies, infrastructure And processes
31 Normally, House Bank as deposit and transaction “mirror”… Sub 1 Local bank account Sub 2 Local bank account Sub 2 Local bank account Bank 1 EUR Bank 2 USD Bank 3 Currency x Customers Suppliers,Personal,Tax,Owners Corporate Internal Clearing and reconciliation of internal payment Sub 1 Internal account Sub 2 Internal account Sub 3 Internal account Central payment and sweeping vehicle
32 With an In-House bank  In-House Bank – Group treasury acts as primary source of all banking services, to operating units at arms length – Offsets exposures and perform net transactions with banks – Includes normally:  Foreign exchange  Liquidity management  Cash pooling  Netting In House Bank
33 Degree of centralization  Shared service center – Centralized transaction processing using economies of scales from similarities in processes – Local business defines processes – Central administration carry out tasks – Functionality  Accounting  Accounts payable  Accounts receivable  Parts of human resources (payroll, pensions)  IS/IT  (Treasury) Shared Service Center
Second Trend: The Developments in Regulation Why regulation might help Treasury in the Next Five years..
35 Trend 2. The Developments in Regulation
1. SEPA European Standardization might just work….
37 SEPA is The Singe European Payments Act, focused on completion, Open Standards and Efficiency. Mandated by the European Parliament, the European Commission & the European Central Bank Intended to complete the currency union, removing barriers to cross-border transactions A key initiative in European economic and financial integration Developed through significant collaboration between the banks.
38 History of SEPA Regulation #2560/2001 of the European Parliament Implementation and deployment Schemes piloted. Clearing Houses began developing strategies to respond to SEPA Euro launched and adopted by 12 EU member states European Payments Council (EPC) created The vision of SEPA was conceived Scheme design and preparation Overall SEPA framework developed, comprising three schemes. SEPA Credit Transfer launched SEPA Cards Framework also takes effect PSD takes effect SEPA Direct Debit (soft launch) SEPA Direct Debit (mandatory) Discussions begin about demising national clearings End date of 2012-13 recommended by European Commission 2000 2003 2002 2004-6 2005-8 2008 2010 2010 2009
39 SEPA adoption rates 0-2% 2-10% 10-20% 20-40% 40-70% >70% 0-2% 2-10% 10-20% 20-40% 40-70% >70% Euro countries Non-Euro countries Number of SCTs Percentage = _____________________________________ Number of all SEPA-eligible credit transfers Source: CapGemini
40 SEPA complements key treasury trends Centralisation Standardisation and interoperability Rationalisation of relationships Systems integration Pathway to a single account, in a single location. Natural balance consolidation. Common instruments and technical standards, standardised clearing, settlement and value dating; harmonised legal basis. Potentially no need to maintain local banking relationships. All 32 countries reachable to/from a single location. ERP vendors have invested in response to SEPA. Single file format. Facilitates automated reconciliation. Improvedefficiencyandscale
41 Real benefits Reduce the number of Euro accounts Reduce payments fees Enter new markets without large capital costs Automate resources; redploy resources Harmonise procedures Improve STP (and reduce cost of repairs) SEPA will be mandatory; inaction has its cost
42 SEPA Advantages Same-day value on SEPA Credit Transfers initiated before 09:30 (CET) Countries where you can domicile your SEPA account Countries that can be reached by SEPA instruments Cut-off times Transaction type Cut-off time (CET) Value Date SCT bulk file 09:00 Day 0 SCT CashPro or SWIFT 11:45 Day 0 SDD B2B scheme 17:00 2DP Day 0 SDD Core scheme First collection 17:00 6DP Day 0 SDD Core scheme Recurring or final collection 17:00 3DP Day 0
2. Digitalization of Payments and Electronic Invoicing How EIPP might help treasury in the next Five years..
44 2. Electronic Invoicing, Payment and Presentment  While Electronic Invoicing, Presentments and Payments (EIPP) are common in many countries, they have not become the Standard in BtC and BtB because of the lack of Critical Mass.  The main force behind Electronic Invoicing now are Governments, and specifically the Tax Authorities, requiring and aiming at: – more compliance, – avoid tax evasion, – obtain easier and better control, and – Allow for easier review and audit.  In many countries Tax Authorities are now phasing out paper invoices and will make E- Invoicing and EIPP compulsory,  While initiatives take place everywhere, Latin America is leading, with Brazil, Peru, Chile and Mexico at the Forefront. Mexico is phasing out deductibility of paper invoices this year. 44
45 What is EIPP? •  Statements or bills rendered on Web (1) •  Multiple bills consolidated at one site (2) •  Customers visit the site to view bills (3) •  Customers review bills, schedule payments (4) •  Remittance information returned to biller (5) •  Payments routed from customer's bank to biller’s account (6)
46 AOP, Payment Invoice No.Payment No. Ship & Invoice PO No.Invoice No. Purch Order PO No. This is a “No-Manual-Touch” process..! Purchasing" Dept." Accounts" Payable" Receiving" Dept." Sales" Dept." Accounts" Receivable" Shipping
 & Invoicing" Dept." Buyer" Seller"
47
3. The Tax Authority enters cash management*… *actually they have always been there and never left…
49 The IRS enters cash management.. Actually it has always been involved in Treasury..… So, what should a Treasurer look for in the next years… 1. Withholding Tax on Interest, Dividends and Royalty. - The Fear for tax havens and under-taxation - 2. Capital Control and Convertibility issues 3. Money Laundering Compliance. 4. Financial Transaction Tax: The recently intensified discussions about taxing financial transactions, (which is increasingly politically popular, but very disruptive to Cash Management….) 49
50 1. Withholding Tax on Interest, Dividend and Royalty  Tax and Treasury always work together…  With Liberalization of Trade, and general acceptance of Transfer Price Studies based on OECD Guidelines, more countries are now focusing on multinational tax income rather then on import duties. TPS are annual obligations for MNC in most countries.  Withholding Tax Planning, and Compliance, is an important part of treasury work, including setting up systems to obtain evidence of credits for parents or subsidiaries. This remains often paper based, and labor intensive.  Tax Departments often direct Interest, Dividend and Royalty to different jurisdictions, based on preferential treatment and Tax Treaties for each category.  Most of these withholdings are subject to Thin Capitalization, Transfer Prices, Arms Length Rules, Marked to Market Rules and Residency or Non-Residency.  The Treasurer has to comply and provide a paper or digital trail. With governments short on cash worldwide, audit’s will become more sophisticated.
51 2. Capital Controls, Convertibility  Many Currencies are not Convertible.  You can not cash pool into Cash Concentration non convertible currencies, like the Chinese Yuan, Indian Rupees or Brazilian Real.  There are even serious restrictions in pooling US Dollars in Cash Pools, when located in ZBA or “Notional Pooling Restricted Countries” (Like LATAM)  Non-Convertibility. The currency has no transaction value outside the country. Payment abroad with this currency is not allowed.  Sometimes it’s restricted and you can only under certain condition export, pay or trade in these currencies. Non-Convertible Currencies do not necessarily have to be pegged currencies, they can be floating.   Capital Controls are different, and also possible with convertible currencies. Basically it means you have to ask the central bank permission to export the domestic currency, or give a reason for requiring foreign currency.  Both issues are becoming more important with an internationalizing world, while governments have the last 5 years become more restrictive.  All require enhanced Liquidity Planning. A less advanced ZBA Cash Pool
52 3. Money Laundering  The Office of Foreign Asset Control is based in the Department of Treasury.  Banks, not only US banks, are required to report any international transaction over 10.000 and suspicions transaction under that amount (…say 2 x 5,000 or 9,999).  Normally MNC are not suspected of drugs of terrorism money, or money laundering, but many transactions can be scrutinized for Tax Reasons. –  Not only focused on Terrorism Money or Drugs Money… Tax Evasion is as important. –  In foreign countries incoming Intercompany Money has to declared within a certain category: –  Capital, Dividends, Short and Long term IC Loans, and Commercial Intercompany Transactions. –  All categories have Different Taxation.  Main solution for treasury of any normal MNC: Compliance. –  Have always all documentation in order –  Prepare to comply with Audits –  Be able to show the legal or commercial reason behind any IC transaction. –  Especially non-commercial intercompany transaction sare subject to scrutiny Bottom-line: your obligation is to know what your paying, and why. …and have a paper or electronic trail. The good news is that this obliges companies to have their processes in order…which is good business anyway!
53 4. The Financial Transaction Tax
54 4. Financial Transaction Tax.  Financial Transaction Tax (FTT) are not new. They started in the United Kingdom as the Stamp Tax in 1694, and existed in the UK until 2003. Keynes Proposed in the 1930’s to lessen speculation on Wall Street.  However they become commonplace in the last 10 years, as a new source of revenue, especially outside the OECD. Many countries currently have a kind of FTT, Stamp Tax, or Tax on Cash, Checks or Electronic Transactions.  For treasurers it effectively kills the benefits of a zero Balance cash pool. (Notional pooling is not affected)! Especially in an environment were interest rates are very low and liquidity is abundant.  A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.  In many countries the tax is a credit to general income tax. In Mexico this is the case on the “Cash Deposit Tax”, in Peru on the “Debit and Credit” transactions tax. In other countries the tax is eliminated when the money becomes long term rather then speculative or short term. (often after 1 year)  In many jurisdictions where an FTT is introduced you see increased payments in Cash and Netting.  The FTT is likely to become a mayor issue for treasurers in the next 5 years.  Although the cost can easily be back charged to customers, the accountancy issues, the compliance issue and the planning issues will require to be involved in detail.
55 Summary  Regulation: The future is bright: even Regulation and government intervention bring new standards and opportunities like the SEPA and the Electronic Invoicing EIPP.  Strengthen Compliance, and fiscal regulation requires good housekeeping, improved and streamlined processes and further innovation in the next years.  Innovation will be Mobile, will be Host to Host, and only core value added activities will stay in- house, all others will be Outsourced or Standardized. For Treasurers the Future looks Bright, there should not be uncertainties to navigate in uncharted waters…. Hence, there are no dragons on the still unchartered map….. 55
56 Hic Sunt Dracones
57 “Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker‑dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered (the “Company”) in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. These materials are based on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise reviewed by us. We assume no responsibility for independent investigation or verification of such information (including, without limitation, data from third party suppliers) and have relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the managements of the Company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar with the business and affairs of the Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materials are not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security in connection therewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared with a view toward public disclosure under applicable securities laws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without our prior written consent. These materials may not reflect information known to other professionals in other business areas of Bank of America Corporation and its affiliates. Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and strategic advisory services and other commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, potential counterparties or any other company that may be involved in a transaction. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America Corporation. We have adopted policies and guidelines designed to preserve the independence of our research analysts. These policies prohibit employees from offering research coverage, a favorable research rating or a specific price target or offering to change a research rating or price target as consideration for or an inducement to obtain business or other compensation. We are required to obtain, verify and record certain information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company in accordance, as applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States. We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to any such tax statement in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support the promotion or marketing of the transaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor. Notwithstanding anything that may appear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2012 Bank of America Corporation. Notice to Recipient

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The Next 5 Years: Innovation in Treasury and Finance, "Where are the Dragons?", Bank of America Merrill Lynch

  • 1.
    Financial Forecasting andPlanning Summit, IE Group Patrick Peters-Buhler, Director GBS, BofAML Omni Hotel, 24 February 2012, San Diego, California
  • 2.
  • 3.
    3 ….Hic Sunt Dracones…… Here Be Dragons! Why Dragons? In Medieval Times many navigational maps were intimidating their users not to go beyond the known by writing : Hic Sunt Dracones: or “Here be Dragons” on the corners of the map… …to warn the users of the maps that they might be entering in unchartered and dangerous territories… For treasurers… the same will happen…the next five years will be unchartered terrain and often involve incomplete maps…but rather than finding dragons, we will find innovation, more controls, regulation and compliance, but even in regulations there will be opportunities for efficiency, and for adding value…
  • 4.
    4 What are wetalking about today? Short Introduction – Speaker and GBS Where is cash management heading in the next 5 years? Two Broad Trends in Treasury ….(and many imaginary Dragons) Trend 1. The Developments in Innovation I.  SWIFT… the internationalization continues, II.  Mobile Payments & Receivables III.  STP and HTH IV.  Decisions on Centralization and Outsourcing Trend 2. The Developments in Regulation I.  SEPA and other standardization II.  Digitalization and Electronic Invoicing III.  The IRS enters Cash Management Managing the Future … is Managing Innovation and Managing Regulation. Don’t be intimidated by the unchartered roadmap of the next 5 years!
  • 5.
    5 Introduction Patrick Peters-Buhler Patrickhas been involved in treasury management and capital markets for over 15 years. His experiences includes positions as a CFO, Director of Finance, Interim Manager, General Manager and as a Corporate Treasurer in 8 countries in global industries including Pharmaceuticals, Food Ingredients, Consumer Products, (Retail and Direct Selling) Manufacturing, and Financial Services. Patrick joined BofAML in 2011 after a Career in the US and several Latin American Countries, Including Mexico, Argentina, Uruguay, Peru, Chile and Colombia. He is a Certified Treasury Professional by the AFP. He has been chairing and participating in Conferences in LATAM, USA and Europe on issues of Treasury, Liquidity Management, Cash and Risk Management, among others with Eurofinance, EI Group, FIBA and IQPC. He is a Senior Tutor for Eurofinance for Treasury and Risk management Courses in the Americas and Europe. He was a contributor to the Economist Intelligence Unit (EIU), and taught at Universities in New York, Lima, Buenos Aires and Mexico City. He has been the President of the Latin America Treasury Association. Patrick, a native of the Netherlands, has lived 25 years abroad, holding Degrees from The Free University of Amsterdam, Johns Hopkins University (SAIS - School of Advanced International Studies) and has attended Post Graduate Studies at the London School of Economics, London, UK, and The “Instituto Universitario Europeo in Florence, Italy. He is based at the Miami and Mexico City Offices of BofAML.
  • 6.
    6 Introduction GBS Patrick worksfor the Global Business Solutions Group of Bank Of America Merrill Lynch.   What is Global Business Solutions? -  A value added offering for select strategic clients beyond products and services -  Focus on client’s strategic priorities, core business processes and significant pain points -  Something we do with clients instead of something we do to clients   What it is not: -  A traditional fee based consulting team -  A focus on products and services Combining Process Improvement, Practitioner and Industry Expertise, the GBS team focus on strategies and processes to optimize Client’s working capital objectives Practitioner Expertise Global Business Solutions   Client Benefits:   Objective, fact-based, process improvement approach   Integrated solutions including infrastructural process improvements, not just products and services   Advice and counsel — a partner and trusted advisor   Improved operating efficiencies and cost reductions   Bank of America Merrill Lynch Benefits:   Build stronger relationships with clients   Gain knowledge of client’s business and needs   Strengthening and differentiation of BAML brand   Catalyst for new product innovations and industry leadership
  • 7.
    7 Where is CashManagement heading in the next 5 years? … more Innovation and Regulation.
  • 8.
    8 Where are we?Where are we Going? Traditional Business ModelTraditional Business Model Business Transformation Globalisation Centralization Treasury and Business Functions ■  Global / regional treasury centres ■  Shared services centres ■  In-house banks ■  Payments factory Technology Initial Business Integration ■  Overlay cash concentration structures ■  Local pooling Centralized Management ■  Integrated information delivery ■  Cash forecast and requirements ■  Asset tracking and investment ■  Credit performance Optimal Working Capital Mgmt ■  Receivables management ■  Accounts payable financing ■  Tax efficiency ■  Outsourcing Towards a World Class Treasury…
  • 9.
    9 The Aite’s Top10 Trends in Wholesale Banking for 2012: 1.  THINK GLOBAL 2.  Increased investment in cash management and supporting technologies 3.  Implementation of next-generation corporate portals 4.  Supply-chain-finance automation and the role of banks 5.  Focus on the customer experience 6.  New treasury management systems (treasury intelligence management systems) 7.  Connecting with small-business customers 8.  Improvement of the payments process 9.  Continuation of business-financing challenges 10.  Concerns about liquidity management Source: Aite Top 10 Trends in Wholesale Banking, 2012. Aite is an Independent Research Firm Six of them are directly related to Core Cash-Management and Treasury
  • 10.
    10 Trend 1. TheDevelopment in Innovation, (and the transformation of Communication. We see several tendencies in innovation that will become important for Treasury over the next years. The main ones are : 1.  SWIFT … the standardization continues. 2.  Mobile Payments and Receivables 3.  STP and HTH 4.  Decisions on Centralization and Outsourcing
  • 11.
    1. SWIFT …the Standardization continues.
  • 12.
    12 What is SWIFT? A co-operative organization servingthe financial industry A provider of highly secure financial messaging services The financial standardisation body
  • 13.
    13 e-banking Y host tohost X e-banking Z VAN “fax-banking” Internet leased line PSTN Corporate Accounts payable Accounts receivable Treasury Other Typical corporate-to-bank messaging
  • 14.
    14 SWIFT: A secure,standardised global window Accounts payable Accounts receivable Treasury Other CORPHRFF Middleware SWIFTNet
  • 15.
    15 Who participates inSwift and Where?
  • 16.
    2. Mobile Payments& Receivables
  • 17.
    17 A. Mobile Paymentsand Alternatives to Receivables  Every day we will see more mobile transactions, different types of interfaces and we will move away from the traditional Bank Branch into cheaper, faster and less manual solutions. Many of these solutions will be mobile. Cost savings will be a main driver for change.
  • 18.
    18 B. Non-traditional plasticwill bank non-traditional groups… We will see the development toward alternative plastic solutions. Even those who have no traditional bank account will receive plastic rather than paper or cash. The digitalization of payments and receivables will increase in the next years. Everything that requires manual handling will become (relatively) more expensive. Pricing of bank products will reflect more the underlying cost. This includes disposable cards, gift cards, stored value cards, payroll cards and Direct Debit cards. This tendency is still lagging in the US, but becoming evident world wide. Most European Countries no longer accept checks as legal tender.. In the US the check overstayed is economic life cycle due to the absence of a high volume system for low value electronic payments, and cross subsidies in the consumer market.
  • 19.
    19 C. Cash &Check Deposits will be automated… We will see more intelligent “Inverse ATM’s”, Cash deposits will not only become mobile, but “Mobile” receipts & deposits will become the dominant payment format.
  • 20.
  • 21.
  • 22.
    22 How do weimprove security of transactions and obtain better information? What is Straight Through Processing? “To Functionally link two or more systems, so that they transparently behave as “one” to the End User” STP Concepts are applied beyond Trade Execution • Improve Efficiencies – shorten processing cycles • Reduce Operational Risk • Minimize Operational Costs To better plan and feed the data in the banking system, and initiate payments, it is preferable to use Straight-Through-Processing (STP) from the ERP rather than manual payment file entry. This way the information quality improves. Companies often use a single-file to transmit multiple batches of multi-currency instructions to the bank and receive corresponding electronic delivery acknowledgements and statement information. STP allows: •  Efficiency– Expedite file integration and improve STP •  Standardise – Adopt one global standard (ISO 20022 XML) for payments and receipts •  Leverage SSC processes and control systems •  Control – Allow file authorisation direct from SAP or via a web browser. •  Perform – Execute all foreign exchange payments/settlement efficiently 22
  • 23.
    23 The keys tothe Money... With all their security risks
  • 24.
    24 Retail broker HTML/XML, Streaming, Wireless Private investor Corporate treasurer Clearing &settlement Order mgmt Market data mgmt Accounting Trade capture Proprietary systems Risk mgmt Credit mgmt Portfolio mgmt In-house dealers Typical situation … Before BPM
  • 25.
    25 … and theSTP Vision with BPM Enterprise Application Integration Portals B2B Integration Business Process Management Sales, Customers, etc. Front / mid / back office ERP, manufacturing, Databases etc. Accounting, Payment CRM etc.
  • 26.
    26 Enterprise drivers forSTP: FAILS RISK COSTS Improving Control •  Reduced operational risk •  Reduced capital allocation •  Greater understanding of Issues & hotspots Reducing Cost •  Reduced manual effort •  Increased effectiveness Enabling Delivery of Great Customer Service •  Provide greater accuracy •  Increase customer satisfaction •  Improve customer relations
  • 27.
    27 The STP Vision  Seamlesscommunication among parties  Concurrent, not sequential, exchange of information  Significant real-time processing, less batch processing  Virtual processing, not physical processing  Reduces operational risk   Reduces settlement risk   A catalyst for change  improvement of lower cost structure  more efficient market process and infrastructure
  • 28.
  • 29.
    29 Companies have todefine the “Culture” of their Treasury “Business” Model ”A Treasury Model” is often their definition on Centralization and Outsourcing What is the tendency among MNC? Centralization. •  ”Payment On Behalf Of” •  ”Receipt In Favor Of” •  ”Sender” and ”Ordering party” not necessary the same legal entity •  Central responsibility for bank interfaces Outsourcing. •  ”Shared Services Center”, •  ”Payment Center” or •  “Treasury Center Standardization • Common in this process: • Standardized payment process • External format (different internal) • External communication and security solution Central administration Central Processes Central bank interfaces
  • 30.
    30 Models: Centralisation vsDecentralisation CentralizedDecentralized Decentralized Centralized Responsibility Transactionexecution Infrastructure & Organization central Decisions and processes are decided locally Full autonomy Central policies and Directives mandatory Local processes To comply with central policies and directives Full centralization of Policies, infrastructure And processes
  • 31.
    31 Normally, House Bankas deposit and transaction “mirror”… Sub 1 Local bank account Sub 2 Local bank account Sub 2 Local bank account Bank 1 EUR Bank 2 USD Bank 3 Currency x Customers Suppliers,Personal,Tax,Owners Corporate Internal Clearing and reconciliation of internal payment Sub 1 Internal account Sub 2 Internal account Sub 3 Internal account Central payment and sweeping vehicle
  • 32.
    32 With an In-Housebank  In-House Bank – Group treasury acts as primary source of all banking services, to operating units at arms length – Offsets exposures and perform net transactions with banks – Includes normally:  Foreign exchange  Liquidity management  Cash pooling  Netting In House Bank
  • 33.
    33 Degree of centralization  Sharedservice center – Centralized transaction processing using economies of scales from similarities in processes – Local business defines processes – Central administration carry out tasks – Functionality  Accounting  Accounts payable  Accounts receivable  Parts of human resources (payroll, pensions)  IS/IT  (Treasury) Shared Service Center
  • 34.
    Second Trend: The Developmentsin Regulation Why regulation might help Treasury in the Next Five years..
  • 35.
    35 Trend 2. TheDevelopments in Regulation
  • 36.
  • 37.
    37 SEPA is TheSinge European Payments Act, focused on completion, Open Standards and Efficiency. Mandated by the European Parliament, the European Commission & the European Central Bank Intended to complete the currency union, removing barriers to cross-border transactions A key initiative in European economic and financial integration Developed through significant collaboration between the banks.
  • 38.
    38 History of SEPA Regulation #2560/2001 ofthe European Parliament Implementation and deployment Schemes piloted. Clearing Houses began developing strategies to respond to SEPA Euro launched and adopted by 12 EU member states European Payments Council (EPC) created The vision of SEPA was conceived Scheme design and preparation Overall SEPA framework developed, comprising three schemes. SEPA Credit Transfer launched SEPA Cards Framework also takes effect PSD takes effect SEPA Direct Debit (soft launch) SEPA Direct Debit (mandatory) Discussions begin about demising national clearings End date of 2012-13 recommended by European Commission 2000 2003 2002 2004-6 2005-8 2008 2010 2010 2009
  • 39.
    39 SEPA adoption rates 0-2% 2-10% 10-20% 20-40% 40-70% >70% 0-2% 2-10% 10-20% 20-40% 40-70% >70% Eurocountries Non-Euro countries Number of SCTs Percentage = _____________________________________ Number of all SEPA-eligible credit transfers Source: CapGemini
  • 40.
    40 SEPA complements keytreasury trends Centralisation Standardisation and interoperability Rationalisation of relationships Systems integration Pathway to a single account, in a single location. Natural balance consolidation. Common instruments and technical standards, standardised clearing, settlement and value dating; harmonised legal basis. Potentially no need to maintain local banking relationships. All 32 countries reachable to/from a single location. ERP vendors have invested in response to SEPA. Single file format. Facilitates automated reconciliation. Improvedefficiencyandscale
  • 41.
    41 Real benefits Reduce thenumber of Euro accounts Reduce payments fees Enter new markets without large capital costs Automate resources; redploy resources Harmonise procedures Improve STP (and reduce cost of repairs) SEPA will be mandatory; inaction has its cost
  • 42.
    42 SEPA Advantages Same-day valueon SEPA Credit Transfers initiated before 09:30 (CET) Countries where you can domicile your SEPA account Countries that can be reached by SEPA instruments Cut-off times Transaction type Cut-off time (CET) Value Date SCT bulk file 09:00 Day 0 SCT CashPro or SWIFT 11:45 Day 0 SDD B2B scheme 17:00 2DP Day 0 SDD Core scheme First collection 17:00 6DP Day 0 SDD Core scheme Recurring or final collection 17:00 3DP Day 0
  • 43.
    2. Digitalization ofPayments and Electronic Invoicing How EIPP might help treasury in the next Five years..
  • 44.
    44 2. Electronic Invoicing,Payment and Presentment  While Electronic Invoicing, Presentments and Payments (EIPP) are common in many countries, they have not become the Standard in BtC and BtB because of the lack of Critical Mass.  The main force behind Electronic Invoicing now are Governments, and specifically the Tax Authorities, requiring and aiming at: – more compliance, – avoid tax evasion, – obtain easier and better control, and – Allow for easier review and audit.  In many countries Tax Authorities are now phasing out paper invoices and will make E- Invoicing and EIPP compulsory,  While initiatives take place everywhere, Latin America is leading, with Brazil, Peru, Chile and Mexico at the Forefront. Mexico is phasing out deductibility of paper invoices this year. 44
  • 45.
    45 What is EIPP? • Statements or bills rendered on Web (1) •  Multiple bills consolidated at one site (2) •  Customers visit the site to view bills (3) •  Customers review bills, schedule payments (4) •  Remittance information returned to biller (5) •  Payments routed from customer's bank to biller’s account (6)
  • 46.
    46 AOP, Payment Invoice No.Payment No. Ship & Invoice PO No.Invoice No. Purch Order PO No. This isa “No-Manual-Touch” process..! Purchasing" Dept." Accounts" Payable" Receiving" Dept." Sales" Dept." Accounts" Receivable" Shipping
 & Invoicing" Dept." Buyer" Seller"
  • 47.
  • 48.
    3. The TaxAuthority enters cash management*… *actually they have always been there and never left…
  • 49.
    49 The IRS enterscash management.. Actually it has always been involved in Treasury..… So, what should a Treasurer look for in the next years… 1. Withholding Tax on Interest, Dividends and Royalty. - The Fear for tax havens and under-taxation - 2. Capital Control and Convertibility issues 3. Money Laundering Compliance. 4. Financial Transaction Tax: The recently intensified discussions about taxing financial transactions, (which is increasingly politically popular, but very disruptive to Cash Management….) 49
  • 50.
    50 1. Withholding Taxon Interest, Dividend and Royalty  Tax and Treasury always work together…  With Liberalization of Trade, and general acceptance of Transfer Price Studies based on OECD Guidelines, more countries are now focusing on multinational tax income rather then on import duties. TPS are annual obligations for MNC in most countries.  Withholding Tax Planning, and Compliance, is an important part of treasury work, including setting up systems to obtain evidence of credits for parents or subsidiaries. This remains often paper based, and labor intensive.  Tax Departments often direct Interest, Dividend and Royalty to different jurisdictions, based on preferential treatment and Tax Treaties for each category.  Most of these withholdings are subject to Thin Capitalization, Transfer Prices, Arms Length Rules, Marked to Market Rules and Residency or Non-Residency.  The Treasurer has to comply and provide a paper or digital trail. With governments short on cash worldwide, audit’s will become more sophisticated.
  • 51.
    51 2. Capital Controls,Convertibility  Many Currencies are not Convertible.  You can not cash pool into Cash Concentration non convertible currencies, like the Chinese Yuan, Indian Rupees or Brazilian Real.  There are even serious restrictions in pooling US Dollars in Cash Pools, when located in ZBA or “Notional Pooling Restricted Countries” (Like LATAM)  Non-Convertibility. The currency has no transaction value outside the country. Payment abroad with this currency is not allowed.  Sometimes it’s restricted and you can only under certain condition export, pay or trade in these currencies. Non-Convertible Currencies do not necessarily have to be pegged currencies, they can be floating.   Capital Controls are different, and also possible with convertible currencies. Basically it means you have to ask the central bank permission to export the domestic currency, or give a reason for requiring foreign currency.  Both issues are becoming more important with an internationalizing world, while governments have the last 5 years become more restrictive.  All require enhanced Liquidity Planning. A less advanced ZBA Cash Pool
  • 52.
    52 3. Money Laundering  TheOffice of Foreign Asset Control is based in the Department of Treasury.  Banks, not only US banks, are required to report any international transaction over 10.000 and suspicions transaction under that amount (…say 2 x 5,000 or 9,999).  Normally MNC are not suspected of drugs of terrorism money, or money laundering, but many transactions can be scrutinized for Tax Reasons. –  Not only focused on Terrorism Money or Drugs Money… Tax Evasion is as important. –  In foreign countries incoming Intercompany Money has to declared within a certain category: –  Capital, Dividends, Short and Long term IC Loans, and Commercial Intercompany Transactions. –  All categories have Different Taxation.  Main solution for treasury of any normal MNC: Compliance. –  Have always all documentation in order –  Prepare to comply with Audits –  Be able to show the legal or commercial reason behind any IC transaction. –  Especially non-commercial intercompany transaction sare subject to scrutiny Bottom-line: your obligation is to know what your paying, and why. …and have a paper or electronic trail. The good news is that this obliges companies to have their processes in order…which is good business anyway!
  • 53.
    53 4. The FinancialTransaction Tax
  • 54.
    54 4. Financial TransactionTax.  Financial Transaction Tax (FTT) are not new. They started in the United Kingdom as the Stamp Tax in 1694, and existed in the UK until 2003. Keynes Proposed in the 1930’s to lessen speculation on Wall Street.  However they become commonplace in the last 10 years, as a new source of revenue, especially outside the OECD. Many countries currently have a kind of FTT, Stamp Tax, or Tax on Cash, Checks or Electronic Transactions.  For treasurers it effectively kills the benefits of a zero Balance cash pool. (Notional pooling is not affected)! Especially in an environment were interest rates are very low and liquidity is abundant.  A Tobin tax, suggested by Nobel Laureate economist James Tobin, was originally defined as a tax on all spot conversions of one currency into another. The tax is intended to put a penalty on short-term financial round-trip excursions into another currency.  In many countries the tax is a credit to general income tax. In Mexico this is the case on the “Cash Deposit Tax”, in Peru on the “Debit and Credit” transactions tax. In other countries the tax is eliminated when the money becomes long term rather then speculative or short term. (often after 1 year)  In many jurisdictions where an FTT is introduced you see increased payments in Cash and Netting.  The FTT is likely to become a mayor issue for treasurers in the next 5 years.  Although the cost can easily be back charged to customers, the accountancy issues, the compliance issue and the planning issues will require to be involved in detail.
  • 55.
    55 Summary  Regulation: The futureis bright: even Regulation and government intervention bring new standards and opportunities like the SEPA and the Electronic Invoicing EIPP.  Strengthen Compliance, and fiscal regulation requires good housekeeping, improved and streamlined processes and further innovation in the next years.  Innovation will be Mobile, will be Host to Host, and only core value added activities will stay in- house, all others will be Outsourced or Standardized. For Treasurers the Future looks Bright, there should not be uncertainties to navigate in uncharted waters…. Hence, there are no dragons on the still unchartered map….. 55
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  • 57.
    57 “Bank of AmericaMerrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., all of which are registered broker‑dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. 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Notwithstanding anything that may appear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2012 Bank of America Corporation. Notice to Recipient