Financial Operations Magazine Summer 2015

Q2 Summer 2015 • Canada’s Independent Magazine

Financial S Payables | Receivables | Collections | Data | P-Cards | ECM | Technology

DATA AND DOCUMENTS Insights on data breach, B2B payment data, real-time payments data

DATA TRENDS: Success lies in increasing revenue streams

Technology: The risks of disruptive technology

Compliance: Challenges of crossborder payments PM40050803

Contents

Q2 SUMMER 2015 Volume 2 Number 2

6 4 News 20 Events 21 industry Update Features 6 Data Report

A multi-faceted look at data – from breaches to B2B payment data to real-time payments data

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13 Data Trends

Why traditional payments players should be less traditional

16 Technology

A looks at handling the risks of disruptive technology

18 Compliance

Five challenges businesses face when initiating cross-border payments

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18 Also Publishers of

Canadian Equipment Finance

Advertising Sales Mark Henry mark@financialoperations.ca Publisher and Editor-in-Chief Steve Lloyd steve@financialoperations.ca Editor Karen Treml karen@financialoperations.ca Creative Direction / Production Jennifer O’Neill jennifer@financialoperations.ca Photographer Gary Tannyan

For subscription, circulation and change of address information, contact subscriptions@financialoperations.ca Subscriptions available for $40.00 year or $60.00 two years. ©2015 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Financial Operations should be directed to the publisher.

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NEWS Xerox helps enterprises conquer paper predicaments by automating work processes Xerox addresses the paper puzzle with new services and tools that improve the way retailers, financial institutions, healthcare systems, and other large enterprises deal with documents.

The offerings are the latest example of Xerox building greater automation and intelligence into its solutions and products, with the goal of helping clients better manage their critical business processes.

“Organizations can have a love-hate relationship with paper. It remains critical to everything from invoicing to collaboration, but it can also cripple productivity. That’s why workflow automation is a business priority,” said Mike Feldman, president, Large Enterprise Operations, Xerox.

“Eliminating the inherent issues of manual, paper-based work streams can improve operations and accelerate benefits derived from managed print services.”

Smarter supply chain Xerox’s Workflow Automation Solution for Supply Chain Optimization, a servicebased retail offering, uses the Datawatch Managed Analytics Platform to digitize, centralize, automate and govern errorprone and costly manual steps of a product lifecycle. The solution reduces labor and print costs, simplifies inventory and invoice reconciliation and improves fill rates by syncing data and applying automated analytics at the store level.

Automation across industries To further strengthen its vertical industry offerings, Xerox introduces several workflow automation solutions built on its partnership with Hyland, creator of OnBase, to automate processes critical to business functions, such as: • Loan application processing – captures loan application inputs from sources such as multifunction printers, mobile devices and web applications, and automatically routes them to loan officers through a tailored workflow.

External data sources – such as credit reporting services and vehicle registration databases – are seamlessly integrated into the process and stored in a secure content management system.

• Health records information management – helps hospitals improve productivity and enable better visibility into patient care by providing a single, comprehensive view of all clinical documents and data stored in an Electronic Health Record, Picture Archiving and Communication System and clinical content repository.

• Human resources onboarding – increases the speed and efficiency of the onboarding process by removing paper, automating steps and providing management oversight. New hires are granted access to an employee portal to complete e-form “paperwork” and other required documentation online.

Supporting organizations, such as

facilities, IT and payroll, are engaged to ensure timely provisioning. Data is placed under records management control for future reference, retrieval or destruction.

Expansion to the cloud Xerox digital alternatives, which lets users sign, annotate, share, save and read documents from one interface, is now available in a Xerox private cloud. New powerful analytics also accelerate an organization’s paper to digital migration.

In addition, Xerox’s DocuShare® Private Cloud Service allows for easy deployment of an enterprise content management and collaboration platform to capture, manage and share content securely in the cloud from a mobile device or PC.

Analytics drive smarter print decisions The Xerox Secure Print Manager Suite with User Analytics powered by CompleteView® from NewField IT provides an analysis of who is printing what, when, how much and where. With this insight, Xerox counsels businesses on how to optimize their print environments.

Business apps simplify mobile printing New apps designed for the mobile workforce make secure, no-hassle printing easier for large enterprises with the Xerox Print Service Plug-in for Android users, the Mobile Access App and Mobile Link App.

FSI announces new board member The Financial Services Institute (FSI) today announced the election of John Rooney, Managing Principal of Commonwealth Financial Network, as the newest member of its Board of Directors. Rooney will serve a minimum of three years.

“Our Board of Directors is strong and diverse, with small, medium and large firms all represented,” said FSI President & CEO Dale Brown. “The Board’s strength is reflective of the overall strength of our organization.

“John is well known and well respected in our industry,” Brown continued. “His

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leadership, vast industry experience and expertise across all facets of the business will help our Board of Directors, as we move into our next five-year strategic plan. We are grateful John answered the call to serve his industry and our efforts to ensure investors are protected and have access to quality, affordable financial advice – and ultimately a dignified retirement.”

“It is both a pleasure and an honor to join the FSI Board of Directors,” said Rooney. “I look forward to working closely with this distinguished group of industry leaders who

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are as passionate about serving as the voice of independents as I am.”

Rooney added, “I am dedicated to creating a healthier regulatory environment for independent financial services firms and independent financial advisors who provide advice to hardworking investors. This exceptional opportunity will allow me to uphold that commitment.”

The FSI Board now stands at 16 members, including large, mid-sized and small independent financial services firms as well as four independent financial advisors.

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DATA AND DOCUMENTS

Protecting Stakeholders Through a Privacy Breach How communication can boost resilience

By Natalia Smalyuk and Rick Byun

B

ig Data means big opportunities and big risks. According to a 2015 Association of Corporate Counsel study, one in four chief legal officers reported their organization had experienced a data breach over the past two years. That’s 25 per cent of businesses. Could yours be one of them? Guidelines below will help you work through what to do and how to communicate if your organization is hit with an information security breach.

Ask the right questions Every company dealing with sensitive stakeholder information must proactively prepare for privacy breaches. In reality, many organizations are only starting to awaken to the massive business, legal, regulatory and ethical implications of the risks inherent in how they do business in a fast-evolving information economy.

When a breach hits, there is no onesize-fits-all solution. While each situation is unique, the first step is always asking the right questions: • How many records or sets of data have been – or may have been – compromised?

• What type of sensitive information has been or may potentially be exposed?

• How many people – customers,

employees, business partners or other stakeholders – are affected?

• What’s the damage created by the breach – actual or potential?

• What do you need to do immediately to stop the breach, contain the damage, and protect those affected?

At this early stage, the answers may be uncertain. To make the right decisions, anchor your actions in a firm commitment to the well-being of your stakeholders.

Activate your breach response team Next, escalate the issue to your crisis or breach response team. If your organization doesn’t have one, build it now. Integrate different areas of expertise, including the heads of IT, security, operations, legal, human resources, and communications. If the breach is significant, the CEO needs to be on the team, and you may have to notify the board, too. No one on the leadership team should be caught off-guard. Seek their input and advise them on a locked-down internal and external communications protocol.

Set your narrative Take the precious few hours for high-level consultation with your organization’s key

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DATA AND DOCUMENTS leaders to create the blueprint of your mitigation strategy. If you don’t do this now, you may waste valuable time later fixing mistakes. Questions below will help lay out the narrative – your organization’s definition of the truth of what’s happening and what should be done: • What’s the truth? What’s the right thing to do, based on that truth and your values? What’s the right thing to say?

• How do you want your stakeholders to think and feel about your organization?

Activate the response Your narrative sets the context for all management decisions. If you get it right, this may make all the difference between success and failure in your breach response effort.

Questions below will help map out the what, who, how, where and when of the response: • Does your organization have existing breach response and crisis communications strategies?

• What are the relevant laws and regulations in the jurisdictions your organization operates in – and where the breach occurred?

• What are your organization’s existing proactive notification obligations and compliance requirements?

• What are potential liability implications?

Now, act. Set up a breach response centre.

If online files are exposed, pull them down.

If there’s a risk that other data could be compromised, close any open portals to avert further breaches. If your customers’ financial information has been exposed, offer credit monitoring and fraud protection. Set up a hotline where stakeholders can get essential information.

Err on the side of proactive disclosure While working to solve the problem, you also need to communicate. Silence is toxic in any crisis. Here’s one of the toughest judgment calls: should you proactively communicate about the breach with external audiences? If in doubt, err on the side of full and speedy disclosure. Your stakeholders don’t want to be left in the dark or learn about your breach from the news or tweets.

Talk to those directly affected first. Tell them what you know. Acknowledge what you don’t. Tell them what you are doing

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to investigate and solve the problem – and how they can protect themselves. Commit to providing updates.

Notify federal or provincial regulators in the jurisdictions where you do business. Speak to the privacy commissioner’s office as soon as you know enough about what happened and what it means. Provide enough detail.

Keep the regulator updated throughout your response effort.

There may be others you’d be wise to communicate with, such as your payment and technology partners. Third-party experts might be called to comment on your crisis.

Consider giving them your side of the story, too. Last but not least, never forget your employees. If you keep them informed, chances are, they will be on your side.

Communicate in proportion to the scale and nature of the breach Another judgment call: should you proactively communicate with the media once those directly affected have been notified? If the breach is severe (for example, involving millions of compromised credit and debit cards), the answer is yes. Data and privacy breaches make headlines. Get ahead of them and own your story without feeding the media frenzy.

Word of caution: When in doubt about the seriousness of the breach, don’t jump the gun. Communicating too much or too soon may derail the response as much as talking too little or too late. Not every incident warrants proactive notification. If your employee lost a portable USB device with a company document possibly containing some non-sensitive customer information, would anyone benefit from proactive disclosure? To make the right decision, put yourself in your customers’ shoes. If the risks of any damage are negligible, will alarming them cause more harm or good? Trust your instinct.

Choose the right spokespeople Your spokespeople in a crisis should be intimately familiar with the issue, available, and able to inspire confidence and trust.

• Who can best communicate what your stakeholders need to know?

• Who can best communicate how you want your organization to be perceived?

If the breach is massive, consider bringing in the top executive. It shows the CEO cares. A CIO might be your best choice for questions

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that require technical knowledge. If you get lots of calls, have back-ups to relieve the pressure. Make sure all spokespeople are media-trained and on message.

Don’t overlook your employees. They are your spokespeople, too, as they will talk to their networks and, potentially, the media. While you can remind them of your company’s communications protocols, you can’t gag them. Instead, engage them in your mitigation strategy. Empower them to tell your story – their story.

Show leadership Who’s responsible for the breach? Is your organization a victim or a perpetrator?

Stakeholders will be looking for answers. Who or what caused the breach? Storing sensitive customer information in an unprotected environment? Leaving firewalls open? Was the breach easily preventable? Should there be an apology? Confusing and painful as these questions are, you need to address them.

Here are some guidelines: • If people suffered, express concern.

• If your organization is at least partially responsible, apologize. Owning up to your responsibility in the court of public opinion is not the same as the admission of guilt in the court of law.

• If you apologize, fix the error and demonstrate a commitment that it will never happen again.

Learn from the breach Hidden in every breach is a gift of learning.

As the crisis reaches the resolution phase, think about how it played out. What worked well? What didn’t? Take a hard look at your organization. How can you prevent similar events in the future? How can you deal with them better when they occur? Now is the time to dot the ‘i’s and cross the ‘t’s.

Natalia Smalyuk is Vice-President, Corporate & Public Affairs at MAVERICK, a Toronto-based full-service communications firm that provides a full scope of reputation management services. Natalia is passionate about helping organizations navigate change and build capacity in managing crises and reputation risk.

Rick Byun is Vice-President, Strategy & Business Development at MAVERICK. With a rich background in corporate communications, politics, and journalism, Rick provides strategic counsel to clients on issues management, corporate narrative and brand development.

DATA AND DOCUMENTS

What We Can Learn From B2B Payment Data “Intelligence and analytics that are generated from the payments process itself that can add great value …”

By: Christian Lanng

O

ver the last few years, it has become evident to many that the B2B payments space is ripe (and longing) for innovation. A lot has happened to bring the space forward, but this is only the beginning. There are more startups focused on this space than ever before, some trying to innovate at a broad level, others focusing

on niches such as foreign exchange or crossborder payments. In any case, it’s safe to say that the manner in which businesses make and receive payments is going to shift over the next few years.

In my view, a primary reason for this much-needed shift is data. Whether sending or receiving, businesses want to get more than

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DATA AND DOCUMENTS

affects supplier relationships.

• Information and analysis of supplier payment terms can help to establish a plan/process to capture more early payment discounts.

• Understanding upcoming requirements for cross-border payments helps with forex hedging.

• Identifying the best type of payment for every type of transaction (e.g., PCard for payments below $1000)

the dollar amount from payments; they want the information that goes with it. Data is one of the most valued pieces of information that exists within a payment – who is being paid, for what, when, how, what currency is being used, what bank is housing the transaction, what bank account, etc. Without this kind of information, a payment is just a number and, in too many cases, there is a tremendous amount of time and resources that are spent figuring out the important data elements.

“There is such a lack of information throughout the payments process that an entire industry exists for the sole purpose of recovering overpayments, duplicate payments, and other payments errors…”

In fact, there is such a lack of information throughout the payments process that an entire industry exists for the sole purpose of recovering overpayments, duplicate payments, and other payments errors. It seems easy enough to avoid such errors but what about when you have thousands of suppliers globally, multiple ERP systems, multiple banks and accounts, no standardized process, and so on and so forth.

There are also a ton of intelligence and analytics that are generated from the payments process itself that can add great value. Unfortunately ,it is almost impossible to get any level of accuracy here unless the transaction and the process itself is digital.

Here are a few examples: • Information such as the percentage of on-time payments is a good determinant of process control and efficiency but also

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Of course, all of the above is improved when business processes are automated and especially when businesses are connected. Imagine all of this working within a network of connected trading partners or even an entire supply chain, connected across multiple tiers of suppliers.

The power of the network

One undeniable fact about the future is that businesses will be connected digitally. This is already happening around the world in a big way. Businesses connected to each other in a network mean digital transactions, real-time communication and information exchange, and with the right model it also means the ability for third-parties to add value to the network. The common denominator that everyone in the network has access to is data and every single transaction, action, comment, approval, and rejection generates data.

Consider Linkedin or Facebook. These are networks that connect people together on a common platform. What makes these networks so valuable? It’s the user generated data that flows across the network and the intelligence that can be gained from understanding this data. Apps that are developed on top of these platforms to add value to the network leverage the underlying data. The same goes for businesses within a network. Transactional data such as orders, invoices, shipment notices, delivery notes, supplier data, and much more can be linked together to make sense not only of payments but numerous B2B processes.

Quite often in a B2B setting hundreds of

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invoices are paid all at once with one lump sum payment. Too often this will cause several issues on both the buyer and supplier side with having to reconcile the payment to the order/invoice and each item that is being paid for. On the other hand, if the two businesses were connected and transacting within a network, all the information would be at their fingertips and there wouldn’t be a lag in receiving the information either (which is often the case with ERP systems).

As mentioned before, certain networks are designed to be open, allowing third-parties to build apps that add new capabilities for users.

A good example is a bank. With access to a network of connected businesses and detailed transaction information, banks would be able to have a better view into their customers’ supply chains and the processes within them.

They would have access to information that would enable them to spot inefficiencies in the financial supply chain. Consider an invoice that offers a discount if the customer pays 10 days after receiving the invoice as opposed to the standard 60 day terms. Assuming that the buying organizations accounts payable process is automated and efficient and that they have the funds to pay early, this is a no brainer. Pay early, get a discount, and generate a fairly high return with minimal risk. What happens if the customer still wants the discount but doesn’t have the cash or if the supplier still wants to be paid earlier but the customer is unwilling – enter the connected bank. Because the bank is connected to the same network and can view details of the transaction, they could provide the funds at a fee (i.e, supply chain finance).

So the possibilities are almost endless when you have trading partners connected on the same platform and you enable third-parties to come in and add value. What we can learn from simple processes such as making or receiving payments is a great deal, given the right environment.

Christian Lanng is CEO, Chairman, and co-founder of Tradeshift, a global-business platform connecting enterprises with their suppliers and simplifying vendor relationships.

After his first startup at the age of 19, Christian took a position in the Danish Government where he launched its new strategy to connect with its suppliers in a different way.

He is regularly invited to speak at events around the world about how modern business needs to change, and his background studying sociology broadens his perspective beyond technology alone.

DATA AND DOCUMENTS

Getting Up To Speed with Real-Time Payments Data Analyzing and using payments data in real-time to develop the actionable insights

By Steve Gilde

Understanding the shift to real-time In today’s market, most payments providers rely on a hodge-podge of legacy systems to protect payment transactions and analyze problems – including potential fraud – after they occur. New payment options like Apple Pay clearly resonate with Millennials and are rapidly altering the traditional payment model.

The stream of transaction data being received by companies continues to grow and evolve, meaning many legacy systems are becoming less effective in determining and managing risk.

Moving forward, payments companies will need to move toward more real-time visibility into their payment systems, all the way down to the individual transaction level if they are to effectively manage their operations, reduce organizational risk, and combat fraud. Real and near real time insight into the payment stream can also help companies avoid larger problems like the data breaches that have stolen headlines in the last year.

As the payment industry has become more globally connected, the assumption might be that the industry is already accessing,

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DATA AND DOCUMENTS monitoring and analyzing its massive amounts of transaction data at real-time speeds around-the-clock. The fact is that many companies are still leaving this hugely important role to antiquated systems that no longer afford the utility or protections that they once did. The radical transformation taking place across the payment industry today is rendering systems that were originally developed well before the rise of the internet and the advent of mobile technologies obsolete at best and vulnerable at worst. The ‘2014 World Payments Report’ by Capgemini states that global non-cash payments grew by 9.4 per cent in 2013 alone.

As electronic payments of all types continue to expand, successful organizations must effectively analyze and use their payments data in real-time to develop the actionable insights necessary to survive, thrive and beat the competition.

With new technology comes new risks The payments industry has historically been slow in the overall adoption of technology and has also recently been faced with the massive growth of alternative payment options from companies such as Bitcoin and Apple, among others. Consumers clearly like anytime, anywhere access to information, products, and financial services, including payments. However, as these technologies proliferate, so do the opportunities for fraudsters to take advantage of any gap in the system. Criminals continue to demonstrate their ability to develop new techniques to commit financial crimes, making it more important than ever for the financial service community to monitor their payments

systems in real time and respond to fraud threats instantly.

Preparing for the future, now Banks and payments companies understandably want and need to protect their clients and data, but the recent spate of hacks, attacks, and data breaches have proven that this is a daunting task. Part of the issue here is that various parts of the payments industry have evolved at different times and speeds, leaving gaps in the system that are relatively easy to exploit. Rationalizing legacy systems and adopting new real-time technologies will help banks and other payment processors close these loop holes, while at the same time they will be able to develop deeper insight into what’s going on with the health of their business. Not only does this help manage risk and prevent fraud, it helps them serve their customers better. Ultimately, building out a more agile infrastructure means improved efficiency, reduced costs, and increased profits.

In a technology-driven payments company of the near future, the business, operations, and fraud prevention systems can all access the data they need and leverage common technology platforms. They will have the foundation on which to become a best-in-class operator that runs efficiently, adapts quickly, and detects potential problems instantly or proactively. The environment is selfmonitoring, self-healing, and self-modifying.

The importance of these systems cannot be understated, but management of payments infrastructures and data has been historically left solely to the operations team. This scenario may prevent the business from understanding the importance and value of

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the data that is already available to them.

Bringing the conversation of real-time data analysis to the forefront of a business conversation will become vitally important in improving payments infrastructures moving forward.

Imagine a payment processing strategy being overseen by an executive team comprising of professionals from the operations team, business analysts, and even the CEO; this combination of roles will provide the organization with both the insight and means to effectively survive these turbulent times. This team could become a strategic asset because it can be utilized to the utmost business advantage.

Of course the ROI is in the successful deployment of new systems; and with cost pretty much at the top of the inhibitor to the innovation list, it is smart and strategic to invest in lower cost/higher return infrastructure and monitoring solutions.

The move toward centralized, real-time data and allowing access to third-party providers will help to successfully re-open the door to innovation that has been lacking within the industry.

The industry is beginning to recognize this shift and the promise of real-time data in order to prevent fraud, mitigate risk, and improve customer experience, but there is much work to be done. You need to get started today to ensure that your company is here tomorrow.

Steve Gilde is the Global Payments Alliance Director at Integrated Research (IR).

DATA TRENDS

Why Traditional Payments Players Should Be Less Traditional The most successful companies will be those that increase their revenue streams in three key areas …

By Kevin Grieve and Mark Flamme

I

n February, the U.S. District Court ruled that American Express’s ‘anti-steering’ provisions reduce its incentive – as well as those of Visa, MasterCard, and Discover – to offer merchants lower discount rates and, as a result, violate antitrust laws. This signalled support for merchants – and looks like another move toward the global trend of

lower interchange fees. Both the European parliament and the European Council, for example, recently reached an agreement to cap interchange fees for credit cards at 0.3 per cent and debit cards at 0.2 per cent.

Clearly, this trend presents a challenge for financial institutions and credit-card companies, and it’s not the only obstacle.

New mobile entrants are sure to take a significant cut of profits from the traditional payments industry. The Apple Pay wallet has created unique consumer mobile and in-application payment value propositions around convenience, ease of use, and security.

According to a Strategy& survey done in collaboration with the Electronic Transactions

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DATA TRENDS Association (ETA), approximately 70 per cent of consumers have security concerns around using mobile or in-application payments.

But Apple Pay’s unique deployment of biometrics and card-number tokenization has assuaged consumer fears and allowed Apple to enter the payments value chain, unbundle interchange fees, and charge issuers 15 basis points for the reduced fraud risk.

Moreover, technology innovations, like the blockchain ledger underlying Bitcoin, will further reduce costs while increasing the speed of cross-border transactions. Start-ups, as well as established tech companies like IBM and Oracle, are working on advances that could eliminate the role of banks and clearinghouses in this arena – not to mention reduce the overall revenue pool by further lowering transaction prices.

As these drivers threaten historic value propositions – such as instrument issuance, transaction routing and processing, and financial settlements – traditional payments players must create new solutions for their customers. Based on our analysis, the most successful companies will be those that increase their revenue streams in three key areas: • Monetizing data • Offering white-label assets • Redefining and unbundling payment services

Monetizing data Financial institutions and credit-card companies already possess data assets that can be used to create new value across the digital commerce experience for both consumers and merchants. The key to successfully monetizing this data will be launching products and services that benefit both transaction counterparties across both the consumer and business-to-business commerce experience.

Consumers are increasingly going online to shop. They use digital tools to search for products, find the most competitive price, locate deals and offers, make purchases, and earn loyalty and rewards. This year, we estimate that digital tools will influence more than 60 per cent of offline sales. Merchants, meanwhile, are using digital tools to curate the customer shopping experience, provide product information, drive traffic through deals and offers, offer conveniences like ordering ahead, create easy to earn and redeem rewards, and improve marketing ROI.

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“The pressure on traditional payment players is strong and won’t abate soon, but the opportunities for growth are also powerful…”

In business-to-business commerce, many processes involve activities to reconcile payment data with other business data.

Procurement, for instance, requires reconciling payments to invoices and healthcare providers must reconcile insurance company payments to claims submitted. As these payments digitize, there are increasing opportunities to more tightly link the information and payments flows together to enable straight-through automated processing.

The three most promising datamonetization opportunities are: • Creating a data-sharing coalition.

Merchants have a depth of data on their consumers down to the SKU level but no breadth across merchants, while payments players have breadth of data on consumer behavior across retailers but no depth. There are opportunities to create data-sharing utilities and loyalty coalitions that benefit all parties by combining data and creating a richer data set from which to run campaigns.

American Express’s multibrand Plenti loyalty program is an attempt to do this; consumers accumulate points at participating merchants no matter what credit card or form of payment they use.

• Integrating transaction data with relevant payment data. There are multiple opportunities across industries and functions to improve this integration. The flow of claims information to health care payers from providers and the reverse flow of payments and the explanation of those payments is not efficient today and requires significant manual intervention.

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Additionally, procurement flows of purchase orders, invoices, and payments between trading parties is often inefficient. Payments innovators are creating solutions for these inefficiencies.

For example, Discover has partnered with Ariba to create AribaPay, a solution that links invoice and payment data together.

• Selling access to data. One way to do this is by using consumers’ credit-card transactions’ history to personalize deals and offers. Cardlytics, for example, now partners with Citi, Bank of America, and other financial institutions to analyze cardholder transactions and personalize offers. Matching card transaction data to digital offers, deals, and advertisements enables ‘closing the marketing loop’ for merchants, helping to quantify marketing ROI and refine campaigns.

And as merchants shift their ad spend to more targeted and measureable options, they will pay about 10 per cent of the gross sale for a proven closed sale resulting from an offer.

Location-based information also has significant potential. Payments players can access real-time transaction authorization data to pinpoint a consumers’ location, or to provide network/processor data on merchant POS locations. On the consumer side, in April of this year, Visa debuted its opt-in Mobile Location Confirmation program, which will verify your location on your smartphone whenever your card is swiped to help prevent credit card fraud. On the merchant side, store locator services, including MasterCard “Merchant Identifier” API and Discover MDP, can be more accurate than merchant’s own data and drive increased foot traffic.

Finally, payments data on sales and fraud trends against an anonymous set of competitors can guide merchant operational and investment decisions.

For example, fraud information at the pump level can help fuel retailers prioritize where they should invest in EMV pump upgrades.

Offering white-label assets Most traditional payments players haven’t yet white-labelled their own technology

DATA TRENDS and infrastructure assets – including their networks, tokenization services, payment standards, and fraud and compliance tools.

But doing so is a relatively straightforward opportunity to generate non-traditional payments revenue.

In 2013, Visa leased a private version of Visanet to JP Morgan Chase, and other companies can similarly sell access to their network pipes. They can also expand their networks by adding new endpoints with new services. For instance, Visa reported building links to the government of India’s national ID system. Additionally, traditional payments players can improve network functionality, as MasterCard did in clearing and settling points for Points.com. Another way to explore this area is by creating and selling tokenization services, like MasterCard and Visa both do.

Redefining and unbundling payment services Today, a payment typically bundles five value-added features: authorization, speed, information flow, finality, and receipt account optionality. For example, a wire is a bundle that includes real-time good funds authorization, real-time funds availability, transaction-only information flow, irrevocability, and limited receipt account flexibility.

But these features could be unbundled and priced separately as infrastructure innovation continues. Creating options for both payers and payees to specify the features of a transaction would create new value for the customer and new revenue for the payment provider. Theoretically, a consumer might pay extra for an emergency bill payment to have real-time funds availability. And a

business might pay extra for real-time good funds guarantees on a new customer with a thin credit file, but be willing to accept a slower availability/settlement time of 2-plus days with the bank. Some innovative startups are already moving in this direction.

HyperWallet, for one, charges their clients (businesses) for the convenience of being able to send payments to a consumer’s account of choice (bank, card, inbox, or portal).

The road to success Traditional payments players are standing at a fork in the road right now. Those that move ahead in new directions are bound to see more success than those that stand still.

So what can you do to get started? When it comes to creating new value propositions and revenue drivers, all the opportunities require easy and rapid integration with partners and customers. So your first step should be establishing an easy-to-use set of APIs and streamlined processes for partner approvals, contracting, testing, and certifications.

Next, evaluate your innovation capabilities.

World-class developer talent is in short supply. Are you productively engaging that talent through well-written SDKs and wellstructured outreach efforts, using social media and hackathons? Are you building awareness of your company among the broader start-up community? Recruiting and retaining top talent should be one of your top priorities.

Another one should be agility. Adopt agile technology development and encourage a culture of innovation that permits people to experiment and fail. Incorporate continuous business improvement into business as usual, and be willing to partner to increase your speed to market.

Commit to a portfolio-based payments governance model. It should allow new innovation to cannibalize existing products and revenue streams by balancing three types of investments: stay in business, return on investment, and option creating.

Finally, demonstrate a commitment to insight generation, which requires strong data capture, A/B testing capability, data management, data analytics, and analysis interpretation skills working in concert. Insights will be required as a data product in and of themselves, and as an input to creating and selling white-label assets and unbundled products.

The pressure on traditional payment players is strong and won’t abate soon, but the opportunities for growth are also powerful.

Now is the time to harness these five critical capabilities, and begin developing sustainable new revenue sources for the future.

Kevin Grieve is a partner with Strategy& based in Chicago, a member of the firm’s financial-services team, and head of the North American card and payments practice.

He has more than 25 years of consulting and business experience in financial services.

Mark Flamme is a partner with Strategy& based in Chicago and a member of the digital business and technology practice, where he specializes in the financial-services industry.

This article is based on the authors’ February 2015 report, published by Strategy&, ‘Data-driven payments: How financial institutions can win in a networked economy’ (www.strategyand.pwc.com/global/home/whatwe-think/reports-white-papers/article-display/ data-driven-payments).

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15

Technology

Handling The Risks Of Disruptive Technology Services in the cloud involve risks

By Ben Hunter

P

ervasive new and evolving technologies are causing all companies – not just technology firms – to reevaluate their risk management strategies. Today, businesses of all kinds collect and store ever-growing mountains of data, send private and confidential client information over the Internet via the ‘cloud’, and stream sensitive data wirelessly to a host of mobile devices. As these trends transform commerce, however, they’re also reshaping risk management. When it comes to cloud computing, ‘big data’, and mobile technology, here are some key risks that companies of all kinds shouldn’t overlook.

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Cloud risks First, let’s demystify the cloud. It’s simply how individuals and enterprises access shared computing resources, such as networks, servers, and applications, on demand, over the Internet. Cloud services range from Webbased personal email accounts to business software (software as a service) all the way to countless servers located throughout the world utilized to store vast amounts of data for research purposes (infrastructure as a service). By 2017, research firm Gartner estimates about half of all enterprises will have hybrid clouds, that is, use a mix of onpremise and public cloud services. Goldman

Financial Operations | Summer 2015 | www.financialoperations.ca

Sachs predicts that spending on cloud computing infrastructure and platforms will grow at a 30 per cent annual rate, or six times faster than overall enterprise IT spending.

For companies that provide cloud services and those that use them, a variety of risks need to be recognized. From a privacy perspective, companies offering ‘software as a service’ solutions become custodians of their clients data, and may be responsible for maintaining its confidentiality. Private and confidential data should be encrypted not only when it is in transit or being processed, but also when it is at rest. Companies that offer ‘infrastructure as a service’, such as storage

Technology

and processing systems, have to not only address cyber risks that are often in the news these days, but the physical risks tied to their data centres, such as fire and earthquakes.

They also need to provide the right levels of redundancy and resiliency – or ‘fail over’ capability – to make sure a client’s business can continue uninterrupted if a server or data centre goes down because of physical damage or a cyber attack. These redundancies, and the steps necessary to execute a company’s response to such incidents, should be clearly articulated in a business continuity and incident response plan.

Renting the cloud Before they make use of cloud services, companies should decide which data and functions are best kept in-house, such as trade secrets and intellectual property, and those that can be handled outside the corporate firewalls. Companies may want to keep mission-critical supply-chain management and accounting functions in-house, for instance, while using the cloud to perform customer relationship management tasks.

Companies should assess the physical security of a cloud vendor’s site as well as the network security. ‘Boundary defences’ should include firewalls, the monitoring and control of access, and the level of user authentication required, such as biometric identification.

Resiliency and redundancy of data centres are critical considerations, with levels ranging from Tier 1, or less resilient, to Tier 4 with multiple redundancies to provide nearly 100 per cent uptime.

While the services may be in the cloud, the physical location of back-up servers and data centres should not be overlooked. Canadian firms handling personal, health, or financial data may want this information to remain in Canada, and not copied to an out-of-country data centre.

Big data, big risks By some estimates, roughly 90 per cent of the world’s data has been created in the last two years, reflecting the ability to record and store just about everything digitally. Big data refers to the massive amounts of data corporations are collecting, creating, and storing. Some of that data is useful, but much of it may just add risk.

Storage of non-essential data can pose a

threat of a devastating breach, if unnecessary personal information or proprietary customer information is exposed. The loss of consumer information carries potentially severe reputational risks, as illustrated by a number of massive data breaches at large companies in recent years.

To avoid the costs and risks of keeping huge quantities of unusable information, companies have to make some strategic decisions. Data collection rules should govern the kind of data that will be retained and its utility. Data management applications, such as analytics software, can derive useful intelligence out of the collected data, but if it cannot be interpreted or is of questionable veracity, it may be best discarded.

Companies should use data separation capabilities to identify important information that should be kept in-house or on a ‘privatecloud’, that is, on specifically designated servers. Crucial data should be replicated and backed up daily to offsite remote locations.

Data decisions rules should cover which employees may access which levels of data, which data should be retained, and which information should be destroyed.

Companies need to address data theft by outsiders as well as the risks posed by disgruntled employees who may provide access to outsiders or even steal data themselves. Risk controls include monitoring employee data use for anomalies. Companies should not underestimate simple carelessness by employees as a security threat.

Data goes mobile Not only are corporations collecting massive amounts of data, they are sending much of it over wireless networks. Current ‘4G’ networks make it easier to stream video and perform other data-intensive tasks. Coming ‘5G’ networks promise even greater power and almost-instantaneous connectivity. As more work goes wireless, companies need a mobile risk management strategy.

More employees are clamoring to use their own devices to avoid having to carry multiple ones, and Canada has been a leader in this trend. Research firm Ovum found in a 2013 study that more than 75 per cent of Canadian firms support the use of employeeowned devices. The proliferation of mobile devices adds risks and companies need to decide whether to provide access only on

corporate devices or to a broader spectrum of personal devices.

People, however, do remain the weakest link. Security considerations include which apps employees can download and how data will be encrypted. For instance, if employees working in a coffee shop send unencrypted data wirelessly, that data may be intercepted.

Small devices that hold very large amounts of data can easily be misplaced. Companies should have the capability to remotely wipe data from lost devices. Visitors to a company site may pose risks if they are able to use the corporate Wi-Fi network as an entry point to more sensitive systems.

Companies should establish an inventory of authorized and unauthorized devices, have secure configurations for hardware and software on mobile devices and laptops, and install multiple firewalls between wireless access and the corporate networks. Privacy policies should include mobile vulnerabilities and employees should be trained in proper procedures for mobile device use to protect sensitive information and corporate networks.

Managing virtual risks Even though much of business now takes place virtually, the risks remain very real.

While the proper security procedures and training can help to mitigate the risks that these disruptive technologies bring, they cannot eliminate them. Computer hackers continually find new ways to break into networks, and employees still make careless mistakes. Even the most resilient computer systems may crash. Losses tied to electronic activities or loss of data are typically excluded from general liability policies. For that reason, even non-technology companies should consider cyber insurance to protect against those risks. Technology companies should also consider errors and omissions policies with cyber coverage included for the risks that may arise from providing technology products and services. Even though information technology often runs in the corporate background, risk managers should keep today’s cyber related risks front and center.

Ben Hunter is a Director of Technology & Clean Technology, Chubb Commercial Insurance, for Chubb Insurance Company of Canada in Toronto. He can be reached at bhunter@chubb.com.

Financial Operations | summer 2015 | www.financialoperations.ca

17

Compliance

Five Challenges Businesses Face When Initiating Cross-Border Payments

By Neil Platt

T

he Internet has fundamentally changed the way we do business globally. Businesses everywhere are now able to tap into the growing consumer markets and freelance resources in virtually all corners of the world.

Unfortunately, traditional banking systems haven’t been able to keep pace with the change in international business when it comes to facilitating cross-border payments.

The international correspondent banking network is both decentralized and nonstandardized, with inherent problems that can create friction for businesses and professionals attempting to send or receive cross-border payments.

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The Challenges Facing Senders and Receivers To help businesses and professionals better determine whether they’re sending or receiving cross-border payments via traditional bank systems is right for them, some of the challenges facing initiators of cross-border payments are outlined below:

1. Exorbitant Time and Cost Depending on the method correspondent banks use to send and receive cross-border payments, the transaction can take days or weeks to clear. In most cases, the time is unknown in advance by both the initiator and the beneficiary, and it can be very

Financial Operations | Summer 2015 | www.financialoperations.ca

difficult to find out what step of the process the transaction is in once it has begun.

Additionally, throughout the transactions, multiple intermediaries are involved, each charging a fee and/or taking some share of the foreign exchange revenue. Often, end users do not know whether costs are also assessed to their counterparties. The World Bank estimates that globally, sending remittances costs an average of 7.99 percent of the amount sent – quite a large chunk of the payment.

2. Lack of Standards and Absence of Direct Relationships National payments systems do not generally

Compliance

occurs (for example, a payment is not received by the beneficiary), the initiator may not be able to trace the transaction quickly or reliably due to the absence of direct relationships with downstream banks.

3. Lack of Transparency in Currency Conversions There is very little transparency within traditional cross-border payment systems. It is often unclear which party is responsible for exchanging currency and what margin is being added above the inter-bank rate.

4. Compliance with Regional Regulatory Environments Regulatory environments can vary quite drastically across different regions. Depending on the country the correspondent bank is located in, there will likely be different regulations for preventing money laundering, controlling currency flows and enforcing sanction regimes. In fact, new anti-money laundering (AML) directives are currently making their way through the European Union’s legislature that will create more red tape for banks by eliminating some exemptions that have allowed simplified customer due diligence. These types of regulations can impact the type and size of transactions that can be completed, as well as the optimal method of payment. Being unaware of these country-specific limitations can result in failed payments.

5. Difficulty Maintaining End-to-End Customer Support and Determining Regional Preferences support direct participation by banks in other countries, so in cases where one particular bank in a country does not belong to the payment system, a domestic correspondent bank is used to act on its behalf.

Unfortunately, there’s no standardization as to how each bank sends, receives and settles payments, which can cause confusion and blurriness in moving cross-border payments from an initiator in one country to a beneficiary in another. Cross-border payments involve multiple intermediaries, which can make it incredibly difficult to relay data regarding reconciliation, payment tracking and straight-through processing (STP) to the receiving party. If a problem

Maintaining end-to-end customer support for exception handling and addressing operational issues encountered by beneficiaries that reside in different countries and speak different languages is an extremely complex task. Additionally, many businesses initiating cross-border payments are unaware of the regional preferences of their beneficiaries, making it difficult to determine the optimal choice of payment method. For example, while beneficiaries living in un-banked regions prefer prepaid cards, freelancers contracting out work may prefer electronic wallets as they provide a closed loop stored value system allowing them to easily receive payments and pay subcontractors.

Although the banking system may not be evolving quickly enough to match the globalization of businesses requiring crossborder payments, there are alternative payment methods that address many of the challenges arising in the traditional correspondent bank system. These include: • Debit cards, which facilitate daily net settlement of funds between participants, address the data transport requirements accompanying the transaction and perform any currency conversions that may be required.

• Low-value payment networks (LVPN), which act as gateways facilitating the absorption of cross-border payments into a particular region’s low-value payment system.

• Electronic wallets, which facilitate the initiation of payments and money transfers via online channels. These enable customers to send, receive and hold funds in different currencies worldwide and to make financial transactions online by transferring funds electronically between individuals and businesses.

It might make sense for a company to make use of multiple payment methods, based on the particular situation so it’s valuable to have a single provider that can support all payment methods and geographies. Cross-border payments providers such as Payoneer offer businesses the convenience and benefits of using a single unified interface for initiating, tracking and reconciling payments regardless of beneficiary location, payment method or currency. Payoneer’s service enables beneficiaries worldwide to receive funds quickly, easily and cost-effectively no matter where they are located. For payers and payees alike, Payoneer removes geographical borders and ensures smooth, secure, cost-effective transactions.

Neil Platt is the Chief Revenue Officer of Payoneer. Prior to joining Payoneer, Platt served as SVP, Payments at Fiserv and EVP of CashEdge. In more than 10 years at CashEdge, he grew the company from a pre-revenue startup to an industry leader, serving most of the large banks in the U.S., including seven of the top 10. After Fiserv acquired CashEdge in 2011, Platt stayed on at Fiserv as SVP, Payments, where he led the integration and roll-out of CashEdge products to thousands of Fiserv clients. Earlier in his career, Platt was a consultant with McKinsey & Company.

Financial Operations | summer 2015 | www.financialoperations.ca

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EVENTS 2015 JUNE June (TBA) 8th Annual Prepaid & Payments Retreat Toronto, ON www.paymentseXchange.ca June TBA Payments Awards 2015 Toronto, ON www.paymentseXchange.ca June TBA ATMIA Canada Annual Canadian Conference 2015 Niagara Falls, ON www.atmiaconferences.com

June TBA NBPCA Annual Congress-The Power of Prepaid 2015 National Harbor, MD www.nbpca.com June 10-12 FEI Canada Annual Conference Winnipeg, MB www.feicanada.org June 16-17 ACT Canada Cardware 2015: Payment Insights Niagara Falls, ON www.actcda.com

August August 2-5 Retail Solutions Providers Association RetailNOW 2015 Orlando, FL www.gorspa.org August 11-13 tppEXPO 2015 The Pre Paid Press Expo Las Vegas, NV www.prepaidpressexpo.com

September September 14-16 IFO Canada 4th Annual Canadian Financial Operations Symposium

Vancouver, BC www.financialops.org/ canada2015

October October 4-6 Members Meeting Smart Card Alliance Phoenix, AZ www.smartcardalliance.org October 7-8 Smartcard Alliance NFC Solutions Summit 2015 Phoenix, AZ www.smartcardalliance.org

Visit us online www.financialoperations.ca/events.html 20

Financial Operations | Summer 2015 | www.financialoperations.ca

INDUSTRY UPDATE

Dramatic 2015 Place of Supply Changes for Electronically Supplied Services in the European Union

By Jill Grenier

Introduction As of January 1, 2015, new VAT rules apply to the supply of digital services within the European Union (EU). This change is the final phase of the EU VAT Package that progressively introduced new place of supply of services rules in 2010, 2011, 2013 and now in 2015. This final phase of changes dramatically impacts both EU as well as non-EU suppliers of e-services to private individuals and non-business customers within the EU (B2C).

Services in scope The law change effective January 1, 2015 covers the following three categories of services: • Telecommunication Services: includes the services of sending or receiving signals by wire, radio, optical, or other systems. This includes fixed and mobile telephone services, video phone services, and access to the internet.

• Broadcasting services: includes the supply of television and radio programs transmitted over a radio or television network and live broadcasts over the internet.

• Electronically supplied services: services which are delivered over the

internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.

For purposes of this article, the focus will be on the rule change as it applies to electronically supplied services (i.e. e-services).

Some common examples of such services include: • Database access • Downloaded or remotely accessed software • Downloading or accessing music, books, films, or games • Website design and related services • Video on demand In some cases, the determination of whether a particular supply is considered an e-service can be quite tricky. For example, pursuant to the law, live training conducted over the internet would not be considered an electronically supplied service since the nature of live teaching involves more than minimal human intervention and is possible to ensure

in the absence of information technology.

What rules have changed?

VAT determination for B2C supplies The main change relates to supplies of e-services by EU based suppliers to EU based consumers. Pre-2015, the VAT for these intra EU supplies was determined by the location of the EU supplier. As of January 1, 2015, the VAT for these intra EU supplies is determined by the location of the nontaxable EU customer. A major reason for this change was to level the playing field by removing the competitive advantage of EU member states with lower rates of VAT (EU VAT rates currently range from 17 per cent to 27 per cent).

The following chart compares sample results pre-2015 and post-2015:

Supplier Establishment

Consumer Location

Result Pre1/1/2015

Result from 1/1/2015

Luxembourg

Hungary

15% Luxembourg VAT

27% Hungarian VAT

Financial Operations | summer 2015 | www.financialoperations.ca

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INDUSTRY UPDATE VAT registration requirement and the new “mini one stop shop” (MOSS) In order to comply with the new rules, suppliers are required to either register for VAT in each applicable customer’s country, or alternatively to register under the new “Union Scheme” in a country where the supplier is established. Under this new Union Scheme simplification (i.e. mini one stop shop or “MOSS”), the supplier would still be collecting the VAT of the customer’s country, but reports and files the VAT collected in the country where it registered via the Union Scheme.

For purposes of registering under the Union Scheme, a supplier that has a business establishment (i.e. principal place of business or head office) in the EU must be identified for the mini one stop shop in the country of its business establishment. If the supplier does not have its business establishment in the EU, but has a fixed establishment (i.e. sufficient degree of permanence in terms of human and technical resources) in the EU and decides to register under the Union Scheme, the Member State of identification must be a Member State in which the supplier has the fixed establishment. Where such a supplier has more than one fixed establishment, it can choose any Member State in which it has a fixed establishment to be its Member State of identification. Suppliers can only be registered under the Union Scheme in one Member State.

What are the challenges?

At first blush, the above changes may seem relatively straightforward and understandable.

However, there are several challenges to consider: • Required evidencing of location of customer: Suppliers must obtain and keep two pieces of non-contradictory evidence specifying the location of the customer (assuming a legal presumption doesn’t apply) Examples include billing address, IP address of the device used by the customer, location of the bank, the country code of SIM card used, or other commercially relevant information; • Invoicing: The supplier must issue invoices in accordance with any applicable local requirements at the customers location. In some Member States, no invoice is required while others allow for a simplified invoice.

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Further, several Member States have specific requirements with respect to wording, language and currency.

• Audits and record keeping: MOSS audits can stretch back 10 years, creating a substantial record keeping obligation.

Businesses may opt to maintain their existing VAT registrations or create new ones across the EU. There are pros and cons to each compliance option which should be carefully considered.

The European Commission has recommended the use of a standard audit file for MOSS (SAF-MOSS), in .xml format. Most Member States have indicated that they will accept the SAFMOSS format.

• Input VAT recovery: The MOSS return only allows the supplier to pay the output VAT on the sales of digital services to consumers in the EU. If the supplier also incurs input VAT on its purchases, it is reclaimed through either the domestic periodic VAT return or the electronic cross-border VAT refund scheme.

Consequences of non-compliance Penalties and interest are applied by local tax authorities in each Member State for VAT not accounted for, failure to properly register, incorrect record keeping, etc. This means that suppliers are subject to 28 different penalty regimes, with penalties as high as 200 per cent of the VAT not accounted for. Needless to say, the potential cost of non-compliance can be substantial.

How is Sovos compliance addressing the 2015 place of supply changes in the EU? VAT reporting In April 2014, Sovos Compliance acquired VAT Resource, a European company based in the Netherlands which focuses on tax technology and VAT compliance outsourcing services. VAT Resource offers VATware, a web-enabled VAT reporting and analysis solution that: • Analyzes the VAT treatment of purchases and sales • Validates VAT identification numbers and rates • Reconciles VAT amounts and other relevant VAT data

Financial Operations | Summer 2015 | www.financialoperations.ca

• Completes VAT reports, analysis reports, customized reports In response to these changes, VATware has adopted a specific MOSS return for preparation and submission purposes. The return data can be extracted in an Excel, csv or .xml format, depending on the business requirements and ensuring automatic upload to the Web portals of the EU Member States. In addition, there is a standard audit file for MOSS (SAF-MOSS), based on the transaction data uploaded in the application and is extractable from the application in the required XML format.

Taxware enterprise Taxware Enterprise includes functionality to address these transactions by providing users with an option to select a new registration status to indicate where they are identified for the Union Scheme. With this new functionality, users will only be able to select one country of identification, which is the required result under the law. The new functionality also includes: • New place of supply rules to calculate the correct tax effective January 1, 2015 • Updated logic to determine customer type (Business vs. Consumer) • System messaging to validate the new registration requirements • Additional audit information to identify MOSS transactions

More information For more detailed information regarding the complexity surrounding the 2015 place of supply rules and the new reporting requirements, please see the European Commission’s VAT MOSS portal at the following link: http://ec.europa.eu/taxation_ customs/taxation/vat/how_vat_works/ telecom/index_en.htm Jill Grenier is a Lead Tax Counsel in the Tax Research Department at Sovos Compliance. Jill joined the Sovos Compliance team in 2006 and focuses her work on understanding and supporting the VAT rules in the European Union, while also keeping abreast of sales and use tax changes in a number of U.S. states. She is a member of the Massachusetts Bar and admitted to practice before the United States District Court for the District of Massachusetts. Jill has a BA from Boston College and a JD from Suffolk University Law School. She is a member of the Massachusetts Bar Association and is proficient in French.

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