Citi Payments Prospectus 2013

Transcription

1 Citi Payments Prospectus 2013 A look at the payments market around the world... Treasury and Trade Solutions

2 Payments Around the World Payments Markets Market Insights Regulatory Ecosystem Global Currencies

3 Market Insights Payments Markets Market Insights Regulatory Ecosystem Global Currencies The payments industry is undergoing a transformation: from a commoditized business to an important area of growth. There are three major themes underlying the changes taking place: systemic risk reduction, transparency and consumer protection, and standardization and convergence. We ve touched on a few of these themes in the Market Insights articles. Payments: From Compliance to Innovation Written by Ebru Pakcan, Mark McNulty, and Carolina Caballero A Fresh Take on the Payments Business Written by Sam Itzcovitz and Jitendra Chauhan Ebru Pakcan Global Head of Payments Mark McNulty Head of Euro Clearing, EMEA Head of Clearing and FI Payments Carolina Caballero Product Risk and Regulatory Strategy Manager China Rising: A Look at Growth in RMB Written by Yiting Shen Sam Itzcovitz Global Head of Clearing and FI Payments Jitendra Chauhan Head of USD Clearing Yiting Shen Head of Developing Currencies

4 Payments: From Compliance to Innovation Payments Markets Market Insights Regulatory Ecosystem Global Currencies By viewing regulation change as only a compliance project, financial institutions may miss out on the opportunities to innovate. The regulatory and industry changes currently unfolding in the payments environment are so important they require much more than a tactical operations or IT approach, says Ebru Pakcan, Global Head of Payments, Treasury and Trade Solutions at Citi. Strategic thinking on the part of business owners will enable financial institutions to meet the challenges these changes present and innovate to make the most of the opportunities that will also arise. There are three main themes underlying the changes taking place in the payments industry: systemic risk reduction and control; transparency and consumer protection; and standardization and convergence. Some, but not all, of the changes are driven by regulation. Therefore, by treating such changes as individual compliance exercises, financial institutions may miss out on the bigger picture of how these three themes relate to each other and how business models can be adapted. Systemic risk reduction and control The reduction of risk and strengthened control over the financial system continues to be a focus for financial regulators across the globe. Initiatives in this area include Basel III, the US Foreign Account Tax Compliance Act (FATCA), CPS-IOSCO standards, the US Dodd-Frank Act, and new liquidity standards and clearing rule changes mandated by central banks. These changes have a number of consequences, including more costly intra-day liquidity, higher collateral requirements for clearing, rapidly changing clearing rules for member banks, the need for systemically important banks and clearing infrastructures to undertake resolution planning exercises, and the review and overhaul of risk management practices by clearing infrastructures. While Basel III does not directly affect the payments industry, its intraday liquidity requirements will have important implications, says Pakcan. The Basel Committee on Banking Supervision (BCBS) is defining its requirements for sound liquidity risk management and supervision. In April, it published Monitoring tools for intraday liquidity management, which sets out seven intraday liquidity indicators and a reporting framework that will enable banking supervisors to monitor banks intraday liquidity risks and their ability to meet payment and settlement obligations. The intraday liquidity requirements mean there will be more regulatory oversight on financial institutions about how they manage their intraday liquidity, says Carolina Caballero, Product Risk & Regulatory Strategy Manager for Clearing and FI Payments at Citi. Therefore internationally active banks will need to better understand and monitor their liquidity needs and have visibility over their liquidity at any point during the day. Citi itself approached the issue by developing real-time monitoring capabilities to track and control intraday liquidity movements. This exercise created a great deal of management information for Citi s treasurers. The exercise enabled us to look at our client data in a different light, says Pakcan. We could see this was very valuable data that our clients, such as broker dealers or banks, would like to see. FIs have many payments and receivables made in different currencies throughout the day. By seeing the data on these transactions they can identify patterns of liquidity movements with individual counterparties. What we have developed in response to Basel III and intraday liquidity isn t really a product it is more a form of reporting, says Pakcan. By viewing the data in this way, customers can make improvements to their operating processes and to their relationships with counterparties. Citi has benefitted from developing this tool, and so too have our clients who can improve their intraday liquidity management significantly. Caballero adds: The presence of intraday liquidity has been taken for granted, particularly in the US. But there are new demands for liquidity, and as the financial environment changes, there will be more focus on a value that will be charged for. This should drive FIs to change their behavior to more closely consider when they send payments into the clearing systems. For example, traditionally FIs would typically release payments at the earliest time in the day in order to get the transaction as far Article continues

5 Payments: From Compliance to Innovation Payments Markets Market Insights Regulatory Ecosystem Global Currencies down the payments chain as possible and reduce operational risk. But the focus on intraday liquidity means FIs also need to look at the efficiency of their payments and how they could be staggered in order to improve workflows. The intraday liquidity requirements are an opportunity to work in partnership with transaction banks to not just develop reporting solutions, but also to review workflow practices, says Pakcan. By doing this, banks can review how they send and release payments to ensure everyone in the payments chain has access to intraday liquidity in the most efficient way. This can only be done successfully via a symbiotic partnership, she adds. Transparency and consumer protection Many government agendas are driven by an element of consumer protection. In the payments sector, governments are pushing market infrastructures and FIs to create more transparent and cost effective ways of making payments. These government requirements are being delivered via regulations such as the Dodd-Frank Act (Section 1073 and the Durbin Amendment), national currency account mobility initiatives (the UK recently announced the introduction of account portability for September 2013) and data protection laws. The potential implications of these initiatives include: more transparency of charges in the payments chain, price controls on debit card transactions, downward pressure on card interchange fees, pressure on traditional correspondent banking fees and charges, and challenges for global applications such as data storage location and application hosting locations, and lengthy regulatory approval cycles. In this area there is evidence that the financial industry is trying to innovate and leverage technology without thinking about what the retail customer really needs, Pakcan notes. FIs need to consider whether there is an issue that needs to be addressed or are they just innovating for the sake of innovation? This is exacerbated by the fact that some payments are viewed as being commoditized and therefore market infrastructures are seeking to develop more value-added services in order to attract more revenues. To illustrate her point, Pakcan cites the UK s Faster Payments initiative, which was developed by UK banks and reduced payment clearing times from three working days to a few hours. Originally, it aimed to solve a problem to make payments faster and less expensive. The UK industry decided rather than to introduce a faster clearing cycle for the BACS system, it would invest a large amount of money into developing the new Faster Payments infrastructure. The average person on the street is more interested in making a payment to another individual or to a commercial entity. They don t think of the infrastructure that underpins that and I would question whether the industry really needed to deliver real time payments, as opposed to something like same-day payments. The danger in delivering solutions to address transparency and consumer protection is that often it is not immediately apparent who benefits from innovation. Another example is the Dodd Frank Act Section 1073, which covers remittance transfers. The requirements laid out by DFA1073 are being implemented by the US Consumer Financial Protection Bureau (CFPB). On 30 April 2013 the CFPB issued a revised 2013 final remittance transfer rule with an effective date of 28 October The Final Rule implements new protections for consumers transferring funds electronically from the US to another country. These are designed to increase transparency in cross-border payments and include prepayment disclosure and receipt that provides additional transfer details at the time the transfer is requested, 30 minute cancellation rights, and extended error resolution rights, which will allow customers certain remedial rights to submit claims within 180 days from the disclosed date of funds availability. Banks operating in the US will be required to notify customers of any fees charged by the sending institution or intermediary banks. The 2013 Final Rule makes it optional, in most cases, to disclose fees imposed by the designated recipient s institution applied to the designated recipient s account provided that the sender is notified that additional fees may apply. Information regarding the delivery date and fund availability to the beneficiary is also required along with the relevant FX rates and taxes that will be applied to the transaction. Banks outside the US that receive consumer wires, or nostro providers to US-based remitting institutions may be approached by US institutions for information about their charging practices in order to be able to provide information on the fees that will be Article continues

6 Payments: From Compliance to Innovation Payments Markets Market Insights Regulatory Ecosystem Global Currencies charged along the payments chain. From a regulatory point of view, information provision is not required; however non-us nostro providers might consider the relationship implications of not providing such information to their partner US banks. US-based nostro holders may also ask for additional information to enable processing of consumer-initiated wires such as local fees, services that will avoid downstream fees (such as guaranteed OUR) and funds availability. As US-based banks will likely adopt an OUR approach to avoid downstream decisions, banks outside the US will see more OUR incoming transaction volumes after the effective Final Rule date of 28 October, says Caballero. The idea behind Section 1073, of giving consumers transparency before a payment is transacted is a noble one, says Pakcan. However, the regulation has been substantially modified as the difficulty of providing a raft of information from across the world, as originally envisaged, has been acknowledged. Balancing the need for enhanced consumer protections against the safety and soundness of the banking industry continues to be an iterative process, she adds. Industry uncertainty concerning Section 1073 remains elevated. In a recent survey of US banks conducted by Citi, clients identified ability to execute as the most important criteria in their decision to choose a DF1073 correspondent. However, remittance transfer providers are expected to increasingly rely on their DF1073 correspondents. Process flows will have to be documented and they will need to understand the detail in their correspondents service level agreements, reporting and alerting services. Citi has developed solutions to address Section 1073 for Citi s retail banking operations and has leveraged these for its retail bank clients as well. These service offerings can help FIs to be compliant with the transparency requirements and are based on Citi s global capabilities in cross-border payments, explains Pakcan. Standards and convergence The evolution of the payments infrastructure during the past decade has resulted in fragmented clearing systems, involving different settlement cycles across the globe. There are now moves to standardize and simplify the payments landscape via real-time payment systems, which are leading to a convergence of RTGS and ACH infrastructures. Initiatives such as the Single Euro Payments Area (SEPA) have sparked a number of similar payment format or rule standardization projects elsewhere in the world. Same-day settlement and faster payments concepts are elements of standardization while checks are migrating (albeit slowly) to electronic payments alternatives. There has been increasing technology investment by market infrastructures and FIs to support the evolution of clearing infrastructures, resulting in new technology architecture and operational workflow requirements. Meanwhile, convergence and standardization put pressure on the payment fees and floats that banks traditionally have implemented, and narrow the competitive differentiation gap in this critical field. Each of the initiatives that characterize the standards and convergence theme are bringing very positive aspects to the payments landscape, says Pakcan. But these positives come hand in hand with challenges, such as significant investment in order to comply with the changes. SEPA is a case in point; it creates a level playing field across the euro zone but has been a very significant change for FIs and their corporate clients. The amount of time it has taken to develop SEPA shouldn t be viewed as a failure. Given the diversity of the region, SEPA is happening at a pace that enables such as large geographical area to remain in synchronization as the changes are rolled out, says Pakcan. Many banks are still working towards SEPA compliance says Mark McNulty, EMEA Head of Clearing and FI Payments, Treasury and Trade Solutions, Citi. There has been significant investment across the banking industry to comply with SEPA and that has put a lot of pressure on resources. SEPA is not just a technology project but requires Banks to review their entire operational model to ensure they are fit for purpose post SEPA migration. When surveyed at Citi s recent global client conference in Istanbul, 79% of delegates had either implemented a compliance and migration project for SEPA or had already completed the required changes. However, 11% had not yet begun their projects. Article continues

7 Payments: From Compliance to Innovation Payments Markets Market Insights Regulatory Ecosystem Global Currencies McNulty believes many institutions underestimated the effort that was required to migrate to full SEPA compliance for credit transfers and direct debits. Many banks are looking at the level of investment required in continuing to be a direct member of the low value clearing systems and evaluating whether Indirect Participation is more appropriate to their business model and available resources he says. Outsourcing SEPA clearing to a transaction bank committed to this space is seamless to the Indirect Participant bank s clients, brings benefits of scale and expertise from the transaction bank and it can free up resources at the Indirect Participant bank to focus on more core and value-added activities. Citi has been offering these Indirect Participant services since 2008 and continues to invest in its SEPA architecture to ensure it has the right scale and solution set to service the growing demand for Indirect Participant services. SEPA is of interest not only to banks within the SEPA zone but also those outside it, he adds. Banks in certain Non-SEPA markets are interested to understand SEPA and how they can access it and leverage it. We see the level of interest here growing. Medium sized and supra-regional banks are looking for SEPA access to service their clients with a growing demand for local capabilities in the SEPA markets. From an international perspective correspondent banking into and out of SEPA/Europe is still a crucial space, says Pakcan. As the industry guidance clarified, banks located outside SEPA should still be able to benefit from the low value, low cost ACH access into Europe. However there are differing views across the SEPA clearing schemes and Banking Industry regarding accessibility. It remains to be seen how international cross-border payments will develop where SEPA is the last European mile. The success of the SEPA migration project, which ends on 1 February 2014 when full compliance with the SCT and SDD schemes is required, will be closely watched in the rest of the world. Already other regional bodies such as the Association of South-East Asian Nations (ASEAN) are investigating the possibility of similar payments processing harmonization. However, Pakcan warns that with new initiatives the inability of the financial industry to sunset old projects is highlighted. In markets that have two or three clearing infrastructures, the roll out of any new program such as SEPA or real-time payments raises the question of whether you are merely adding more complexity to the overall payments landscape, she says. The delegates at Citi s global client conferences in Europe and the US were asked whether they felt that regulatory changes in the payments industry would have a positive effect on the overall industry. In Europe, responses were almost equally divided between yes 42% and no 47%. In the US, respondents were more upbeat about the impact of regulation 64% viewed it as positive, with only 21% feeling it was having a negative effect. Our role as a transaction bank is to educate our financial institution clients about the availability of options regarding regulations and other changes and give guidance about which payments options are the best to use. Ultimately, the FIs will have to make their own decisions about the route they take, says Pakcan. Innovating for change Meeting the challenge of the various regulations and changes is one thing; leveraging change in order to be innovative can be a real success factor. There is so much change occurring in the industry at the moment. The question is how do you comply, but also approach these challenges in an innovative way, says Pakcan. A strategic response and deliberate action planning will be necessary considering each of five key components of the payments business, says Pakcan, if institutions are to adopt the business models necessary for a changing industry and regulatory environment. The five components, or pillars, of the payments business are: clients, counterparties/ clearing infrastructures, network/correspondents, technology architecture and operating model, and innovation. Each of the changes emerging in the payments landscape should be evaluated in terms of how they affect each of these five pillars, she says. Evaluation should be based on key considerations, common themes and a strategic approach. In the case of clients, for example, an FI should investigate regulation or change by asking what the true value of its services are to clients and whether they are priced according to their value. Some common themes that are emerging in this segment are Article continues

8 Payments: From Compliance to Innovation Payments Markets Market Insights Regulatory Ecosystem Global Currencies that intraday clearing lines are scarce and more costly, but there is pressure on charges and fees. A strategic approach to these dilemmas would be to redefine the client value proposition and price for value. In the case of counterparties and clearing infrastructures, FIs should consider whether they have assessed the entire end-to-end risk situation and how they measure it. They also should look at direct and indirect clearing membership and when each scenario is most applicable. The themes in this sector include the cost of intraday liquidity and requirements for more collateral, as well as payment systems risk. A strategic approach would involve a greater focus on payments risk management and the development of tools to enable end-to-end risk management. Network and correspondents activity will raise questions such as how much transparency and accuracy an FI is receiving and what the optimum number of correspondents should be. In this segment data and transparency are emerging as king,, says Pakcan. The Way Forward It is natural to view changes as a compliance project, says Pakcan. But in the case of FATCA, for example, an institution may make changes to its technology operations but overlook the fact that FATCA will also have an impact on its clients and how they should be on-boarded, the documentation required, how accounts are opened et cetera. It is important to think about all of the regulations and other changes in the payments industry from a business angle, rather than as a tactical technology project. Some of the changes under way have enough impact to force some providers to reconsider their business models. As Pakcan explains, These are very fundamental decisions that have to be made. This can be done only when you view the changes from a business point of view. With regards to the technology architecture and operating model, FIs should consider how agile their technology development processes are in the face of continuous regulatory and industry change. Moreover, the operating model must be sustainable. The dominant themes regarding IT include increasing cost of maintaining and developing technology, along with a problem that existing real-time payments architectures are not designed for high volumes of low-value payments. A strategic assessment and re-engineering of the operating model and technology architecture should be undertaken, whereby critical vs. non-critical components are assessed as well as in-house vs. outsourcing strategies. Finally, in the innovation segment itself, FIs should consider what opportunities exist to offset the contraction of margins in parts of the payments business. They also should look at what new opportunities can arise from new regulations. A theme here is the narrowing competitive differentiation in traditional payment processing that is increasing as a result of regulation. FIs can take a more strategic approach by extending services further up the payments value chain.

9 Fresh Take on Payments Payments Markets Market Insights Regulatory Ecosystem Global Currencies According to the Boston Consulting Group, the worldwide payments market will grow to $782 trillion in value by Despite its continued growth, the payments market is facing two opposing forces: the shift from paper-based to electronic payment instruments and the increase of standardization have turned many payments products into commodities. Meanwhile, shifting remittance and trade patterns provide added complexity to the payments business, spurring banks and corporations to do business in new markets. Being able to differentiate in a commoditized market and service customers increasingly complex and global needs is a growing challenge for financial institutions. Digitizing the global payments business While technology has been a significant driver of commoditization, it may also hold the key to differentiation in the digital payments environment. Tools that can deliver increased efficiency in payments processing and full end-to-end visibility of the payments chain enable financial institutions to better service their clients. Banks unsurprisingly are looking to achieve rapid deployment and return on investment in the payments market, says Samuel Itzcovitz, Global Head of Clearing and FI Payments, Treasury and Treasury Solutions, Citi. This is increasingly challenging in today s environment and requires a reassessment of business models and a fresh look at partnership opportunities. The challenges may arise from a significant increase in payments-related regulations, shifting global trade patterns, and emerging payment types. At the same time, FIs face pressures on revenues and expenses. Within these challenges are opportunities that should not be overlooked, says Itzcovitz. The key to differentiation lies in overlaying the core payments processing infrastructure with efficiency tools that offer visibility and control over payments. Banks expect efficient, reliable and timely payment executions from their service providers. As their own customers have heightened expectations of service levels, FIs are requiring the same from their transaction banks. Customers of banks expect far more than end of day reporting. Full visibility into payment lifecycle and payment assurance is an important expectation, says Itzcovitz. The power of information By working in partnership with global banks that have strong infrastructures and global networks, FIs can better serve and ultimately empower their customers, he says. This can be done most effectively by having the right information at the right time to deliver a positive experience and influence how payments are executed. End-to-end visibility of the various stages of a payment lifecycle is considered an important service differentiator. At Citi s recent global client conferences, a majority of delegates indicated the best way to deliver such visibility would be through a comprehensive reporting platform accessible over the internet. Such a platform should include paymentsrelated reporting, information on balances and liquidity aspects of the FI s activities with its clearing bank, as well as analytics of payment activity and trending indicators of total payments flows. Real time visibility via an FI portal such as this can be strengthened by adding an element of self-service, says Jitu Chauhan, Head of USD Clearing, Treasury and Trade Solutions at Citi. The global nature of commerce means payments flows can span across many different time zones. A payment may involve many hand-offs before it is fully executed and if those handoffs occur in different time zones, the delays can add up. We have addressed some of the problems associated with that by looking at how organizations in other industries that operate in many countries approach it, he says. The solution is self-service, but it is no longer plain vanilla self-service. FIs can give their corporate clients the ability to log into a website and enter a reference number, thereby tracking the status of payments from anywhere in the world. For example, a company based in Germany that has employees in Dubai, can track the status of salary payments in real time. This empowers the client, says Chauhan, in much the same way that international logistics companies have been doing for years via parcel tracking, for example. Article continues

10 Fresh Take on Payments Payments Markets Market Insights Regulatory Ecosystem Global Currencies Understanding nuances in the global landscape Officially recorded remittance flows to developing countries reached an estimated $401 billion during 2012, according to World Bank estimates 2 and are expected to grow at an average of 8.8% during to total around $515 billion annually by Global trade patterns are also changing as trade liberalization initiatives have borne fruit. Supply chains have become more complex and fragmented, with natural resources, technology and components traded across less traditional trade corridors. As global trade and remittance patterns evolve, financial institutions are challenged to understand the nuances of many new markets. Their corporate customers want to have a consistent experience in whichever market they do business, explains Itzcovitz. Global transaction banks, which have established extensive correspondent banking networks and intermediate flows over an extensive network, have access to a vast store of knowledge about local market practices and regulations. This knowledge can be passed on to FIs who don t necessarily have the visibility of specific market practices. As FIs service their clients they do not want to upset them by overcharging for particular payments. At the same time, they don t want to leave money on the table. A mistake could cost money or business, says Chauhan. Citi can provide information that helps banks to benchmark pricing points such as beneficiary deductions to what is locally acceptable. Very often FIs will go through a trial and error period in trying to establish the correct fees and charges. Benchmarking provides a safer and more effective alternative. The core infrastructure and global network of a large transaction bank underpin these services, says Chauhan. Applying a big data approach, along with a local presence, helps us to drive conclusions for our FI clients. There are 193 recognized UN states and they all make payments to each other. The large banks with the right infrastructure and platform can preside over payments flows in multiple currencies and reap a bounty of data and knowledge that can be used to help FI clients achieve greater efficiency in their payments activities. By better understanding local market practices, FIs can optimize currency flows and take advantage of opportunities that might otherwise have been missed. In-depth knowledge is also a crucial benefit when it comes to financial regulation. By partnering with global transaction banks, FIs can make sense of the enormous raft of information and requirements associated with regulations such as the Dodd-Frank Act. Our value proposition is all about keeping it real, says Chauhan. We can help FIs to interpret information into actions and consequences. Globally important trends, such as emerging China, and the changes being introduced via the Single Europe Payments Area may raise questions about whether there are opportunities or threats and how FIs can monetize these opportunities. Building on a scalable platform Understanding the changing nature of currency flows and being able to capture the FX opportunities that reside within them is an important goal for financial institutions, particularly as they enter new markets. As emerging economies expand and develop local payment infrastructures, onshore clearing capabilities to acquire flows locally are becoming increasingly prominent. Success in FX requires scalable platforms and intellectual capital, says Itzcovitz. Helping clients succeed in new markets and to capture the opportunities from specific currency flows is about collaboration. Citi has built a Multi Currency Gateway suite of solutions that provide a host of options to FIs ranging from upfront foreign currency payments (active FX conversion) to further downstream conversion (passive FX), that enables its bank clients to transact business around the globe, without the need for multiple accounts to send and receive payments in multiple currencies. These new streams of revenues help to supplement the increasing earnings power and relevance of the payments business. A wealth of intelligence on local market practices from around the globe is entered into the platform, providing financial institutions with consistent information and a consistent experience in each market they enter. Local market practice insights are important in helping to establish new streams of revenue such as upstream FX conversion. While technical capability for FX conversion is relatively easy, says Itzcovitz, the real strength lies in understanding local account number conventions, having artificial intelligence to capture return information and establishing hierarchical rules that can be applied at a corridor level. Article continues

11 Fresh Take on Payments Payments Markets Market Insights Regulatory Ecosystem Global Currencies Leveraging local knowledge Local knowledge can help FIs to gain a competitive edge and overcome any challenges in specific markets. One example is a recent change to the payments routing instructions for a group of banks in a country in Asia. These banks failed to inform the market participants in time hence, published market reference data kept pointing payments to the incorrect routing instructions. Banks need to be able to react and adapt to such changes in a market. Our platform enabled us to absorb this information into the system, putting a temporary override to routing via market published data and instead replace it with what should have been the revised routing instructions says Chauhan. It sounds simple, but it was in fact something of a challenge as you are going against the convention. However, it was important that we could reflect the reality of the situation in our clearing platform and override market data. This gave our clients a real benefit in being able to adapt to a change even before official records of the change had been issued. Citi s clearing systems are self learning, he adds. They can identify where FX conversions are being done inefficiently downstream. By moving these conversions upstream, more income is generated for clients and their beneficiaries will gain appropriate value for the transaction. The systems will also remember the preferences of different combinations of banks and their beneficiaries. Clients can request particular currencies for payments and the system will learn and retain that information. The Gateway provides a huge repository of self-learned facts that are used to generate business rules that in turn can be applied to generate more efficient and optimized FX conversions, resulting in incremental income for the banks that use it. Making the most of a commoditizing business The globalization of finance and commerce means that organizations generally no longer deal with just a handful of currencies; trade takes place between a vast number of different countries. By understanding the macro and micro trends in the payments industry, FIs can ensure that their payments transactions are executed in the best possible fashion. Flexible infrastructure and active collaboration provides the opportunity to both intelligently monetize existing payments flows and also acquire more share of the growing global payments wallet, says Itzcovitz. We need to deliver consistent experiences for our FI clients, taking best practice and applying it in the most efficient way in many markets. By partnering, FIs can create intuitive solutions that fit their business model and drivers, and help to enable new revenue streams, create cost efficiencies and deliver service differentiators in the face of unprecedented regulatory pressure and with an increasingly demanding customer base. The information retained within Citi s systems has to be delivered within seconds in volatile FX markets delays can cost money. A platform has to be able to interrogate information in near real-time in order to identify the optimal currency transaction. Citi has built a global template, across a vast number of currencies, corridors and customers in order to deliver this consistency, says Itzcovitz. 1 Global Payments Report 2011, Winning After the Storm, Boston Consulting Group, February The World Bank Migration and Development Brief, 19 April INTPROSPECTS/Resources/ /MigrationandDevelopmentBrief20.pdf

12 China Rising: A Look at Growth in RMB Payments Markets Market Insights Regulatory Ecosystem Global Currencies As the internationalization of China s currency continues, more sophisticated products and services are being developed to enable FIs to take advantage of the country s growth story Despite a managed slowdown in China s GDP growth, the rapid rise of the renminbi (RMB) as a payments currency continues apace. Significant opportunities continue to arise from the internationalization of the RMB, which is just one step away from taking its place among the top ten world payments currencies. According to SWIFT reports, more than 1,050 financial institutions in over 90 countries are doing business in the Chinese currency. In July, SWIFT s RMB Tracker a monthly service that reports on international payments made in the RMB found that the currency had climbed two places in the rankings of world payments currencies, moving to number 11 in the list. 1 It overtook the Thai Baht and Norwegian Krone during June 2013 and reached an all-time high market share of 0.87%. During July global payments for all currencies decreased in value by 4.5%, however the RMB decreased by only 1.3%. SWIFT s monthly RMB Tracker cites that during the past two years, the RMB s market share has increased by more than threefold, whereas other Asian currencies have stayed flat. The RMB is also performing strongly as a trade currency, with a number of currency swap agreements being put in place during the past three years. These agreements, including ones with Australia, Brazil, Russia and the UK, have helped the currency climb to number three in the list of trade currencies. Around 10% of world trade is now denominated in RMB. However, international use of the RMB is in its early days. Further liberalization and promotion of the use of the RMB beyond China s borders should help to grow its market share. The attraction of RMB for Chinese corporates particularly SMEs is that use of it for cross-border trade instead of USD or other foreign currencies potentially means less exchange risk and no FX fees. Foreign companies paying in RMB can do business with more corporates in China, thus increasing their overall involvement in trade with China. Large corporates can manage their RMB on a more global basis, and over time diversify their assets and protect against depreciation. Citi has forecast China s GDP to grow by 7.6% in 2013, in line with the central government s growth target of 7.5%. China has maintained GDP growth of 8% during the past eight years. Recent factory production, investment and construction figures indicate an expected stabilization of growth in the country. With much slower growth rates in the developed economies, international corporations are increasingly drawn to the opportunities that China s sustained growth offers. With a population of approximately 1 billion and hundreds of millions of its citizens having been taken out of poverty, China is a very attractive market. Financial institutions are increasingly called on to provide RMB services and capabilities to their corporate clients who are setting up operations in, or doing business with, China. FIs are looking for holistic services when they want to participate in both the onshore and offshore RMB markets, says Yiting Shen, Head of Developing Currency Clearing, Treasury and Trade Solutions, Citi. Offering cash, trade, and FX capabilities in RMB is a bare minimum these days. Added to that a bank s need to offer its FI partners holistic USD, Euro and RMB services for specific areas such as account services, monitoring and investigation tools, and FX solutions. FIs are approaching banks such as Citi and asking what can you do for us in RMB?, says Shen. There have been some rapid developments in RMB product offerings during the past year. In May, Citi Hong Kong Markets traded the first CNH/USD cross-currency swap transaction using the three-month CNH Hibor as the pricing benchmark with Bank of China (BOC) Hong Kong, a new milestone in the offshore RMB business. The CNH Hong Kong Offered Rate (Hibor) was launched by the Treasury Markets Association in Hong Kong. It is designed to support the growth of the RMB market by providing a benchmark for loan facilities. It is also expected to facilitate the development of a variety of RMB interest rate products, increasing the ability with which market participants can manage the interest rate risk of their RMB businesses. In February, Citi added the RMB to its Multi-Currency Notional Pooling service in London. The service provides a liquidity management tool to gain cash flow flexibility and manage FX costs more efficiently among different currencies by notionally Article continues

13 China Rising: A Look at Growth in RMB Payments Markets Market Insights Regulatory Ecosystem Global Currencies offsetting cash balances without performing FX trades. The extension of the existing pooling capabilities to the RMB is a response to the growing internationalization of the Chinese currency and brings the total number of currencies available in Citi s multi-currency pooling offering to 26. Citi was one of the first international banks to offer clearing services in China along with RMB reinvoicing and netting services. We have been able to leverage our global network and global liquidity management expertise to help FIs and corporates to seize the opportunities arising from RMB internationalization, says Shen. Products and services have been developed for the onshore and offshore RMB markets. These efforts have been recognized by Asia Money which ranked Citi in the top three of offshore RMB service providers this year the only US bank to be awarded such an honor. Having a long history of involvement in China has helped, says Shen. We also have a very good relationship with the government authorities, which is very important in a controlled economy. Citi also has established good relationships with its Chinese correspondent banks, such as Bank of China in Taiwan and Hong Kong, she adds. In reaping the opportunities provided by RMB internationalization, Citi s FI clients have similar goals to Citi itself, says Shen. Like Citi, our FI clients want to be able to provide expertise to their underlying clients in the context of the development of the RMB. They want to deliver effective and innovative solutions to their clients. By providing seamless clearing and settlement services, trade and investment related products, and a deep understanding of the Chinese regulatory environment, Citi can help FIs to achieve their goals. One of the key factors for success is access to RMB liquidity. With only a 0.87% market share, the RMB is still relatively new in terms of being an international currency, says Shen. We must be able to work closely with our own treasurers and our local bank partners to source RMB liquidity for our FI clients. While the RMB story is very positive, there are some challenges to be tackled. RMB exchange rate controls, capital account restrictions, compliance with rules, regulations and AML procedures, and the efficiency of the clearing and settlement system are potential obstacles to further RMB evolution, says Shen. The relationship between the government and the market economy is still quite rigid, and so that will constrain the RMB to a certain extent. Banks need to closely watch these constraints in order to determine how best they can participate in the RMB. The China International Payments System (CIPS) is expected to dramatically increase the efficiency of clearing and settlement in RMB internationally, but the launch date is yet to be confirmed. The introduction of the system may require substantial system changes and changes in procedures for FIs, says Shen. Despite these obstacles, innovative solutions based on the RMB continue to be developed. The Renminbi Qualified Foreign Institutional Investor (RQFII) scheme has been extended to international banks and asset managers based in Hong Kong, giving more opportunity for new products and solutions to be developed, including exchange traded funds. The bilateral swap agreements, such as the most recent one with the UK, will be very significant in building confidence in RMB liquidity and will help further internationalization, says Shen. There is a lot of opportunity for the RMB in Europe and the UK is a very active RMB trading center. Innovative solutions are being developed there and London could become the next financial center for offshore RMB, alongside Hong Kong. Global banks have invested a great deal in the infrastructure and technology to incorporate RMB into their offerings. In addition, correspondent networks have been established to enable liquidity to be accessed onshore and offshore. These banks can play an important role in helping the RMB to establish itself as a leading global currency. RMB internationalization is a journey, says Shen. It is very much a growth story, although that growth may fluctuate month by month. However, it is likely that the RMB will gradually replace some USD payments flows and take a place among the leading global currencies. 1 RMB Tracker, July 2013, SWIFT tracker_july2013_slides.pdf

14 Regulatory Ecosystem An overview of regulatory reforms and their implications for banks Payments Markets Market Insights Regulatory Ecosystem Global Currencies Europe: SEPA A Single Market for Payments: in the Euro Zone Timeline: February 1st, 2014 Objective: The payments integration initiative of the European Union for the simplification and harmonization of ACH and Direct Debits in EUR, removing cross border barriers between EU countries today Requirements: Banks in the Eurozone must ensure SEPA readiness by February 2014; Banks located in the non-eurozone will have more time to comply until October 2016 Implications: Migration from local ACH and Direct Debits (DD) to SEPA Local and cross border EUR ACH and DD will have to migrate to SEPA Credit Transfers (SCT) and DD ISO XML format is mandatory for bank-to-bank communication As a direct participant of EBA STEP2 SCT, Citi provides client banks with connection to clearing infrastructure Minimal infrastructure investment required for clients Citi was the first bank to send a direct debit transaction via SEPA and is deeply involved in shaping SEPA regulation: worked with large global/regional corporate and public sector clients to successfully migrate their payments to SEPA US: DODD-FRANK Section 1073 Timeline: Signed into law in July 2010; Effective October 28th, 2013 Objective: Provide new protections for consumers transferring funds electronically from the US to another country Relevant Parties: All remittance transfer providers operating in and outside of the US with working relationships with US institutions Implications Consequences are stricter record keeping, new reporting requirements, oversight and inspection by the SEC Prepayment disclosure and receipt providing additional transfer details; 30 minute cancellation rights; Extended Regulation E error resolution rights US Banks: *Fee disclosures, delivery date of funds availability, FX rates, and applied taxes Non-US Banks: *Banks may be asked by US institutions for information about their charging practices, their local fees, services to avoid fees (e.g. Guaranteed Our), funds availability to beneficiary timing, investigations support, updated contracts. New messaging standards will be in place to support global Dodd Frank wire recognition *Not required but highly recommended International: BASEL III Timeline Banking: Effective Start Date: January 1st, 2015; Objective: Global standards designed to strengthen capital and liquidity, resulting in a more robust and resilient banking sector. Includes stress testing, loss absorbing capacity: systemically important FI s. Applicable to all reporting banks, including those providing correspondent services and direct participants Intraday Liquidity Monitoring Implications Banks need a robust monitoring and reporting system for liquidity management: Mobilize collateral to meet intraday objectives; Manage timing of liquidity outflows in line with intraday objectives Monthly data report submission to local supervisor Scenario analysis and forecasting flows: Measure daily gross liquidity inflows and outflows, timing of flows and potential net funding shortfalls throughout entire day Monitor intraday liquidity positions and compare to expected activities Ensure sufficient intraday funding Liquidity Coverage Ratio (LCR) Implications Banks must hold an amount of highly-liquid assets equal to or greater than their net cash position over a 30 day period Ensures financial institutions have the necessary unencumbered assets on hand to endure short-term liquidity disruptions: Maintain at least 100% coverage China/International: Renminbi (RMB) Internationalization Timeline: July 2013 Background: July PBOC (Central Bank) Announcement: Simplification of RMB Cross-Border Trade Settlement, Opening-up of RMB Cross-Border Lending, Cross-Border RMB Trade Finance, Cross-Border RMB Guarantee, Funds Raised from RMBdenominated Bond Issued Overseas, etc. Implications: Trade settlement now includes all companies and all current accounts and compliance check post trade RMB cross-border lending quota is removed, PBOC approval is no longer required and only a bank review is needed RQFII: Expansion of the RQFII scheme quota to RMB 270 billion broadens the range of Renminbi investment products in Hong Kong RMB Offshore Market Development: Hong Kong has extended the RMB RTGS system operating hours to 15 hours per day City of London RMB initiative aims to develop another RMB center supplementing the Asian RMB centers: Hong Kong, Singapore and Taiwan US: FATCA US Foreign Account Tax Compliance Act Timeline: Signed into law in March 2010 Implementation is in phases: FFI Registration required by April 25th, 2014 New Account Due Dilligence & US FDAP Withholding by July 2014 Due Diligence on prime facie FFIs preexisting accounts Documentation due by December 31st, 2014 Objective: Reduce US tax evasion by individuals and entities who invest directly in offshore accounts or indirectly through the ownership of non-us entities. Relevant Parties: All foreign financial institutions (FFIs) and multi-national corporations with accounts held by US persons Implications: Extends the meaning of US source income to include income earned and paid by foreign branches of a US Bank Requires more extensive documentation from foreign recipients. Citi will solicit the use of new tax forms Citi is expanding its existing Tax Operations and the supporting technology (Electronic Tax Account Classification System (etacs) and Flex Processors) to ensure compliance. The LCR should be used on an ongoing basis to help monitor and control liquidity risk Banks are expected to inform supervisors of their LCR and their liquidity profile on an ongoing basis, especially if below 100%