Innovation Toward Financial Efficiency—A Primer

Institute of Public Administration of Canada

David Gourlay, Director Public Sector—Citibank Canada

Victoria, B.C.

August 2011

Citi’s Canadian Franchise   With roots in Canada dating back to 1919, we have been in Canada continuously since the 1950's   Citi provides a full array of investment banking and corporate banking services to Canadian institutional clients and to

global institutional clients with operations in Canada   Citi has over 3,800 employees in Canada   Member of the Canadian Payments Association (CPA)   Member of the Association of Financial Professionals – Ottawa Chapter (AFP-O)   Member of the Toronto Financial Services Alliance (TFSA)

Citi in Canada

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Ottawa   Public Sector Office

Toronto/Montreal   19 Global Bankers   12 Derivatives ���

product partners   2 Equity Capital Markets

product partners   Offices cover a full range of

corporate clients as well as financial institutions and global subsidiaries

Calgary   7 Global Bankers   Newly added GTS coverage for

Western Canada   Commodities Platform with 8

sales and trading product partners

  Office covers Energy, Power, Mining, Transportation, Sector and Telecom and Media Companies, as well as the Public Sector

Vancouver   10 Private Bankers

The Global Transaction Services Franchise

Payments Receivables

Liquidity and

Investments

Securities and Fund Services

Commercial Cards

Trade

Information Services

Payments

  ACH   RTGS   Funds Transfers   WorldLink Payment Services   Citi Procure to Pay

Trade Services and Finance

  Working Capital and Supply Chain Management

  Global AR Discounting   Trade Services and Finance for Importers

and Exporters   Export and Agency Finance

Card Solutions

  Commercial Card Solutions   Procurement cards   T&E cards   One Card   Prepaid Solutions   Virtual Card Accounts

Securities and Fund Services

  Issuer Services   Fund Services   Capital Markets

support and post closing servicing

  Pension Services

  Custody and Clearing

  Securities Finance   Middle Office

Outsourcing   Investment

Administration Services

Receivables

  ACH   Direct Debit   Electronic Check Deposit   Lockbox   Electronic Invoice Presentment

and Payment

Liquidity and Investments

  Investment Services   Automated Investment   Liquidity Desks   Online Investment Services   Notional Pooling   Target Balancing

Information Services

  CitiDirect® Online Banking   CFX File Services   SWIFT   Treasury Systems Integration   Treasury Solutions Group   TreasuryVision®

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How Banks May Support Public Sector Goals of Achieving Financial Efficiency The banking sector is able to support the Public Sector objectives throughout the financial value chain. We believe that banks are not just delivery mechanisms for alternate service delivery, but they can generate efficiencies in all areas where finance is involved as well as implementing financial management platforms which support longer-term reform.

Financial Objective How? Mechanism

Outcome

Support Economy

Raise Revenue Cut Costs

Enhance Financial Control

Improve Citizen

Experience Support

Localization

Raise Finance

Asset Sales Privatization of Bank and Industrial Holdings

Real Estate

Debt Raising Sovereign Bonds Infrastructure Finance Public Services Provider Finance

Manage Risk Restructuring Restructure Holdings

and Contingencies

Budget Certainty

Currency and Rates Hedging Commodities Hedging

Manage Finance and Drive Efficiency

Financial Shared Services

Financial Mgt. Systems Payments and Financial Processing

Citizen Budgets Pensions Fund Administration

Support Economy

Market Intelligence

Specialist Financial Markets Industrial Sector Advice

Corporate Banking

General Banking Services

Finance for Supply Chains and Trading

Suppliers to Government

British-based Industrials

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A Vision—NYC’s Citywide Transformation Program

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Payments Processing Challenges in the Public Sector

Public Sector entities face several challenges that limit payments efficiency.

Current Challenges

Transparency and Accountability

  Lack of a centralized system that provides clear visibility into various government agencies’ payment processes

  Absence of information intermediary to compare and benchmark the performance of various agencies against previous years or against targets

Productivity and Effectiveness

  Enhancing the quality and quantity of output without increasing funding levels

  Inability to track the effectiveness of various government programs (e.g. stimulus checks, rebate programs, disaster relief programs)

Authentication and Eligibility

  Confirming the identity of recipients and minimizing fraud

  Ascertaining the eligibility of applicants for various government programs (e.g. Medicare)

Sustained Efficiency   Modernization of legacy systems to streamline processes and achieve greater, sustainable efficiency

  Transformation of existing payment channels to reduce waste and achieve higher levels of efficiency

Public Sector Organizations are Looking for   Greater control and visibility

  Consolidation of back office tasks

  Prevention of identity management fraud

  Ongoing process improvement

  Robust Continuity of Business Plan for Suppliers

Source: McKinsey & Company.

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Payments Consolidation Trends

Best-in-class entities have consolidated payment providers to achieve the following key benefits.

Cost Efficiencies   Elimination of redundant activities and infrastructure

  Reduction of banking fees from decreased accounts and better pricing as volumes are consolidated

  Reduction of cross-border payment costs including foreign exchange

  Reduction or elimination of inter-agency payments through netting solutions

  Implementation of best-in-class processes and creation of centers of excellence

Improved Processes   Improved process through a single connectivity, efficient payment processing and rate rendition and diversity in distribution methods and standardized reporting

  Streamline and in-source payments originating across various departments/agencies within the government –  Streamline reconciliation, re-issuance and post issuance reporting –  More efficient customer service –  General control over validation

  Payables consolidation with straight-through processing

Control and Visibility   Increased control and visibility over payment activity for improved financial and operational risk management (e.g. foreign exchange exposure)

  Compliance with internal policies and external regulatory reporting requirements

  Re-engineer processes and build in desired efficiencies and controls

Source: Evolution Towards Treasury and Payments consolidation—Monie Lindsey, Frederick Westerling, Treasury Strategies.

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Citi’s Response to Public Sector Challenges in Cross-border Payments

  WorldLink is Citi’s premier Cash Management offering for overseas payments for Public sector

  Last year, WorldLink executed over 13 million Public Sector payments totalling over $28 billion

  WorldLink’s unparalleled reach and coverage leverages Citi’s network in over 100 countries globally

  The flexibility, product range, market knowledge, global distribution and competitive pricing offered by WorldLink makes it an ideal solution

  WorldLink processes 30 million payments a year and reconciles over 4,000 client issuances across 140 accounts daily

  WorldLink processes $60 billion in foreign exchange across 138 currencies annually

  WorldLink’s flexible payment solution incorporates the following

Funds Transfers   135+ currencies

Cheques   Remote Cheques 32 currencies

  Onsite Cheques 16 currencies

  WorldLink features localized cheques that clear automatically in each jurisdiction

  WorldLink allows customizable cheques with client’s logo

Cross-border ACH   40+ countries

Cash   Available in 190 countries and 220,000 locations

Account Structure   WorldLink owns and operates accounts in multiple currencies so that you do not have to

Foreign Exchange   Automated foreign exchange rates that can be benchmarked

  Tiered FX rates available by value of the payment

Benefits to Our Clients Cost Reduction

  Single Global provider that eliminates the need to hold local currency accounts

  Provides a comprehensive end-to-end cross-border payment solution incorporating Electronic and Non-electronic payment methods

  Provides the advantage of Citi’s global network to deliver payments instead of using high cost correspondent bank arrangements

Control

  Ability to offer single file delivery channel to support consolidated payment processing

  Provides an award winning Online Payments platform (CitiDirect) featuring sophisticated audit features supporting payment tracking that are Sarbannes-Oxely compliant

  Detailed pre-issuance and post-payment reporting available to facilitate reconciliation of payments

Ability to Manage Risk

  Robust Continuity of Business program to ensure uninterrupted delivery of service

  Dedicated to the provision of secure connectivity and proper management of sensitive data for our clients

  Cheque offering provides sophisticated fraud prevention measures   Flexible Foreign Exchange offering that enables clients to minimize FX risk

Enhanced Service for Beneficiaries

  Option to receive electronic payments in a timely manner, in local currency, with competitive FX rates, instead of a paper instrument in foreign currency

  Option to avail of Cash Payments in a timely manner in local currency where a Bank account is not held

  Receive full value of payments   Payments received on-time every time

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Case Study: Payment Consolidation

  In 2005 DWP began a project to consolidate the management and administration of its Overseas Pension Services

  Before consolidation, DWP used multiple Bank providers to deliver overseas payments in both local currency and Sterling drafts

  Main objectives of DWP were to select a service provider to execute overseas payments in a manner that would provide –  An attractive All-in Price –  Robust Business Continuity and Disaster

Recovery Capabilities –  A solution capable of sending local currency

payments to all required countries

Benefits

  DWP went from 4+ Banking providers to one provider

  Increased STP rates across all countries to 99+%

  Reduced Administration costs

  Enhanced Beneficiary Satisfaction by guaranteeing Full Value Settlement

  Implemented a single Disaster Recovery program for Overseas Payment Processing

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Prepaid Cards Overview

  By theme, e g. –  Financial exclusion –  Child poverty –  Social mobility and access –  Civil service efficiency –  Emergency management

  By geography –  Central or local g’ment –  Other provider

  By Department –  Social benefits

and pensions –  Fuel payments and

discounts –  Education and children –  Treasury, tax and payroll –  Subsidies and incentives

  By Agency Role –  Employer –  Administrator –  Benefits distributor

The prepaid card is a card which stores pre-funded cash. It is a mechanism which is applicable across multiple areas and levels of government, and addresses a number of public policy aims, particularly in enhancing a citizen’s experience of public services while for government providing value for money and better control.

Area of Public Sector Application

Policy Rationale

Benefits— Government Benefits—Citizen

  Choice and Personalisation –  Ease-of-management for

citizen user –  Personalised payments

  Citizen Reach and Influence –  Can incorporate

un-banked populations –  Supports public policy

outcomes by influencing citizen behaviour through incentivising payments

  Value-for-money and Efficiency Enhancement –  Reduction in staff, process

and transaction costs –  Enhanced transparency and

control over expenditure through simplified processes

  Service Enhancement –  Reduced costs of providing

payment service enables more funding to be directed towards support services

  Enhanced financial management –  Lower cost delivery –  Eliminate fraud –  Eliminate handling of

uncashed cheques –  Better auditing

and transparency –  Improved funds

management   Better delivery

of payments

  Reduce operational costs while increasing efficiencies

  Guarantees the delivery of benefit payments

  Facilitates the financial inclusion of un-banked beneficiaries

  Improve ability to track and audit payments

  Personalised service and impact (depending on programme structure) –  Potentially increased choice

of service provider –  Formerly rewarded for

socially good behaviour

  Better communication with public service provider

  Improved financial management –  No need to carry cash –  Online card account

management –  Stepping stone to

financial inclusion

  Some mechanisms—such as prepaid cards eliminate payment fees (such as cheque encashment) –  No liability if card is lost

or stolen

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Pre-Paid Card Case Study—Unemployment (State of Maryland)

Client Need

  Over 200,000 people received UI payments in 2010

  Over $1.5 billion paid annually in unemployment benefits

  Unemployment rate over 7%, highest in 12 years

  Program historically made 100% of payments via paper check

The Solution

  Rapid, turnkey program implementation and launch

  Fully custom program with Citi Visa Prepaid Card

  Streamlined process, easier program management

  Full recipient and media communication support

Key Benefits

  Migrated payment process to fully electronic platform

  Increased convenience, delivery speed and access flexibility for recipients

  Savings projected at $1–2 per payment—over 3 million payments made in 2010

  Saves 375 trees annually by eliminating paper

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Pre-Paid Card Case Study—UK Replacing cash and cheque payments to citizens from central and local government, with electronic payments, saving money while embedding the financial infrastructure for personalisation.

Case Study: Lewisham Borough Council Prepaid Cards

  Client Need: The London Borough of Lewisham wished to migrate to an electronic platform, for the weekly allowance they pay to 18-year-olds to help them continue in education –  Recipients had to visit council offices once a week to collect their

allowance in cash. This exposed staff and recipients to risk and required complex cash management procedures at the council

  The Solution –  Citi provides a prepaid card solution to enable Lewisham’s young

recipients to receive their money on a secure and convenient prepaid Visa® card

–  Prepaid cards facilitate social inclusion, since they can be used at point of sale, over the Internet, telephone, and at ATMs to withdraw cash

  Key Benefits –  The scheme is expected to reduce Lewisham’s payment processing costs

by 62% –  Recipients no longer have to travel to council offices as cards are

remotely reloaded –  When a prepaid card is lost or stolen, money on the card can be recovered

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Pre-Paid Card Case Study—City of Bogota

City of Bogota’s Government Subsidy Program   Cost of living subsidy payments were paid to elderly citizens in person by cash at multiple locations

across the city   Citizens living on the outskirts of the city had to make difficult and costly trips into the city center

each month and queue to collect their payment   The distribution of these benefits was a massive burden on the city’s infrastructure in terms of time,

personnel and cost

Modernizing payment systems and improving service to beneficiaries.

Citi Prepaid Services’ Citi Pay Card eliminated the City of Bogota’s Pain-points   Cash Replacement—eliminated the need to manage the physical distribution of cash   Streamlined Operation—single, centralized process to manage and deliver payments electronically   Resource Efficiency—fewer personnel needed to administer and reconcile payments   Improved Control—improved fraud detection, monitoring and protection   Better Service to Beneficiaries—funds loaded for use instantly, eliminating the need to travel and

queue for cash   Citizen ASSISTANCE—CITI service agents based at benefits offices to advise citizens on the use of

the card, and guide them on first time use

Outcome   The City of Bogota achieved process transformation with a paperless payment delivery process.

The elderly citizens of Bogota have a convenient, flexible, dependable means of receiving their benefits

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Supplier Finance Program: Supporting Suppliers and Delivering Efficiency

What is Supplier Finance?

  Partnership between the Government and Banks

  Allow pre-agreed suppliers to sell receivables to banks in respect of goods and services delivered to, and accepted by, the Government of Canada as the buyer

  Banks purchase the receivables, on acceptance of the invoice by the buyer, thereby providing the supplier funds at a competitive rate

  Banks charge lower price, utilizing credit worthiness of the Government

Supplier Finance programs assist financially strong buyers, such as the Government, to support SME’s by providing ready working capital in today’s challenging credit environment.

Key Benefits to the Public Sector …

  Meet 10-day payment target without compromising working capital

  Procurement savings through pre-negotiated basis points calculation that is shared between Citi and Government of Canada

  Rapid implementation achievable –  Citi implemented one year $3.5 billion

supplier finance scheme for US Department of the Treasury to support auto sector suppliers in less than one month

  Government support for SMEs at no cost to Government

Why is this Relevant?

  Provides liquidity to cash-strapped suppliers (SMEs)

  Reduce cost of borrowing for those suppliers who are able to borrow

  Help SMEs to compete for Government contracts

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Supplier Finance Overview

  Additionally, Citi’s innovative program can offer the city solutions to add value to the process and best meet the city’s unique needs, such as –  City may reduce costs by receiving a portion of the unlocked value –  City may self-fund all or a portion of the program, obtaining improved cash yields

Citi offers a comprehensive supplier finance solution to help the Public Sector engage with a larger group of suppliers/vendors and manage their transactions most efficiently and effectively.

Citi’s Supplier Finance is a Solution Consisting of Two Major Parts

An electronic disbursement service, between Citi and the PS buyer in which Citi is the paying agent

A separate service, between Citi and the supplier/vendor, that enables early payment to the city supplier/vendor

Organization Authorizes Citi to Pay Citi Pays the Supplier

Supplier Canada PS

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Citi Supplier Finance: Value Proposition

Buyer

  Enhancing Supply Chain Sustainability—By offering Suppliers a new credit and liquidity source at a lower cost than their own, the Buyer is strengthening and reducing uncertainty in its own supply chain and improving its Supplier relations

  Cost Reduction—The Buyer can share in the discount revenue earned by Citi, on the discounted payments to Suppliers, thereby reducing purchasing costs

  Strengthen Transparency—Citi Supplier Finance provides both the Buyer and Supplier a window of visibility into invoices and their payment status

  Support Small and Medium Business—Many Suppliers to large buying organizations are small and medium size enterprises, whose growth prospects are limited by their few and expensive sources of traditional financing

  Reduce Transaction Costs—As payments are made electronically via EFT or Wire, there are no fees or costs charged to the Buyer. Additionally, the program typically has limited operational impact on the Buyer

Supplier

  New Credit and Liquidity Source—Suppliers benefit from this program by receiving access to a new credit and liquidity source at a lower cost than their own, which improves financial stability

  No Balance Sheet Impact—Non recourse settlement of accounts receivable has no impact on balance sheet, as it is not debt, and thus frees up Supplier’s existing credit lines

  Working Capital Benefit—Suppliers accelerate cash flow by reducing accounts receivables and shortening Days Sales Outstanding

  Easy enrolment and No Upfront or Ongoing Costs—No financial statements are required from the Supplier to enroll for Citi Supplier Finance, and there are no setup or ongoing costs to use the web based platform

  Flexibility—Suppliers can choose to finance all invoices, a few, or even a single invoice depending on the need

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Treasury Analytics—City of Chicago

Office of the City Treasurer   Manages a $6 billion portfolio of investments for the City of Chicago   To promote economic development, the Treasurer’s investment strategy must protect principal, maintain liquidity and earn

the highest possible return for the City   Treasurer has statutory responsibility for managing investments, keeping accurate accounting records and guaranteeing

compliance with the City’s investment risk and return objectives

State of the art asset management without adding operating cost.

The Challenge   Monitoring and reporting on this large portfolio with hundreds of accounts spread across several municipal custodians was

a time-intensive, manual process   Challenge compounded by the constant pressure to maximize operating efficiency and do more with less

The Solution   To streamline and automate fiduciary and compliance reporting, the Treasury implemented Citi’s Treasury Analytics, a

web-based custody and corporate cash solution that aggregates portfolio information to present from four perspectives: accounting, compliance, risk and performance

  Reports are generated in a matter of minutes, with a few keystrokes and mouse clicks, instead of hours; and the ability to provide executive reporting—and a transparent overview of the City’s portfolio—at a moment’s notice is proving invaluable

“Our responsibility to the citizens and employees of Chicago demands the utmost in transparency of our investments, and Treasury

Analytics has been invaluable in giving us automated and timely information to share with our public and stakeholders.”

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ePayments Gateway—City of Mumbai

Municipal Corporation of Greater Mumbai (MCGM)   Mumbai is India’s financial capital and heart of the Hindi film industry

  The islands support a population of 14 million   The Municipal Corporation of Greater Mumbai is the primary agency responsible for urban

governance across Greater Mumbai   To bring transparency and foster collaboration across the various departments within MCGM, and for the benefit of

the citizens of Mumbai, MCGM has invested in an eGovernment Portal through which most essential citizen services are delivered

A bank agnostic tax and fee collection gateway for the city.

Citi’s NetBanking Payment Gateway   A push-based channel that is integrated with MCGM’s eGovernment Portal, e.g. through

MCGM’s e-tendering service, vendors can access tender documents, submit bids online and pay related tender fees on the same site

  A cost effective, open architecture solution that facilitates the online collection of fees and taxes from 30 partner banks and over 25,000 bank branches

  Eliminates paper-based processes, and improves transparency and service to citizens and vendors   Provides citizens with a common interface for the convenient payment of property tax, water tax,

establishment license fees, security deposits, etc.   Competitive bill payment charges for the payee   Ease of reconciliation with consolidated MIS for credits received from all banks

Outcome   Greater operating efficiency for the City of Mumbai; more convenient access for the citizens of Mumbai

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Thought Leadership

Contact Information: David Gourlay, Director Public Sector – Canada Citibank Canada 613.796.9286 david.gourlay@citi.com

Please click the link below to read our Whitepaper - Global Experience – Local Insight; Achieving Financial Efficiency for Canada’s Public Sector

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Citi believes that sustainability is good business practice. We work closely with our clients, peer financial institutions, NGOs and other partners to finance solutions to climate change, develop industry standards, reduce our own environmental footprint, and engage with stakeholders to advance shared learning and solutions. Highlights of Citi’s unique role in promoting sustainability include: (a) releasing in 2007 a Climate Change Position Statement, the first US financial institution to do so; (b) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of renewable energy, clean technology, and other carbon-emission reduction activities; (c) committing to an absolute reduction in GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (d) purchasing more than 234,000 MWh of carbon neutral power for our operations over the last three years; (e) establishing in 2008 the Carbon Principles; a framework for banks and their U.S. power clients to evaluate and address carbon risks in the financing of electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy & mitigation

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