Despite challenges, Wholesale Transaction Banking remains attractive now and into the future.
Forecasted Growth in Transaction Banking
Transaction banking business represent around one quarter of totalbanking revenue
Historically stable with predictable business development and upward revenue trends
Attractive margins and low capital absorption in comparison with other traditional banking activities
Combined payments andtransaction-banking revenues will reach an estimated US$1.1 trillion by 2022
Revenue mix expected to shift from payment fees to account-related revenue, as pressure on transaction fees persists
Source: Boston Consulting Group, 2013.
1 Global Payments Landscape
2022
Forecasted Growth in Global PaymentsPercentage of Total Value of Worldwide Payments
2012
Source: Boston Consulting Group.
The worldwide payments market was worth US$377 trillion in 2012
… and this value is expected to increase to US$712 trillion by 2022
Europe
Africa
Middle East
Asia
Intra Regional Trade US$4.0–US$5.0 Trillion US$2.0–3.0 Trillion US$1–1.5 Trillion
US$0.5–1.0 Trillion US$200–500 Billion US$100–200 Billion US$50–100 Billion
North America
Latin America
2 Global Payments Landscape
Megatrends Continue to Shape Transaction Banking Landscape
Shifting Global Trade Patterns As emerging economies expand and develop local payment infrastructure, on-shore clearing
capabilities to acquire flows locally are becoming more and more prominent Shift in trade patterns and currency usage can lead to FX opportunities
Emerging Payment Types and Technologies Access to cutting edge payment mechanisms need not involve direct product development Collaboration in shaping and supporting new channels can provide linkage to flows
Regulatory Environment/Risk Management New regulations create an implicit need for solutions that can go far beyond the intention and
culminate in a comprehensive and valuable toolkit Mechanisms supporting better measurement, reporting and transparency are the need
of the hour
Increased Pressure on Revenue and Expenses Pressure on banks to do more with less Requires banks to ensure they are maximising the value from their flows
3 Global Payments Landscape
Emergence of a New Global Currency
... and Drive Changes in the Payments LandscapeGrowing Significance of Low Value Payments
Growing significance of ACH payments requires banks to consider the ability to settle cross-border payments using domestic low-valueclearing infrastructure Global trade and e-Commerce growth have accelerated use of
ACH payments– 21 billion USD transfers processed via NACHA in 2012, up by 4.19%
over 2011– 3 billion EUR ACH credit transfers affected via SEPA in the last
12 months
Regional and national initiatives serve as catalyst: In Europe, SEPA deadline of February 2014 will bring EUR ACH payment standardisation across 32 countries
Immediate/Faster Payments available in UK, Mexico, South Africa; launched in Nigeria and Poland in 2012. Sweden, Singapore, Australia, HK, US, India and Ireland are all in the various stages of evaluation/implementation
On SWIFT and in value, RMB becomes very significant in the global payments space
RMB ranked No.11 as a world payment currency, overtakes RUB, NOK and THB in first half of 2013
UK has become an important off-shore RMB centre: UK has surpassed Singapore since June 2012 and become the No.1 in RMB payments with China and Hong Kong
By July 2013, over 20 countries have established swap lines with China, including UK
China internationalises RMB with simplification of trade payments and collections, relaxation on requirements of regulatory approvals for cross border lending and cross border trade financing
Off-shore RMB Centres and Share in Payments Value
79.0%Hong Kong
5.1%UK
3.8%Singapore
0.6%Taiwan
Payments = US$247,162 billion
Considerations for Banks
Opportunity: Low value payments enables banks to improve their margins on existing transactions and increase transaction income from underserved market sectors
Infrastructure: Banks have to consider impact of connecting to multiple real-time services
Business Model: Partnering with a proven global payments expert offers the fastest, most capital efficient way of meeting bank’s global ACH/faster Payments requirements
4 Global Payments Landscape
Beyond SEPA Compliance – New Opportunities
• Evaluate SEPA decisions and temporary solutions (e.g. manual workarounds) which
helped to meet the deadline.• Put in place a plan for future deadlines (2016 -
e.g. Niche schemes)
Leverage SEPA to fundamentally re-engineer cash management structure
XML Conversion Services
Mandate Management services and process
SDD scheme selection – B2B reachability
Additional Optional Services, e.g. COR1?
Future deadlines: Niche schemes, non-Euro member states in 2016, new Euro states, waivers,
Account location or bank rationalisation
Receivables Centralisation & ROBO
Further technology rationalisation –harmonisation of reconciliation
Payments Centralisation & POBO
Expand geographic scope beyond SEPA –Nordics, UK, Switzerland
As SEPA compliance dust settles, organisations’ attention is shifting towards how to best reap investment benefits from SEPA. It is important to consider both immediate and re-engineering opportunities.
Immediate Re-engineer
Regulations and Industry Changes ImplicationsSystemic Risk Reduction and Control
Basel III FATCA CPS-IOSCO Standards Dodd-Frank Act New Liquidity Standards and Clearing Rule
Changes mandated by Central Banks
More costly intra-day liquidity Higher collateral for clearing Rapidly changing clearing rules for member banks ‘Resolution Planning’ exercises being completed by systematically
important banks and clearing infrastructures Clearing Infrastructures reviewing and overhauling Risk
Management practices Legal entity implications
Transparency and Consumer Protection
Dodd-Frank Act Rule 1073 Dodd-Frank Act Durbin Amendment National Account Mobility Initiatives Data protection laws
Transparency of charges in the payments chain Price controls on debit card transactions Pressure on card interchange fees Pressure on traditional correspondent banking fees and charges Challenges for global applications – data storage location and
application hosting locations; lengthy regulatory approval cyclesStandardisation and Convergence
Real-time Payment Systems (convergence of RTGS and ACH)
SEPA and similar payment format/rule standardisation (e.g. ASEAN)
Same-day settlement; Expedited payments concepts
Cheque convergence to electronic
Increasing technology investment to support changing clearing infrastructures
New technology architecture and operational workflow requirements
Pressure on payment fees and float Narrowing competitive differentiation opportunity
Regulatory Themes and Industry ChangesRegulations and industry changes impacting the Payments industry can be classified under three major themes.
5 Regulatory Changes
Recent Developments
Proposed Payment Services Directive II and regulation on Card Interchange Fees published in the 24th of July 2013 by the EU Commission
It is not expected that the directive will be rushed through before May 2014 EU elections and therefore unlikely that PSD II will be agreed and adopted before Q1/Q2 2015.
Proposed Changes in the PSD II
1. Introduction of ‘third party payment providers’ (TPPs) – can perform services with access to the customer's account and initiating payments .The provider will be licensed under PSD II. Specific for online banking in the context of e-commerce transactions over the web.
– PSD II established the right for all users (consumer and corporate) to make use of such service providers..– Customers encouraged to give away their personalised security details in order to enable the TPP to access online banking portal and to
initiate the payment on their behalf. – The TPP will be able to do so without first enrolling with the account holding bank– TPP will re-use the customer's authentication details and perform an impersonation (which in case of fraud would be a ‘man-in-the-middle-
attack’). – The burden of proof would always remain with the account holding bank, which will not be able to proof that a third party accessed the
account.
2. Payment systems that are designated by the Settlement Finality Directive (e.g. Target2, Euro 1, CHAPS etc.) should allow indirect participation to non-bank payment institutions:
– Potential concern is that direct participating banks would have to take indirect non-bank payment institutions onto their books.
3. Directive maintains the ability to agree different liability rules and some of the operational code of conduct related elements with corporate clients (as compared to consumers)
4. The initial concern that the Commission would propose strict liability for PSD transactions that have one leg outside the EU, has been removed and additional information requirements proposed for all currencies and transactions with one leg outside the EU, are now limited to consumer information requirements and will not impact corporations/business users.
Update on Payment Services Directive IIEU Commission is currently reviewing PSD II with continued advocacy by Citi
7 Regulatory Changes
Benefit from Trends through Partnership
Growth Driven by New Global Dynamics …
Banks intermediating flows over an extensive network can benchmark pricing points such as beneficiary deductions locally rather than go through the “trial and error” method and leave money on the table
Lower transaction costs to our clients by formulating interbank charging agreements with numerous of banks at reduced rates
Generate incremental fee income from capturing FX fromcross-border payments
… assisting you to Drive Revenue by leveraging a robust GlobalBranch Network
Capabilities to Address Client Needs …
Offer ‘one-stop-shop’ solutions for domestic and international payments needs
Flexible infrastructure and active collaboration provides the opportunity to acquire more share of the growing globalpayments wallet
… increasing Client Stickiness with innovative tools and expansion of payment types
Responding to a New Regulatory Environment …
Thought leadership and shared intellectual property can help to meet the evolving needs of clients and respond to theever-increasing regulatory demands
Improve data capture and quality, as well as analytics, to improve client and regulatory insight
… solutioning forTransparency and Controlfor effective response to regulatory changes(i.e. Dodd-Frank 1073)
Streamlined Technology and Processing …
Differentiate yourself in the market with state-of-the-art proprietaryback-end technology platform, with on-going enhancementsand updates
Leveraging the partner with multitude of correspondent relationships and branch networks
… gaining Cost Efficiencies by leveraging technology platforms andtransactions processing
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8 Partnership Opportunities
Client Example: PTSB Partners with Citi London for SEPA ProcessingCiti’s solutions allow banks to address regulatory and market changes without major upfront investment.
The Challenge
Migration of domestic clearing volumes from the Irish Legacy scheme to the SEPA Credit Transfer and Direct Debits schemes without major upfront costs
The Solution permanent tsb leveraged Citi's SEPA platform and Indirect Participant offering to migrate existing volumes to SEPA
Citi to provide permanent tsb clients with full access to the SEPA schemes ahead of the February 2014 end date
Processing of approximately 45 million transactions annually on behalf of permanent tsb
The Results Permanent tsb is able to provide account-holders with the full range of SEPA Services, providing clients access to low cost payments and receivables across the Single Euro Payments Area
Use of Citi’s extensive investment in SEPA capabilities to quickly and easily offer this landmark service to clients
Key Benefits
▲Time to market
▲Leverage existing partner bank infrastructure
▲Move from a fixed to a variable cost model
▲Protect client base against increased competition from local and regional banks
9 Partnership Opportunities
Client Example: Global Bank Expanding FX CapabilitiesCiti’s solution allows banks to expand their FX capabilities in cross-currency payments whilst improving transactional margin.
The Challenge
Global bank needed to derive additional revenue from payment flows to US
Eliminate the need for the bank to undertake development in payment conversion capability for local currencies
The Solution Citi’s Global Clearing Multi-currency Gateway capabilities leveraged in converting customer transaction messages from EUR and GBP to USD of the beneficiary account domiciled in the US
Transactions eligible for auto conversion identified from information available to Citi about the currency of the relevant beneficiary bank account held in thedestination country
Transparent FX rates applied on client customers’ transfers – fixed spreads over interbank Reuter’s comparable rates refreshed hourly
The Results FX conversion process is moved to Citi and bank gets a share of the FX revenue
Bring quickly to market the cross-currencypayments solutions
Key Benefits
▲ Increase revenues through FX revenue share
▲Automated foreign exchange conversion for higher STP rates
▲Partner bank local market expertise translating into lower level of erroneous conversions
10 Partnership Opportunities
FI Payments Innovation @Citi
Citi® Payment Flow Manager
Provides clients with a user-centric online experience while enabling access to a broad range of Citi solutions
Citi® Payment Advisor Mobile
Mobile-enabled application that allows banks, their customers, or third parties to track the status of a payment at any time and from any mobile device, similar to tracking the status of a package
Citi® Payments Directory Mobile
Mobile-enabled application allows banks to explore a database of institutions worldwide that participate in USDollar Clearing
Why Focus on Product Innovation? Product innovation brings value to clients with emerging needs, driven by market and industry changes
Differentiation can only be achieved in the 30% of the payment value chain: Relationship Management, Credit decision and Client Service
Robust and user-friendly interfaces deliver immediate benefits of self-service and timely access to information. Help enhance customer relationships by reducing turn around times
Innovation is a “must” for survival, however investment spend restrictions need to be overcome with new partnerships models
11 Innovation @ Citi