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IS COMPLIANCE TO PSD2’S SCA A BRIDGE TOO FAR FOR B2B MERCHANTS?

Pat Bermingham, CEO, Adflex

 

According to the European Central Bank, 79% of all card fraud in 2018 occurred online from Card Not Present (CNP) transactions. In cash terms, this equates to €1.43bn in fraud losses and represents a whopping 17% increase on the previous year.[1]

Against this backdrop you’d be forgiven for thinking that, for merchants, PSD2’s Secure Customer Authentication (SCA) couldn’t come soon enough. In reality, however, the European Economic Area’s 30th December deadline has had Europe’s suppliers in a tailspin, and many remain so even though the cut-off has passed. In the UK, the extended deadline of 31st September 2021 still feels ambitious, particularly now, as merchant productivity is strained under the pressure of lockdown and remote working.

 

SCA for B2B payments

None are feeling the pinch more than B2B merchants. Unlike B2C e-commerce firms, those in the supply chain routinely support multiple legacy transaction systems (POs and invoice systems, 30 day payment terms, BACS transfers, postal cheques) as well as card payments, making SCA just one of a whole host of payment-related challenges to contend with throughout the Covid-19 storm.

Pat Bermingham

The complexity of B2B payments throws more fuel on the fire. Supplier and buyer contracts commonly specify nuanced and flexible payment programmes linked to stock availability, throughput and forecasted demand for goods. How should these order and payment models, many of which are settled with corporate purchasing cards, be catered for under SCA? Manufacturers, for example, can take card payment details from a buyer at the point they place an order, so they can secure – but not yet take – their payment. But when that order takes weeks to fulfil, when should the SCA procedures take place? At the start? Or when the order is shipped? What about when a buyer’s corporate card details that are taken over the phone, via post or email, and then entered by the supplier into their own web-hosted payment system?

 

SCA: B2B exemptions and exceptions

The PSD2 Regulatory Technical Standards (RTS) does specify SCA ‘exemptions’. One example is when a supplier accepts a corporate card payment via a ‘secure environment’, such as when the buyer logs in to a merchant’s trade portal. Problems arise here, however, since the RTS puts the onus on the issuer to specify what constitutes ‘secure’. And since merchants are routinely forced by customers to accept payments from a variety of issuers and networks, they then need to navigate through all the nuances that occur between these issuers before they can call themselves compliant.

Then there are ‘exceptions’. Here, merchants can evidence to their acquiring bank (which is overseen by the local Competent Authority) that they are performing Merchant Initiated Transactions (MIT) and/or adequate Transaction Risk Analysis (TRA). Satisfy these requirements and the merchant can be granted an exception. Again, however, these processes are hamstrung by complexity. An MIT payment can only be made if it is based on a prior agreement with a customer before it is initiated. Can that be a verbal agreement given over the phone? Does it need to be in writing? In a contract, even? How many local builder’s merchants, for example, liaise with their trade customers in writing, let alone hold contracts?

 

Getting clarity on B2B SCA changes

For many B2B firms, this is the root of the problem: clearly understanding what changes need to be made to their payments acceptance process and in what circumstances they should be applied. Then comes the job of upgrading their systems. Corporate card programmes from different schemes and issuers have varying parameters for implementation, making an across-the-board change in response to regulation impossible. Instead, it spirals into complexity and becomes a costly drain on resources. Increasingly, these upgrades need specialist experience which, frankly, no modestly resourced supply chain business should reasonably expect to develop inhouse, let alone in the middle of what must be one of the worst-hit trading years on record.

B2B merchants urgently need to think differently about how they manage their payments. The current furore is actually a big opportunity. If merchants can nail SCA now and start utilising the new generation of compliant card payment facilities like 3D-Secure, tokenized Card on File or even EMV® Secure Remote Commerce / Click-to-Pay, all of which enhance both security and buyer confidence, they can use this storm to position favourably to the market and increase business.

The case for offloading these challenges to a specialist B2B payments platform provider has never been stronger. Not only will such a partner take the SCA compliance pressure off now, it will continue to do so for every future regulatory or systems upgrade required in the future, whether that’s coming from a card scheme, a regulator or, indeed, a new a customer.

 

Business

LAST DAYS OF LIBOR? WHAT ASSET MANAGERS AND FUND ADMINISTRATORS SHOULD DO NEXT…

By: Sern Tham, Product Director, Temenos Multifonds

 

The replacement of LIBOR with new reference rates in 2021 is not a simple substitution – existing valuation systems will require an overhaul

 

LIBOR (the London Interbank Offered Rate) will be replaced with alternative reference rate by the end of 2021. This is a gamechanger for the financial services industry, particularly when you consider an estimated $350 trillion of financial instruments including bonds, loans, deposits and derivatives used LIBOR as the benchmark rate. Asset managers and fund administrators need to act now and start asking the right questions of their teams and their technology providers.

LIBOR is a forward-looking rate produced daily by the Intercontinental Exchange (ICE), and it is the lack of actual transaction data underlying LIBOR and other IBORs that made them so prone to manipulation. To avoid this risk, central banks around the world have established new ‘Risk-Free Rates’ (RFRs) that are backward-looking, based on actual transactional data of rates offered in liquid markets on the previous day.

The new RFRs that will replace LIBOR will change the way valuations are calculated. The result is wide-ranging consequences on operations, risk calculations and the way institutions will conduct business in the future.  The new observed rates cannot simply replace LIBOR in a floating rate contract, because RFRs are based on observed overnight rates that are compounded over the period. In addition, different market conventions will be adopted to deal with lookback and lockout periods.

Therefore, to accurately reflect the value of the holdings once LIBOR is replaced by RFRs, asset managers and fund administrators will need to make sure their systems are capable of supporting the new methodology. Otherwise, investors buying and selling into a fund could be short-changed, leading to censure from regulators and clients alike.

Acting on the considerations listed below, will save any operational headaches once LIBOR has had its last dance.  Asset managers and fund administrators must be aware of all the securities and contracts that are impacted.  LIBOR’s role as the primary benchmark reference rate for trillions of dollars’ worth of financial instruments means it is deeply embedded in the financial industry. Firms must assess the scale of their exposure. This could be derivatives linked to LIBOR, cash instruments which reference it, or money market funds, which invest heavily in LIBOR rates. Mapping out all the affected instruments is an essential first step.

Alternative rates are already being published by the Federal Reserve Bank of New York, the European Central Bank, the Bank of England and Switzerland’s SIX Exchange. Regulators including the Financial Conduct Authority in the UK have emphasized the importance of early preparation for the transition.

Because the shift to the new reference rates will happen on an instrument-by-instrument basis, asset managers and fund administrators also need an overview of when instruments mature. If they have instruments tied to the LIBOR rate that mature after 2021, they need to be clear on when they will migrate to the new rates in order to meet the current deadline for the end of 2021.

Calculating valuations differently will be the biggest change for asset managers and fund administrators.  Firms should not assume their systems are going to cope with this change. The bigger the size of assets involved, the more complex the change will likely be. Accounting, collateral management and middle office derivatives programs should all be stress-tested to ensure the fund’s entire ecosystem can cope with the change.

Finally, the clock is ticking fast.  Firms will need to have a solution in place by the end of 2021, which means the timeframe for action is shrinking. Starting with assessing their exposure and then upgrading and testing systems, the transition will take time.  Upgrades should be completed in early 2021 to allow testing to start by mid-year, ensuring firms are in a place of strength before the deadline. Firms must act now to ensure their systems are ready for the end of 2021.

 

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Business

THE ROLE OF THE CFO IN ILLUSTRATING THE SUCCESS OF DIGITAL TRANSFORMATION

Tim Scammell, Finance, Treasury and Risk Solutions at SAP

 

It’s no secret that there are changes occurring within the modern corporation. While roles were evolving as a result of the move to digitisation and automation prior to Covid-19, the pandemic has further accelerated this movement as executives face new challenges. The most obvious is of course, the volatile economy we’re facing which has been the primary focus of the CFO within businesses. According to a recent survey, three-quarters of CFOs expect the pandemic to have either a ‘significant’ or ‘severe’ negative effect on their business in the next 12 months. But the same Deloitte report highlights that for CFOs, business transformation is a top priority, with a strong focus on digitisation and automation.

As such, we’re seeing the role of the CFO change most drastically. While the traditional demands of product evolution and revenue generation remain unchanged, they are also now playing a pivotal role in the wide-ranging ramifications of digitisation in terms of evaluating new dimensions like customer experience, channel management, IoT, blockchain and the associated compliance and legal exposures that lurk within the digital economy. CFOs are therefore vital in pushing digital transformation forward for several reasons and business executives would be wise to harness their skills in the journey.

 

Translating compliance and regulatory concerns

The digital journey is undoubtedly an exciting one, and for many industries, it’s a much-needed overhaul to ensure relevancy and success. However, it’s easy to get caught up in the excitement of implementing new programmes, products and services without thinking about the more mundane aspects. Primarily, the associated necessities that come with any new business operation, like regulation and compliance for example. However, the CFO is uniquely poised to tackle this dichotomy due to their ability to drive digital transformation forward but also deal with the more ‘analogue’ world aspects. The CFO is still dealing with the demands of regulatory reporting, tax, and compliance, which demand significant manual intervention and judgment.

As such, the CFO has the ability to break down the tension between the digital and analogue. The broader C-Suite is often focused on shaping the future and is grappling with the changing landscape of a hyper-competitive digital economy whilst pursuing the resulting revenue opportunities. Aspects like compliance normally don’t fit into this fast-paced thinking. As such, businesses should be harnessing the ability of the CFO to translate the actions of the C-Suite implementing digital transformation initiatives into a different language, one that satisfies stakeholders and legislative requirements. This translation demands the talents of an excellent communicator who understands the digital journey the company is undertaking and can articulate the consequences of these decisions using the analogue languages of compliance and regulatory reporting.

 

Pulling on past experiences

Not only can this best of breed, digital-savvy CFO make this translation due to their understanding of the digital and analogue worlds of compliance, but their extensive experience in building governance models should be maximised by the business too. CFOs are well versed in feeding the necessary information to decision-makers, particularly when it comes to unpredictability. The successful transition to a digital company is accelerated by observing how operational risk reacts to the unpredictable nature of the digital market. As such, organisations should bring the CFO into the digital transformation journey early in the planning stages as they are able to use their experiences to best plan for potential operational risks. What’s more, they can then  plan for the resulting avalanche of data that these digital business models generate and navigate a way of ingesting and processing this information.

 

Highlighting success

But this dynamic can only be achieved when the CFO is able to integrate data from across the organisation to produce the numbers they require for decision making. Such a platform will only exist when businesses make a dedicated effort to bring the CFO into digital transformation plans early so that they can explicitly coordinate actions and create a harmonised view of all aspects of performance, in the digital market.

Through this harmonisation of information, contemporary CFOs are critical to the great digital transformation as the insights obtained from big data and associated technological challenges are all manifested in the numerical results collected by the finance team. Financial results that track the impact the digital revolution has on the company’s competitive landscape and revenue projections. Financial results that enable a confident executive team to drive decisions that result in positive outcomes.

Clearly, the digital-savvy CFO is under a tremendous load. They occupy a wholly unglamorous position in the executive team and one where the consequences of failure could quickly derail the digital transformation of the company. Yet, if the CFO is given the means to draw together the right information, from a large number of sources, they can aggregate this quickly, and with the correct analysis, will be able to covert this governance to a strong position in the digital economy.

 

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