Meeting the Demand of Payment and Securities Settlement Systems of the Corporate Community

1
Meeting the Demand of Payment and Securities
Settlement Systems of the Corporate Community
Bahrain, March 16th, 2005 Alberto Casagrande,
The Core acasagrande_at_thecoreconsulting.com
2
CONTENTS

• A general framework of analysis.
• The Italian case.

3
CONTEXT
CORPORATIONS
Retail operators in the context of Payment
Systems (PS) and Securities Settlement Systems
(SSS)
demanding safe and efficient payments and
securities settlement systems
with peculiar needs
4
MACRO PLAN TO REFORM PS AND SSS FOR CORPORATIONS
Implementation
Phase
Diagnostic
Prioritization
Activities

• For each project
• Planning
• Pilot
• Roll-out

• Identification of the current status of the
  system
• Benchmarking with best practices
• Identification of the needs and possible
  initiatives

• Feasibility analysis for each possible initiative
• Prioritization
• Master planning

Timing

• Two months

• Function of the projects

• Two months

Corporate PS and SSS
5
DIAGNOSTIC OF CORPORATE PS AND SSS Methodology
Products and channels
Players and roles
Trends / Needs
Infrastructures
6
DIAGNOSTIC OF CORPORATE PS AND SSS A useful tool
of analysis for corporate PS
Consumers
to ..
Corporations
Government
Foreign
Payments from ..
Relevant for our analysis
Corporations
NOT relevant for our analysis
Government
Foreign
Consumers
7
DIAGNOSTIC OF CORPORATE PS AND SSS A useful tool
of analysis for corporate SSS
Consumers
to ..
Corporations
Government
Foreign
Securities from ..
Relevant for our analysis
Corporations
NOT relevant for our analysis
Government
Foreign
Not Applicable
Consumers
8
ORGANIZATION

• A National Council for Corporate Payment and
  Securities Settlement Systems should be setup, in
  order to implement reforms in this area, with the
  following stakeholders corporations, banks (and
  other relevant financial institutions), central
  bank (oversight), other relevant social planners
• The Council should promote various initiatives,
  driven by the various stakeholders and / or
  through the support of ad hoc units (see below
  the case of ACBI for Italy)

9
CONTENTS

• A general framework of analysis.
• The Italian case.

10
MAIN REFERENCES FOR THE ITALIAN CASE

• Survey on ICT and the Corporations conducted by
  the Bank of Italy, 2004
• Red Book, Payment and Settlement Systems in
  Selected Countries, April 2003, CPSS
• Ad hoc interviews on main players (corporations,
  banking associations, central bank)

11
CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Corporations (Users).
• PS providers.
• Social planners and other relevant players.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

12
BACKGROUND INFORMATION
share of revenues
share of firms
Size
Import/ Export

• Import 17.5 of GDP
• Export 19.9 of GDP (80 of which coming from
  SMEs)

• High diffusion of PCs across all industries
• Almost all firms connected to the Web (76 of
  large firms and 49 of SME own a web site)
• Very limited E-Commerce activity
• 8 and 19 of firms buy and sell respectively
• Volumes of E-Commerce sales and purchases both
  below 10

ICT
13
MULTI-BANKING
Reasons
The evidence (Europe)

• Making banks compete reduce fees

Banks used
2001
1995

• Liquidity threats are reduced

gt1

• 81

• 85

gt2

• 52

• 60

• Geographically different opportunities

gt3

• 26

• 36

• Cost comparison with single banking

• 14

gt4

• 19

• Cross-holdings

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CASH MANAGEMENT
Comment
Approach

• Heuristic approach

Ex post

• Forecasting is not very common
• Lack of relevant information from the banks
• Lack of skills within corporations
• Herd behavior (although supporting packages exist
  and are used elsewhere)

Ex ante
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INTEGRATION AMONG PROCEDURES Evidence

• Strong need of integration of financial
  procedures with administrative, commercial and
  logistic procedures (integrated procedures still
  not available)

• Availability of at least some ERP packages
  widespread across large firms and SME

• Adoption of EBPP still marginal (only 7 of
  corporations do it)

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ORGANIZATION FOR PAYMENTS
Type of firm
Comment

• CEO / Owner does everything, supported at times
  by external certified accountant

Micro

• CFO is in charge, responsible for administrative
  and financial operations (one unit for both)
• CEO follows closely
• As size increases, liquidity management is better
  dealt with
• Background skills accounting or on-the-job
  training

SME
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ORGANIZATION FOR PAYMENTS (Cont.)
Type of firm
Comment

• CFO has the responsibility, managing for it two
  separate departments (and two leading roles)
• Finance (Treasury)
• Administrative
• Liquidity management becomes sufficiently
  structured
• Large groups now have a payment factory
• Background skills accounting or on-the-job
  training (rarely external courses)

Large
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CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Corporations (Users).
• PS providers.
• Social planners and other relevant players.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

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PS SERVICE PROVIDERS
Consumers
to
Corporations
Government
Foreign
Payments from .
Corporations

• Banks

Government

• Banks

Foreign

• Banks

• Not relevant for our analysis

• Banks
• Post Office
• Credit card providers

Consumers
20
PS SERVICE PROVIDERS (Cont.) Banks -
General Features

• Strong competition
• Universal supply of financial products
• Low profitability

21
PS SERVICE PROVIDERS (Cont.d) Banks and corporate
payments

• Neutral or negative, especially when dealing with
  sized corporations

Direct
Impact of corporate payments on the bottom line
of banks

• Crucial, given the cross-selling opportunity
  created

Indirect
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PS SERVICE PROVIDERS (Cont.d) Banks organization
for corporate payments
The general model
Functions involved for corporate payments
Skills

• Two models prevailing
• Product-based organization
• Client-based (en vogue). In such model
  corporations are a business unit separated

• Besides various specialists, those who assist
  corporations on the front-office nowadays have at
  least a bachelor degree, and receive both
  on-the-job and external trainings

• IT
• Back-Office
• Marketing
• Customer Service
• Planning
• Legal
• Front-office (branches always highly involved)

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PS INFRASTRUCTURE PROVIDERS
Roles
Providers

• Bank of Italy manages main clearing and
  settlement procedures (see Red Book, CPSS)

Bank of Italy

• Banks manage both the ATM and POS networks

Banks

• The Italian Banking Association manage an
  infrastructure specifically dedicated to
  corporations, named CBI (see next slides)

Banking Assn.
Other providers

• Credit and debit cards issuers manage
  international credit and debit card networks

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CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Corporations (Users).
• PS providers.
• Social planners and other relevant players.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

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SOCIAL PLANNERS
Activities
Role
Institution

• Data collection
• Ad hoc investigations

• Bank of Italy

Oversight

• ECB

• Active through Bank of Italy

• Italian Parliament

• Bill on el. signature
• Bill on EBPP

Regulation

• EC

• Bank of Italy

• Bill on payment products

• Bank of Italy

• Pressure on service providers (banks mainly)

Antitrust

• EC

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BANKING ASSOCIATIONS
Contribution

• Lobbying

European Banking Federation

• Initiatives to improve corporate payment system
  infrastructures

• Lobbying
• Initiatives to improve corporate payment systems
  infrastructure
• Inter-banks Corporate Banking, (CBI, see above)
• Other

Italian Banking Association
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CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

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PAYMENT PRODUCTS AVAILABLE IN THE ECONOMY

• Cash
• Cashiers cheques from the Central Bank

Cash payments

• Credit transfers
• Bank cheques and bankers drafts
• Collection orders
• Bank receipts
• Direct debits
• Payment cards
• Debit and credit cards
• E-money and card payments over the Internet

Non Cash payments
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MAIN PRODUCTS FROM CORPORATIONS
Consumers
to
Corporations
Government
Foreign
Payments from .
Corporations

• Cheques

• Credit transfers

• Credit transfers

• Bank receipts
• Direct debits
• Credit transfers
• Cheques

30
MAIN PRODUCTS TO CORPORATIONS
to
Corporations
Payments from .
Corporations

• Bank receipts
• Direct debits
• Credit transfers
• Cheques

Government

• Credit transfers
• Cheques

Foreign

• Credit transfers

Consumers

• Cash
• Payment cards
• Direct debits
• Credit transfers
• Cheques

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PAYMENT CHANNELS TO AND FROM CORPORATIONS
Focus
Comment
Channel

• Still predominant for most payment operations

In site

• Increasingly used (see also next slides)

Web

• Scarcely used for payments from and to
  corporations (and also in general) being
  considered not very safe

Phone

• At an embryonic state, though it might become
  relevant to settle retail transactions

Mobile
32
E-BANKING
of firms
Type of service
EBPP
E-Payments
E-Loans
E-Info
Total

• 50

• 3

• 7

• 71

Large

• 55

• 2

• 12

• 83

SME

• 54

• 4

• 9

• 77

Micro

• 46

• 2

• 4

• 66

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CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

34
PS INFRASTRUCTURES IN ITALY

• In general PS infrastructures for corporations
  coincide with those used by other retail
  operators (see slides above)
• In Italy an ad hoc PS infrastructure for
  corporations has been created, CBI (see next
  slides)

35
CBI
Objectives and
features
Objectives
Features

• Simplify life to corporations doing multi-banking
• Transfer electronically the consequent paperwork

• It is an infrastructure for the transfer of
  electronic flows on the basis of ad hoc
  standards
• It allows corporations to do electronic
  multi-banking by dealing with just one bank

36
CBI
Governance and
Impact (YE 2003)

• A non-profit association amongst banks (ACBI)
  sets standards and rules, punishing the
  non-compliant banks

Governance

• Each associated bank conforms to the above
  standards through own (or external) technical
  units

• Over 95 of banks offer the service

• Over 400,000 firms use the service

Impact

• Over 40 of collection orders and around 15 of
  payment orders of all corporations are made
  through the service

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CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.
• SSS.

38
PLAYERS AND ROLES
Trends / Needs

• Increasingly moving their operations towards the
  Web
• Switching to cost-efficient procedures, among
  which
• End-to-end procedures
• E-Commerce
• Dematerialization of procedures, exploiting the
  new bill on electronic signature

Corporations

• In general, adjusting the supply to the
  technological progress
• In particular, introducing new functionalities
  for the corporations, among which
• End-to-end solutions (through the CBI)
• EBPP
• E-Cash Management
• E-Money solutions

Banks
39
PRODUCTS AND CHANNELS Payment Products in the
Economy
Cheques
Collection orders
Credit transfers
1996
2003
40
INFRASTRUCTURES
Scope
Ongoing Initiatives to.

• Introduce End-to-end functions (forthcoming)
• Support settlement on Marketplaces
• Improve cross-border services for firms

Italian (ACBI)

• Improve the European Payment Systems
  infrastructures (standardization, clearing and
  settlement systems)
• Support electronic multi-banking (like CBI)
• Support the payment initiation (relevant for
  E-Commerce)
• Improve cross-border services for corporations

Interna-tional
41
CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• SSS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.

42
CORPORATIONS (USERS)
Strategies to access
securities markets and organization
Strategies to access securities markets
Organization

• Neither aimed at an efficient asset / liability
  management (ALM) nor at collecting funds

• No personnel dedicated to corporate finance issues

Micro firms

• In few cases aimed at an efficient ALM
• Very rarely aimed at collecting funds (less than
  1 of Italian SME are listed in regulated stock
  markets)

• Possibly some personnel dedicated to corporate
  finance issues

SME

• Most times aimed both at an efficient asset /
  liability management and at collecting funds

• In most cases dedicated corporate finance units

Large firms
43
SSS SERVICE PROVIDERS
Consumers
to ..
Corporations
Government
Foreign
Securities from ..
Corporations

• Financial institutions
• Stock Exchanges

NOT relevant for our analysis
Government
Foreign
Consumers
Not Applicable
44
SSS SERVICE PROVIDERS (Cont.) Financial
Institutions (FIs)
FIs
Main services provided to corporations

• All lending services
• Many corporate finance services
• Technical and operational assistance to access
  securities markets

Commercial banks

• All corporate finance services
• Technical and operational assistance to access
  securities markets

Investment banks

• Start-ups funding
• Technical assistance to access securities markets

Venture capital

• Investors-Corporations matching
• Technical assistance to access securities markets

Private equities
45
SSS SERVICE PROVIDERS (Cont.) Italian Stock
Exchange

• The Italian stock exchange is managed by Borsa
  Italiana, a private company whose shareholders
  include banks, investment funds, issuers and
  other market players
• Borsa Italiana provides for the organization and
  the smooth functioning of negotiations for
  regulated equity, bond, and derivative markets

46
SSS INFRASTRUCTURE PROVIDERS
Roles
Providers

• Monte Titoli is the Italian Central Securities
  Depository (CSD)
• It plays the following roles in the securities
  markets
• Clearing and settlement
• Depository
• Custody

Monte Titoli

• Bank of Italy plays the role of liquidity reserve
  provider for securities settlement procedures

Bank of Italy
47
SOCIAL PLANNERS AND OTHER RELEVANT PLAYERS
Main Roles
Institutions

• Oversight
• Supervision / Market surveillance
• Regulators

• Bank of Italy
• Consob

Social Planners

• Italian Parliament
• EC

• Regulators

• Investors / Consumers associations
• Securities issuers associations

Other players

• Lobbying

48
CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• SSS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.

49
MAIN PRODUCTS FROM CORPORATIONS
Consumers
to
Corporations
Government
Foreign
Securities from .
Corporations

• Equities
• Bonds

• Equities

• Equities
• Bonds
• Financial derivatives

• Equities
• Bonds
• Financial derivatives

Only publicly owned corporations
50
MAIN PRODUCTS TO CORPORATIONS
to
Corporations
Securities from .
Corporations

• Equities
• Bonds
• Financial derivatives

Government

• Bonds

Foreign

• Equities
• Bonds
• Financial derivatives

51
SECURITIES CHANNELS TO AND FROM CORPORATIONS
Comment
Channel

• In few cases buying and selling operations are
  performed on site (at FIs offices)

In site

• Few corporations perform their buying and selling
  operations directly on the web

Web

• Most buying and selling operations are performed
  by phone (contacting officers at FIs)

Phone
52
CONTENTS

• A general framework of analysis.
• The Italian case.
• PS.
• SSS.
• Players and roles.
• Products and channels.
• Infrastructures.
• Trends / Needs.

53
TRENDS / NEEDS
Trends / Needs
Context

• Corporations are increasingly putting more effort
  on their ALM procedures
• More corporations should access securities
  markets for funding purposes

Players and roles

• Some financial derivatives (mainly secondary
  credit market products) should be further
  developed and offered on a regular basis

Products and channels
54
APPENDIX
55
SIZE
share of revenues
share of firms
Italy
EU-15
56
INTERACTION WITH ABROAD

• Import 17.5 of GDP
• Export 19.9 of GDP (80 of which coming from
  SMEs)

Import / Export

• Italian companies abroad
• N. of companies 1,220
• N. of subsidiaries 2,875
• Revenues generated ( of GDP) 10.4
• N. of foreign companies in Italy
• N. of subsidiaries 1,843
• Revenues generated ( of GDP) 13.8

Ownership
57
PROPENSITY TO ICT

• High diffusion of PCs in the manufacturing and in
  the service industry

PCs Diffusion

• Almost all firms connected to the Web
• 76 of large firms own a Web site, vs. 49 of
  SMEs

Internet connection

• Very limited E-Commerce activity
• 8 and 19 buy and sell respectively
• Volume of E-Commerce sales and purchases both
  below 10 for users

E-Commerce
58
PAYMENTS FOR ONLINE TRANSACTIONS
of firms
of E-payments over E-transactions
gt60
11-60
lt10
E-Purchases
E-Sales
59
E-PRODUCTS FOR E-PAYMENTS
of firms
Type of E-product
Debit and credit cards
E-Money
E-Banking
Total

• 65

• 2

• 43

Large

• 63

• 5

• 31

SME

• 74

• 1

• 37

Micro

• 51

• 2

• 52