Conquering the barriers to entering the global ACH market

Jonathan Lear, Earthport Gregory Rettinger, U.S. Bank

2

Agenda

• What is global ACH

• Why every bank needs to offer global ACH

• U.S. Bank customer case study

• Common barriers and considerations banks face

• Current solutions available

• Future opportunities and challenges

3

What is global ACH?

It is • Complementary

– recurring – high volume – non-priority – originated in batches electronically – STP = no repair – lower cost – no bene-deduct fees

It isn’t • A universal substitute for wires

Enables banks to improve their margins on existing transactions; and increase transaction income from exploiting underserved market sectors.

“The ability to settle payments across borders using the domestic in-country, low-value clearing infrastructure”.

4

Where do low-value international payments fit?

Transaction Value

Transaction Volume

Transaction and correspondent banking services

Domestic retail banking services

Low High

$200

$100,000

“Global ACH”

Global ACH is ideally suited to the low-value ($200 - $50,000) high-volume, cross-border payments opportunity.

Majority of cross border transactions are between $500 and $100,000 in value Majority of market is “very interested” in cross border payment solutions that connect local ACH schemes “One could argue that this is the largest unsatisfied opportunity today in the payments industry”

5

Four major categories of cross-border payments

Approximately two-thirds of U.S. importers that conduct business overseas currently pay all or some of their foreign suppliers in their local currency.

.

Supplier Payments

Payroll Retirement

Benefits Payments

E-Commerce Purchasing Payments

International Remittances

Corporate Paying

Consumer Paying

Corporate Collecting

Consumer Collecting

64%

20% 5%

20%

26%

14%

5%

23%

5%

26%

10%

25%

5%

40%

80%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SupplierPayments

PayrollPayments

PensionPayments

AffiliatePayments

Frequent Occasionally Very Rarely Never

Source: Earthport / Glenbrook research

6

Downward shift in value of payments

Corporations making more cross-border purchases of services •Global trade growth

– US exports grew by 15.4% in 2010 – Structural shift to lower average value per transaction

•Increasingly mobile workforce

– Global migrant remittances create over 2bn individual transactions per annum with a value of > $50bn – U.S. emigrants top 10 destinations: Mexico, Canada,

Puerto Rico, UK, Germany, Australia, West Bank and Gaza, Japan, France, Philippines

•Growth in e-commerce

– Forecast to be a $900bn category, requiring new forms of low-value payment services

“The number of international migrants

has doubled in the last quarter of a

century, to more than 200m”

7

The importance of global ACH to originators • 40% of U.S. middle-market importers ($50 million - $250 annual revenue) have non-U.S.

trading partners; approximately 78% of those businesses make international payments

Source: Aite Group

Approximately two-thirds of U.S. importers that conduct business overseas currently pay all or some of their foreign suppliers in their local currency.

8

The importance of cross-border payments to banks

The average $ value per transaction is significantly higher for cross-border payments and originators expect a substantial volume increase in the future.

Source: Earthport / Glenbrook research

27%

40%

29%

4% 0% 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Significantlyincrease

Modestincrease

About thesame

Slightly less Much less

In 3 years my cross-border payments volume will . .

9

Originators and banks see the value of global ACH

Both originators and banks see the value that global ACH can play in meeting the cross-border payments challenge.

10

Key benefits of global ACH

Improved growth and reach for banks, enabling the innovation of new

services and improving access to local markets worldwide

Transparent, reliable, predictable and secure payments leading to

outstanding customer satisfaction and retention

Increased profitability due to the cost-effective processing of high-volume,

low-value international payments

Unparalleled end-to-end processing efficiency

Key component in delivering full suite of treasury management service

11

U.S. Bank customer case study

Background: • U.S. Bank corporate originators utilize global ACH as an easy, safe and “known” payment

channel for payroll, pension, vendor payments and inter-company transfers

• They choose international ACH as an option due to customer dissatisfaction with foreign drafts, international Wire Transfer fees, and beneficiary deductions

Client: International educational organization.

Problem: High cost of wires for teacher salaries.

Solution: Global ACH.

Customer benefit: 86% savings in transaction fees.

Bank benefit: Customer retention and increased satisfaction.

12

Key learnings:

• Dedicate extra time to the initial payment instruction setup phase

• IAT is more complicated then domestic ACH, not due to software, just the additional “wire-like” variables

• Ability to see real-time rates online at initiation and approval

• Integrated International ACH functionality within standard domestic ACH workflow

Customer feedback and key learnings

Like: • Speed of payment (parity to wire?)

• No beneficiary deductions

• Cost savings to the originator and receiver (can exceed $20)

Dislike: • Limited pre-notification capabilities

• Truncated return and NOC information available

13

Global ACH: entry options

Build Pros •Proprietary bank solution •Full integration with other systems

Cons •High capital requirement = low ROI •Time-consuming process (24 months) •Significant on-going support overhead •Nostro network management overhead

Partner Pros •Leverage specialism and local expertise •Globalise payments ‘out of the box’ •Rapid ROI •Leverage proven expertise •Immediately meet unmet client demand

Cons •Need to identify expert partners •Evaluate partners against your needs

Partnering with a proven global payments expert offers the fastest, most capital efficient way of meeting your global ACH requirements.

versus

14

Global ACH: partnering options

Correspondent banking

Option Pros

Use a global bank

Exploit scheme based rules

Partner with expert iACH

provider

• Quick time to market • ‘Safe’ (effective?) potential solution

Cons • Lower STP = higher costs • Requires investment in technology?

• Limited counter-party risk • Adequate country coverage

• Common, documented standards • Gaining broad-based industry support

• High degree of focus and expertise • Highly efficient = faster ROI • FX agnostic = higher bank income • Dedicated customer support

• Non-specialized/inflexible? • Multiple technology / support interfaces • Exposes your customers to competition? • Share/dilute FX revenue opportunity

• Still need underlying clearing relationships • Still requires operational overhead support • How is the FX opportunity impacted?

• Requires vendor evaluation • Ongoing vendor management • Additional technology integration?

View

15

Outline Global ACH delivery model Segregated Accounts

Payment Instruction Bank

FI: EUR UK:

GBP

SG: SGD

US: USD

PH: PHP AU:

AUD

JP: JPY

US:USD

SG: SGD

NO:NOK

• Payments infrastructure • Payments operations • Compliance • Connectivity

Segregated Accounts

PL: PLN

16

Key selection criteria in choosing a partner

Criteria Objective

1. Overall solution Deliver an end-to-end global ACH solution.

2. Country coverage Capture maximum payment flow.

3. Foreign Exchange Maximize FX income opportunities.

4. Technical and implementation Low-cost, high-impact implementation.

5. Compliance Highest possible compliance processes.

6. Customer support Parity to other payment methods.

7. Return on Investment Low CAPEX (if any), rapid ROI.

17

Overall solution considerations • Objective:

– To identify a global ACH partner that provides the best end-to-end global payments solution which complements my existing processes/requirements

• Checklist:

Which discrete parts of the payments process will I do and which will the partner do?

Does the partner have the capability to meet all my requirements end-to-end if needed? Beneficiary account validation File transformation Real-time FX quotes Liquidity management

Identify up-front which parts of the payments process your global ACH provider will undertake and which you will retain in-house.

Compliance and sanctions screening Payment operations and settlement Reporting Exception handling and management

18

Country coverage considerations • Objectives:

– To have the broadest possible reach of settlement countries

– To have the ability to expand to new countries effortlessly as your needs evolve

• Checklist: Does the partner offer global ACH delivery to key regions (Europe, Asia Pac, Lat Am)?

Has the partner created and properly resourced a dedicated network expansion team?

Is the partner flexible so that I can influence their future network expansion to meet my future requirements?

Select a partner who has a well established global payments network and the resources, passion and flexibility to expand this to meet your needs.

19

Foreign Exchange considerations • Objectives:

– Maximize the Foreign Exchange (FX) revenue opportunity for the bank

– Be flexible in how best to achieve this

• Checklist: Am I obligated to universally use a partner’s FX service as part of their global ACH

solution?

Does the partner have FX capabilities I can selectively use (e.g. exotics)?

Is the partner fair and transparent to both the bank and my customers on costs, risks and rewards if I use their FX service?

A global ACH partner should enhance and complement your FX offering so that the bank can maximize its FX revenue opportunity.

20

Technology and implementation considerations • Objectives:

– Deliver a fast, low-cost, high-impact technical implementation

• Checklist:

Does the partner offer a range of technical solutions (e.g. API, Batch, teller) which meet my requirements depending upon the environment (online banking, branch, corporate bulk payments)?

Does the partner support open industry accepted technologies/file formats (e.g. web services, XML; ISO 20022; IAT) or will they expect me to write to their technologies?

Will the partner provide dedicated technical support before, during and post-live?

Focus should be on using proven

21

Compliance considerations • Objective:

– To ensure that all global ACH payments are executed to the same standard of compliance as all

• Checklist:

Does the partner offer robust banking-grade compliance capabilities that fit my risk tolerance?

How will sanctions, AML, KYC or CTF ‘hits’ be managed from a customer experience standpoint to limit improper disclosure?

Will the bank continue to screen the transactions as well as the processing partner?

Bank’s can outsource the sanctions screening process to a partner, they will always retain the liability and thus need maximum confidence.

22

Customer support considerations • Objective:

– To provide the same levels of customer support and service for a global ACH transaction as for domestic transactions

• Checklist:

Does the partner provide strong levels of tier-2 customer support so that they remain invisible to my originator but provide the necessary support when needed?

What kinds of reporting is available (web, phone, ticketing, API, on-demand) and how will it be used by the operations group within the bank?

Will the partner provide in-depth training to the bank’s operations group during the go-live phase?

Each settlement country has differing levels of transactional reporting available and this should be ‘normalised’ for consumption by the bank.

23

ROI considerations • Objective:

– To provide a rapid ROI to the bank while meeting my clients global ACH needs

• Checklist:

What is the cost model to the bank (CAPEX, transactional etc)?

How fast can I implement the global ACH solution (typically 4-6 weeks) so that I can begin accruing the benefits to the bank?

Can the partner support my near and long-term growth aspirations?

Global ACH is straightforward to implement with the right partner and a clear project plan which in turn should deliver rapid ROI.

24

Future opportunities and challenges for U.S. Bank

Opportunities • Provide non-urgent international payment

capabilities to corporate originators

• Ability to perform foreign exchange

• Utilize International Payments Framework Standards and Rules

• Adding more countries to reach will position U.S. Bank for continued growth in International ACH and support customer needs

Challenges • Considerable effort to build multiple

correspondent relationships

• Training corporate originators on non-urgent payment routing rules (IBANs, BIC, CLABE, etc) and specific rules and guidelines for specific countries

• Managing and mapping multiple in-country formats

• New regulations on foreign remittance payments

Going forwards, U.S. Bank is working with a specialized partner to expand our global ACH offering which will remove many of the challenges above.

25

Final thoughts . . . .

Dodd-Frank 1073 – key provisions

Does global ACH provide a significant part of the solution to the upcoming 1073 consumer remittance regulatory requirements?

• Full fee disclosure at the point and time of origination

• Guarantee of amount of final funds delivered, to be delivered at time of origination

• Guarantee on when funds will be received

• Right to cancel a transaction up to 30 minutes after its submission

26

Key takeaways

• Global ACH is becoming an integral part of originators’ global payments tools

• Global ACH creates an opportunity for banks of all sizes to compete globally

• Banks can either ‘build’ or ‘partner’ to deliver a global ACH solution

• Partnering typically offers the fastest, highest impact and biggest ROI for a bank

• In evaluating a partner, a bank should consider seven criteria (solution, country coverage, FX, technology, compliance, customer support, and rate of ROI)

• Global ACH offers a significant part of the potential solution for Dodd-Frank 1073