Canada’s magazine of Corporate Finance
Fall 2016 • www.canadiantreasurer.com
Improving debt collection and agent performance
Introducing Canada’s newest Schedule 1 bank
Total Finance Assessing the impact of interest rate increases on consumer debt, lenders Trends driving transformation in global payments and regulation Weighing the risks and rewards of analytics
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Canadaâ€™s magazine of Corporate Finance
Fall 2016 â€˘ www.canadiantreasurer.com
Table of Contents Departments & Columns 4
Total Finance 8
Payment shocks Assessing the impact of interest rate increases on consumer debt, lenders
Trends driving transformation in global payments and regulation
Leveraging the global digital shift to amplify your market access and customer engagement
Canadian banks weigh risks and rewards of analytics Leadership must balance new business insights with increased security challenges
Currency planning a top priority as Canadian small businesses go global
Your Team Improving debt collection and agent performance using real-time data analytics and multi-channel communication
Regulatory Introducing Canadaâ€™s newest Schedule 1 bank
In the next issue: Managing and mitigating enterprise risk A look at identifying and evaluating risk (financial, operational, reporting, compliance, governance, strategic, reputational, etc.)
Risks are rebalancing, but global economic activity remains weak: Scotiabank Economics’ Global Outlook TORONTO, ON -- Global economic activity remains weak. At roughly three per cent, 2016 represents the slowest year for global growth since the Great Financial Crisis. The reasons for this underperformance are now well known, though they vary by country. They generally involve the following elements: structural adjustments in many countries, efforts to reduce overcapacity in most, recurring natural disasters, repeated geopolitical events such as ‘Brexit’, and upcoming national elections and potential policy changes in a number of major countries, including the United States. Despite this weak economic performance, there are tentative signs of a long-awaited investment recovery in the U.S. In addition, Chinese economic activity appears to be picking up following the weakness earlier in the year, oil prices have risen, (a positive development for oil exporting countries like the United States and Canada) and the immediate impacts of ‘Brexit’ have not been as pronounced as feared. “For the first time in a long time, we are feeling more optimistic about our forecast, even though we have revised growth down for both Canada and the United States this year,” said Jean-François Perrault, senior vice president and chief economist at Scotiabank. “Taken together, the risks suggest a more balanced economic forecast.” Highlights of Scotiabank’s Global Outlook include:
◉◉ United Kingdom: Post-Brexit data for the U.K. suggest a much stronger economy than we had anticipated, but we remain of the view that Brexit will come with significant long-term costs for the U.K. economy. ◉◉ Europe: Eurozone growth will be above potential, at about 1.3 per cent in 2017 and 1.5 per cent in 2018. ◉◉ Canada: We expect growth to strengthen to an average of close to 2.0 per cent in 2017-18, supported by infrastructure spending, stronger exports, and a gradual turnaround in oil & gas sector investment. B.C. and Ontario are expected to be the fastest growing provinces next year. Alberta should come out of recession and grow by 2.1 per cent in 2017. ◉◉ United States: The stronger year-end hand-off, coupled with a further improvement in domestically generated spending, points to U.S. real GDP averaging a somewhat better 2.2 per cent rate in 2017. ◉◉ Latin America: A modest acceleration in economic activity is expected in the Pacific Alliance countries, reflecting higher prices for some commodities and stronger global growth. ◉◉ Asia: China is on track to meet the official real GDP growth target of at least 6.5 per cent y/y in 2016. Stimulus is supporting momentum in the short term, yet it is creating larger economic imbalances. ◉◉ Capital markets: We assume that the Federal Reserve raises rates at a moderate pace beginning with a 25 basis point hike in December. Scarcity of supply of tradeable fixed income instruments will get worse in the medium term, moderating the impact of tightening U.S. monetary policy on the longer end of the yield curve. We expect Canadian government bond yields to remain below the U.S. ◉◉ Currency: We expect a 25bps Fed tightening in December to support the U.S. dollar (USD) and a further increase in U.S. rates to underpin
Fall 2016 Volume 25 Number 20 Publisher / Corporate Sales Mark Henry email@example.com Managing Editor Sarah O’Connor firstname.lastname@example.org Contributors Kevin Deveau, Vice President and Managing Director, Canada, FICO Dave Dominy, Chief Executive Officer, FIRMA Foreign Exchange Ltd. Mark Frey, Chief Operating Officer, Cambridge Global Payments Yuri Levin, Professor, Smith School of Business, Queen’s University
Jason Wang, Director of Research and Consulting, TransUnion Stephanie Zee, TTS Payments Regulatory Head, Citi
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Industry watch broad gains well into 2017. We have lowered our British Pound to USD target to 1.20 for early 2017, but feel “overshoot” risks remain significant. ◉◉ Commodities: Accounting for faltering base-case fundamentals and the upside risk of an OPEC deal, we expect WTI prices to average $44/bbl in 2016 before gaining to $53 in 2017 and $57 in 2018. Metals are expected to find their bottom in 2016, though recovery dynamics between individual metals remain mixed.
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Organizations with stand-alone insurance policies jump 29 per cent in 2016, RIMS Cyber Survey NEW YORK -- Awareness, increased availability and contractual mandates are just some of the reasons that have contributed to the significant increase in organizations purchasing standalone cyber insurance—up 29 per cent in 2016—as noted by the 2016 RIMS Cyber Survey. Key findings from the 2016 RIMS Cyber Survey include: ◉◉ Organizations with a stand-alone cyber insurance policy is up 29 per cent from 2015; ◉◉ Organizations transferring cyber risk to a third party is up 10 per cent from 2015; ◉◉ Organizations purchasing cyber insurance as a result of contractual obligations is up 17 per cent from 2015; ◉◉ One quarter of respondents are spending over $500,000 US on cyber premiums; ◉◉ Only 27 per cent of respondents did not think that the government should mandate cyber breach reporting, while 48 per cent thought it should. “Failure to keep pace with technological advancements will leave an organization at a terrible disadvantage,” said RIMS President Julie Pemberton. “Embracing technology has enabled organizations to strengthen their performance, but, at the same time, has created many new exposures that risk management must address. The 2016 RIMS Cyber Survey allows practitioners to benchmark the management of cyber exposures.” This year’s RIMS Cyber Survey had 272 respondents with demographics regarding industry sector, organization revenue and number of employees holding close to 2015 results. The survey was distributed to RIMS membership via an internet link and was accepted between August 8 and September 9, 2016 The 2016 RIMS Cyber Survey is available in RIMS Risk Knowledge library at www.RIMS.org/riskknowledge.
Canadian businesses expect growth in U.S. trade New study looks at challenges and opportunities with Canada’s largest trading partner TORONTO -- Canadian firms continue to see the U.S. as an intimate trading partner and its market a source of growth, according to a new report from the Economist Intelligence Unit (EIU), in partnership with American Express. Although there are some issues to be tackled as regulatory and compliance challenges cause costs to rise, a majority of firms anticipate their trade with the U.S. to increase, in part thanks to the Trans-Pacific Partnership. The research, which includes a survey of 531 companies worldwide, explores the relationships companies have with the U.S., looking at how they trade, the challenges they face and how they expect
international trade with the U.S. to change based on upcoming regulatory shifts. “U.S.-Canadian trade is among the most valuable in the world,” says Paul Roman, vice president & general manager, global commercial payments, American Express Canada. “The results show there are some issues to be looked at, including access to trade finance and infrastructure, but it is positive to see optimism among a majority of Canadian firms that their trade with the U.S. will increase.” Opportunity for U.S. trade improving
The research found that the U.S. is, unsurprisingly, a top
trading partner for three-infour (76 per cent) Canadian businesses. Furthermore, a huge majority (94 per cent) of Canadian companies surveyed derive up to 30 per cent of their current global annual revenue from the U.S. market —the same as the U.S.’s other continental neighbour and NAFTA co-signatory, Mexico. The reliance on trade with the U.S. is expected to rise, as 58 per cent of Canadian companies surveyed expect their trade with the U.S. to increase in the next five years with around one-infive (18 per cent) seeing it grow by more than 10 per cent. A majority of Canadian firms surveyed think that the Trans-Pacific Partnership
(in addition to NAFTA) will improve opportunities for them in the U.S. market. Canada/U.S. trade challenges
Despite the strong trade relationship between the two countries, there are specific challenges Canadian companies find when trading with the U.S. The top two challenges for Canadian businesses trading with the U.S. include access to trade finance (46 per cent) and trade-related infrastructure (46 per cent). Other top concerns when trading with the U.S. include exchange rate volatility (44 per cent), trade-related regulation and harmonization between countries (40 per cent), and
Industry watch making payments (38 per cent). ◉◉ Access to finance: The two main impediments to accessing finance for trading with the U.S. are limited credit insurance options (cited by 30 per cent of respondents) and lack of dollar liquidity (26 per cent). ◉◉ Infrastructure: Over a third of (36 per cent) Canadian firms surveyed say they rely heavily on the rail network in order to trade with the U.S., with 28 per cent mentioning a reliance on port facilities and 24 per cent on air links. ◉◉ Exchange rate volatility: Despite being listed among the top challenges to Canadian-U.S. trade, changes in the exchange rate with the U.S. dollar positively affected a majority (54 per cent)
of Canadian companies’ profitability in 2015. ◉◉ Trade regulation: Nearly three-in-four (72 per cent) Canadian companies surveyed have seen an increase in the cost of doing business with the U.S. due to trade-related regulatory and compliance issues over the last 12 months—42 per cent have seen increases of over 10 per cent. ◉◉ Making payments: Canadian businesses surveyed cite top issues with making payments to the U.S. as currency fluctuation (78 per cent), banking hours (68 per cent), bank fees (68 per cent), limited or no terms (66 per cent), limited payment visibility (56 per cent), and process inefficiencies (52 per cent). Outside of the U.S.,
international trade presents a unique set of challenges for Canadian businesses. These include making payments (50 per cent), transportation costs & delivery (46 per cent), insufficient market knowledge (42 per cent), and communication challenges and cultural hurdles (40 per cent). Insight on international payments
Over a quarter (28 per cent per cent) of businesses surveyed spend more than 10 per cent of their annual costs in purchases from the U.S., while the majority (82 per cent) derive up to 10 per cent of their annual revenue from U.S.-based customers. Payment challenges (currency fluctuations, bank fees, process inefficiencies, etc.) have impacted Canadian businesses, resulting in limited response to emergency payments (32 per cent),
unbalanced cash flows (20 per cent), increased foreign exchange exposure (20 per cent), shipment delays (18 per cent), and increased processing and payment costs (10 per cent). “Navigating cross-border payments efficiently can be challenging” says Roman. “Our Global Currency Solutions solve many of the inefficiencies and hidden costs that come with traditional payment methods. We want to help our customers thrive when it comes to cross-border trade with their continental neighbour.” American Express Global Currency Solutions help business control, manage, and simplify their cross-border payments, giving them full spend visibility, improving cash flow, minimizing foreign exchange impact and reducing transaction costs.
New Schedule I Bank opens with a focus on Chinese Canadians TORONTO -- Wealth One Bank of Canada launched the nation’s first federally chartered Schedule I Bank founded by Chinese Canadian entrepreneurs and with a special focus on the Chinese Canadian community. “We are pleased to be launching Wealth One, a community-focused bank with a vision to become a preferred bank among Chinese Canadians,” said Wealth One President and CEO Charles Lambert. “At the heart of this bank is a team with a deep knowledge and respect for Chinese values and culture, and frontline financial services managers who are fluent in Chinese and English.” Shenglin Xian, the Bank’s founding shareholder, added, “With the tremendous growth we’ve seen in the Chinese Canadian community, the opening of Wealth One presents a significant opportunity and a historic moment for our community.” Wealth One’s financial products include personal and business deposits, residential and commercial mortgages with services available online, by phone or in person. Wealth One has opened offices in the Greater Toronto Area (GTA) and Vancouver with an eye on cross-country expansion in the years to come. Opened in 2016, Wealth One Bank of Canada is a Canadian Schedule I Bank committed to providing great customer service and products to all Canadians with a focus on the Chinese Canadian community. With relevant financial solutions and a deep knowledge and respect for Chinese values and culture, Wealth One’s vision is to be a preferred bank for Chinese Canadians.
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Payment shocks Assessing the impact of interest rate increases on consumer debt, lenders
By Jason Wang
here have been many discussions about whether Canadians have taken on too much consumer debt. Indeed, compared to the year before, as of the second quarter of 2016, credit cards, auto loans and installment loans saw balance increases of 4.7 per cent, 2.2 per cent and 2.7 per cent, respectively, all at a pace that is faster than GDP growth or inflation. One reason why Canadian consumers continue to borrow may be low interest rates, which reduce the cost of servicing debt; however, this raises the concern that when interest rates rise and monthly debt payment amounts increase, consumers may have difficulty in managing these higher payments. By analyzing how ready Canadians are for a rate increase, we can gather important insights into the scope and magnitude of the impact on consumers—how many Canadians may be impacted and how large could that impact be.
Who is exposed to a rate increase Not all loan products are created equal. Some have a fixed rate—think of an auto loan or an installment loan with a hypothetical fixed rate of 2.9 per cent for the duration of the loan. Throughout the full repayment period, the required payment will be a set amount each repayment period—monthly, bi-weekly or other. Consequently, when policymakers increase interest rates, consumers who hold these fixedrate loan types will not be impacted. Then there are the variable-rate loans, such as variable-rate mortgages and the majority of lines of credit. The interest rates on these loans fluctuate over time and are typically structured as “Prime plus a spread,” in which the Prime rate—currently standing at 2.7 per cent— generally moves in lockstep with the Bank of Canada Target Overnight Interest Rate, which is currently 0.5 per cent. When the Bank of Canada implements a rate hike, the Prime rate will increase, pushing up the effective interest rates on these loans. By investigating the anonymized credit files of all credit active consumers in
Canada—26 million in total—we found that 27 per cent have a line of credit account or a variable-rate mortgage or both. In other words, approximately seven million consumers are exposed to potential impact from rate increases. This study refers to these consumers as the “exposed population.”
How big the payment shock could be When interest rates on variable-rate loans increase, the increase in periodic payment amounts for the consumer is referred to as a payment shock. Conceptually, calculating the amount of a payment shock is simple— multiplying the variable-rate debt balances by the level of the interest rate increases. If the variable-rate balance is $10,000 and the rate rises by one percentage point, that translates to an annual increase of debt repayment obligations of $100. Divide by 12, and you get the monthly payment shock. Fortunately for the majority of Canadians, we estimate that the payment shock is not much of a shock. Under a 0.25-point interest rate increase, 56 per cent of the exposed population have a monthly payment shock of less than $10. For the exposed population overall, the median payment shock is only seven dollars. Only 15 per cent of that population face a monthly payment shock of $50 or more. When we simulated the impact of larger rate hikes—namely 0.5-point and one-point increases—30 per cent and 40 per cent of exposed consumers, respectively, would be dealt a payment shock of $50 or more.
How much payment shock can tip someone over The size of the monthly payment shock is only one side of the equation. For some, a $50 increase in their obligations may easily be managed by forsaking a couple of restaurant dinners a month, while for others, this may mean they are not able to fill their gas tank to get to work. Therefore, we need the other side of the equation: comparing the payment shock with consumers’
Total Finance current cash flow. Trended data now available to lenders on consumer credit files provide the ability to assess consumers’ available cash flow based on how much they are paying each month above the minimum due amounts on their debt obligations. A consumer with required minimum monthly credit card payments of $100 who is actually making payments of $400 may have $300 of excess cash flow that she could redirect to offset the payment shock. This insight enables the comparison between payment shock amount and a consumer’s available cash flow. We define a person’s capacity to absorb (CtA) as the difference between excess payments on loans and the size of the payment shock— calculated on a monthly basis: CtA = Excess Payment Amounts – Payment Shock As you can see in the accompanying “Illustration of monthly CtA calculation” chart, two consumers can have the same payment shock amount, but may have different capacities to absorb that shock, simply because of different cash flow situations to begin with. In the case of the second consumer shown above, CtA is negative, meaning this consumer would have challenges meeting the increased debt repayment requirements. For each anonymized individual in
the exposed population defined above, we calculated his or her CtA amount using this method and found that with a 0.25-point interest rate increase, 718,000 consumers might have difficulty absorbing the payment shock. An additional 253,000 consumers might not be able to absorb the shock if the rate were to rise by a full percentage point. Among these consumers, more than 650,000 with strong credit—those whose credit scores are prime or better—may have difficulty absorbing such a payment shock.
What this means to lenders This is especially compelling news for lenders as hundreds of thousands of borrowers currently believed to be lower risk may suddenly become risky with an increase in interest rates and payment obligations. While lenders normally expect subprime consumers to be riskier, this potential change in the risk profiles of prime or better consumers may come as an unpleasant surprise. These findings are simulation results and reality might turn out to be somewhat different. First of all, cash flow based on credit files is a conservative measurement and does not take into consideration potential savings or other sources of
cash the consumers could draw on to help mitigate the payment shock. In addition, rate increases typically happen during “good times” when the economy is expanding, which usually benefits consumers’ cash flow through improved employment prospects and earnings. Finally, even though we identify nearly one million consumers who might struggle under a one-point rate hike, rate increases generally occur in 0.25-point increments; it could take a number of quarters to reach a one-point rate increase, giving consumers and lenders more time to adjust and adapt. Nevertheless, lenders may benefit from evaluating their own portfolios in a similar manner to determine who among their customers might be vulnerable to a payment shock, and work with those customers to ensure their accounts remain in good standing. Jason Wang is the director of research and consulting for TransUnion, where he is responsible for leading research projects and industry analysis in Canada. Prior to joining TransUnion, Wang held management roles at American Express, CIBC and Citigroup. Jason received his MBA from New York University and his Bachelor degree in Physics from Peking University. He is a CFA charter holder.
Illustration of monthly CtA calculation
Number of consumers (in thousands) whose cash flows may not be enough to offset a payment shock
Risk segment (score)
0.25-point interest rate increase
One-point interest rate increase
Super Prime (830–899)
Prime Plus (780–829)
Near Prime (600–699)
transformation in global payments and regulation 10
By Stephanie Zee
eer-to-peer payments, faster payments, enhanced data, straight through processing and straight through reconciliation—the expectations and demands of today’s corporate clients simply can’t be met by the legacy infrastructure we are still using today. Consequently, we find ourselves witnessing extensive change across all aspects of the payments ecosystem. Four key trends are driving transformation in global payments and regulation: infrastructure modernization, cyber security, new entrants and technology and regulatory diversity.
Infrastructure modernization Infrastructure modernization is occurring across the value chain, not just within banks, and is all encompassing. It is truly end-to-end, stemming from both push and pull market activity. Clients are actively updating internal enterprise resource planning (ERP) platforms, payment systems and processes; in many cases centralizing accounts payable and creating a payments hub that often includes several or all countries. Clients are insisting on enhanced data, transparency and ubiquity of process and file type across their payment providers, while new entrants are challenging banks to abandon legacy systems and undertake their own infrastructure transformation to keep up. At the same time, financial market infrastructures are adopting the new messaging standard (ISO 20022), enabling the transfer of richer data, launching faster payment schemes and opening access to non-bank organizations adding to the pressure on banks. As payment infrastructures are being modernized in the domestic landscape, these solutions are creating momentum for neighbouring jurisdictions to also change and impacting cross-border schemes. Infrastructure modernization and faster payment systems have proven to be an enabler of business growth in such countries as the United Kingdom, Singapore and Australia which have already
gone live with these faster systems. Many other countries including Canada are in the planning/ exploring phase. Payments Canada (formerly known as Canadian Payments Association) is currently undertaking a multi-year initiative to modernize Canada’s payment infrastructure utilizing ISO20022 as the de facto standard. At the same time, the banks have come together to overhaul the cross-border payment experience. SWIFT’s Global Payments Innovation Initiative (GPII) is one of the ways that banks are collectively responding to improve cross border payments and address key client pain points. Launched in January 2016, the goal of GPII is to modernize the messaging system and improve transparency and predictability of fees, end-to-end payments tracking and transfer of rich payment information. More than 70 banks channeling payments into 227 countries have signed up. The results of a small pilot are expected in the coming months with a broader roll-out in 2017.
Cyber security The World Wide Web is now 25 years old and has transformed consumers’, businesses’ and governments’ approaches to shopping, procuring and paying. It has opened new markets and trade near and far, and has made a massive amount of information and data accessible to anybody and everybody. Global systems have been integrated and have enabled straight-through processing. At the same time, we have created the perfect environment for pseudo-anonymity and cyber-attacks. A cyber-attack is an attempt by criminals to access or damage a computer network/system in order to cause disruption or for monetary gain. The risk of cyber-attacks continues to increase, with the estimated global cost of cybercrime at $445 billion, as of February 2015 according to Computer Weekly. In 2016 we have seen a marked rise in attacks targeting financial institutions, with the payoff in the millions of dollars for each attack. The rising financial
Regulatory Total Finance news impacts, the pace of change in the payments industry, and local and global system interdependencies have put cyber security high on the agenda of banks, financial market utilities and regulators. Implementing robust practices for system access such as multi-factor authentication, use of biometrics, and segregation of data and information are important elements of a security program. But cyber security is not just about technology. Investment in and execution of an organization-wide strategy to understand and combat cyberattacks is critical. Effective strategies include governance combined with a culture of prudent business control and risk management, including training, communications, documented business processes and being vigilant over different infiltration points such as email or access to company WiFi.
New entrants For several years FinTechs have been quietly and now loudly and explosively leading the charge to address the gaps identified by our clients to capture market share. New entrants and technology developments are driving business model disruptions where VBProfiles found that investments in FinTech reached more than $38 billion in 2015. The extensive scope of activities across the new entrants makes it difficult to know what to focus on and where the greatest threats or opportunities may be. Small but successful startups can pose legitimate threats to even the strongest companies by disintermediating the banks or relegating them to being the “dumb pipes.” Further, non-traditional financial services companies like PayPal, Google and Apple are leveraging cloud and mobile technologies as well as viral distribution to quickly start and scale business at low cost to address the friction clients experience. New technologies like distributed ledger or blockchain enable new paradigms for exchange of value and create new “rails” that sit outside of the traditional bank to Financial Market Utilities (FMU) payment infrastructure. Banks have stepped off the sidelines with many having set up innovation centres to experiment with new business models and technologies. Some banks have invested
in a range of different startups, and are collaborating and partnering with FinTech players.
Regulatory diversity As if infrastructure transformation, cybersecurity challenges and FinTech disruption were not enough, the industry continues to experience an amplification of regulatory oversight with increasing requirements aimed to protect the payment ecosystem, build resiliency of payment providers and utilities, and encourage innovation and competition. Multiple layers of governance over the ecosystem are in place from global oversight bodies such as the Bank of International Settlement, the Basel Committee on Banking Supervision, and the Financial Stability Board, to regional and local oversight such as Office of the Superintendent of Financial Institutions (OSFI), The Bank of Canada, The Department of Finance, The Canada Deposit Insurance Corporation and the Office of the Privacy Commissioner of Canada. The regulatory environment is complex with new requirements emanating from the different bodies to revitalize and address outdated legislation and regulation, and to address the payment market conditions. Heightened capital and liquidity requirements through BASEL III, operational resiliency and “living will” requirements, ongoing anti-money laundering and terrorist financing efforts, and cyber risk management controls are just a few of the topics impacting the payment world. To address the rise of cybercrime in particular, in 2016 The European Union adopted the Network and Information Security (NIS) Directive and General Data Protection Regulation; and in the U.S. the Cybersecurity Information Sharing Act was signed into law December 2015. In Canada the Government has articulated a cyber-security strategy and has created the Canadian Cyber Incident Response Centre (CCIRC) and is also considering legislation. For regulators and banks a conundrum exists with respect to FinTechs: Is a FinTech a technology company or is it a payment provider that should be governed similar to a bank? If so, which regulations
apply and which ones do not and what falls under the regulations? In the case of new technologies like blockchain or virtual currencies like Bitcoin who do you regulate (FinTechs, exchanges, programmers, originators, beneficiaries)? How should they be regulated (legislation, acts, common law, civil law, codes of conduct, and what jurisdiction)? Many of these questions have yet to be answered. Regulations on FinTechs are nascent and vary greatly creating uncertainty for financial institutions that bank these firms and this uncertainty may constrain innovation among FinTechs. Various jurisdictions have introduced “regulatory sandboxes,” relaxing some of the regulatory requirements to encourage exploration and innovation in a flexible environment in which FinTechs can test technology and business models. Once the application has reached defined thresholds, commercialization generally requires full adherence to regulatory obligations. In some cases new regulations may be needed to ensure safety and security that reflect the unique characteristics of the new technology or business model. Examples of regulatory sandboxes include the United Kingdom’s Financial Conduct Authority, the Monetary Authority of Singapore, and the Australian Securities and Investments Commission. Systemic infrastructure change, new risks, new entrants and heightened regulatory pressure… it’s a frenzied pace but payments is the most exciting business to be in. Opportunities are everywhere to innovate, to deliver greater value to our clients, to enhance the client experience, create efficiency, effectiveness and transparency, reduce costs, drive new revenue, and enable a stronger, safer and more secure operating environment. Partnership and collaboration between the banks, FinTechs and regulators are the best way forward through these unprecedented times of change. As TTS Payments Regulatory Head, Stephanie Zee leads a team responsible for creating and driving Citi’s strategy to meet regulator expectations and is responsible for the management of emerging risks across Global Payments.
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Leveraging the global digital shift to amplify your market access and customer engagement F By Mark Frey and Phil Valvardi
rom the urban streets of New York City to the rural villages of Vietnam, consumer markets around the globe are expressing a demand to access mobile banking services in the same way they access everything else; on their smartphones. Over 85 per cent of Millennials in the United States have a smartphone glued to their hip, with the number continuing to grow as the cost of ownership comes down. Pew Research Center cites 64 per cent of American adults owned a smartphone in 2015, an increase from the 58 per cent in 2014. The rising popularity of affordable smartphones has led to a digital disruption in the financial sector among many age groups across both developed and developing countries. EY expects the growth of smartphone shipments to double between 2014 and 2018 in emerging markets such as Indonesia, India and Russia. This digital shift is not only driven by necessity but also by the changing social values reflected in a maturing demographic with its own set of attitudes and behaviors towards the finance industry. The case for digitization can be seen already with Canadian banks where, despite weak
economic growth, they have reported betterthan-expected quarterly profits due in part to their investment in mobile banking services. To leverage this momentum and mobile banking model, financial institutions must look toward digitization as a channel or face being left behind. Understanding the various customer markets, including Millennials who hold a valued market share, alongside collaborating with partner FinTech solutions can help financial institutions better serve their customers and reach new, underserved markets.
The Millennial factor: Skepticism driving change Millennials, who are sometimes viewed as a connected but skeptical demographic, are the largest generation comprising the workforce in Canada. How they choose to do business is influencing financial institutions to develop financial solutions that resonate with them. According to the Millennial Disruption Index, 53 per cent of Millennials do not feel their banks offer anything different than other banks, indicating that they see major banks as
Total Finance a homogenous entity with no discerning differentiators. Is it any wonder then that they believe innovation will come from outside the industry? Compared to the personal computing industry or the discount retail industry, banks are considered to face the highest risk for disruption in the eyes of Generation Y, with 33 per cent of them having the opinion that they won’t actually need a bank in five years’ time. The established reputations of the big banks do not hold much value for this cynical demographic. However, all is not gloom and doom, because this growing cynicism presents opportunities to better cater solutions to this younger, socially conscious group. Millennials, despite their mistrust of financial institutions, are influenced heavily by the power of their peers. The 2015 Millennial Impact Report on Cause, Influence and the Next Generation Workforce, shows that through their peers, Millennials can be engaged to action. Millennials’ almost innate use of social media means that peer group approval and the viral nature of word-of-mouth can go far further and have far more effect within this demographic than more traditional media channels, making socially conscious banking a real alternative model for hitherto underserved markets. For financial institutions, particularly those that are actively looking for solutions to expand their business in the retail sector, mobile financial services offer expansion opportunities without the bricks-and-mortar and associated capital investment. Mobile financial services allow financial institutions to potentially access new markets and new customers without expanding their geographic footprint.
The rise of mobile in rural markets Developing economies, such as India or Vietnam, also show the same consumer appetite for mobile banking applications, albeit from altogether different cultural circumstances. In rural areas of the world, where trips to the city centre would not be a part of the daily routine, a portion of the community may never have had regular access to banking services. For rural families that have family members working as migrant workers, receiving money transfers from their wages forms
According to the Millennial Disruption Index, 53 per cent of Millennials do not feel their banks offer anything different than other banks, indicating that they see major banks as a homogenous entity with no discerning differentiators. an invaluable and stable contribution to the family income. The World Bank reports remittances increased 0.4 per cent from $430 billion in 2014 to $431.6 billion in 2015. There is not only a desire to do things in a mobile fashion in emerging markets but it is also a case of pure necessity. There is a strong pull for mobile financial services in terms of growth from developed and developing markets that will influence how financial institutions think about the global marketplace. One of the issues surrounding mobile opportunities in emerging markets for financial institutions is the high cost of remittance services for migrant workers who send money home. On the individual level, what does receiving an extra $25 as a result of reduced banking fees mean in terms of available income for sustaining a family in an emerging market? It is a good chunk of money that goes a long way for migrant workers. For the individual user, receiving immediate payments through his or her smartphone and getting more of those funds through savings on money transfers is impactful. Financial institutions tapping into emerging markets from the mobile perspective have the ability to be resourceful with traditional fee structures in the digital space and to improve upon the nature of international peer-to-peer (P2P) transfers. Innovative solutions can offer up new opportunities for revenue streams to increase customer engagement with the brand and services of a financial institution.
with a social component. In terms of connecting users within a community of shared values, social banking models are an attractive strategy to attract and retain new markets. However, the digital ecosystem will be driven by bank collaborations with FinTech companies. Rather than competing, banks and FinTech companies can be potential partners in the financial services market, as well as in the payments space. Financial institutions and FinTech companies are embracing the symbiotic alliance for multiple reasons, as in working together the banks can respond more swiftly to the demands of changing customer expectations, and FinTech companies can work within a regulated environment that allows for their solutions to have a high chance of success. Mark Frey is chief operating officer at Cambridge Global Payments. Mark is responsible for leading the company’s operational functions and ensuring the company achieves operational efficiencies to best position Cambridge for scalable business growth in the years ahead. In addition to his role as COO, he leads the organization’s Canadian sales team as the managing director of Canada.
Phil Valvardi is chief financial officer and head of client relations for Meed. He is responsible for financial operations and account management across the company’s network of Member Banks and Corporate Members. Previously he served as the GM of the Prepaid Solutions business at Fiserv, CEO of Maverick Network Solutions and president of the
Collaborate for competitive edge
Financial institutions stand to gain from opportunities in mobile financial services
Canadian banks weigh risks and rewards of analytics Leadership must balance new business insights with increased security challenges By Yuri Levin
he banking industry is one of the most conservative sectors in Canada for good reason: banks must protect customers’ investments and meet increasingly rigorous national and international laws. But with the onset of FinTech and related technologies, the country’s largest banks have been taking a serious look at innovations that harness the power of big data and analytics to thrive in the new digital economy. According to its website, the insurance branch of the country’s largest bank, Royal Bank of Canada, used predictive analytics tools to improve outcomes of customers’ claims for disability support from Canada and Quebec Pension Plans. As a result, the number of clients who received CPP/QPP disability payments increased by two per cent—more than $425,000 in additional monthly benefit payments to customers. Like many other industries, Canada’s banks have been gleaning meaningful insights from volumes of data to make effective decisions and offer what customers are looking for. This can increase the trust they’ve developed with clients over the years and allow them to stay competitive and sustainable down the road. For example, in 2014, Canadian Imperial Bank of Commerce (CIBC) tapped into years of customer data across its credit card portfolio and launched a travel rewards program that tailored service and product offerings for clients and enhanced their experience of personalized banking. How do developments at banks compare to those in a larger corporate landscape? A recent Smith School of Business survey of 250 senior leaders in Canada reveals that executives are now relying more on data analytics to guide strategic business moves. Of those surveyed, 56 per cent report that decisions informed by data analytics, as opposed to experience and intuition alone, tend to deliver better results. They use more data and analytics for strategic
decision making than in the past and emphasize intuition for crisis management and humanfactor decisions involving their teams.
Challenges and risks in using data analytics Like any other new technologies, increased use of data and analytics also comes with challenges and risks. One of the key risks in collecting and analyzing increased volumes of data for analytics purposes is security breach. This risk pre-dates the growth of analytics; however, analytics applications often require higher-value integrated data; for example, data that combines customer transaction and demographic information. The bigger the data, the more prone it is to being the target of hackers who steal customer information, particularly from banking and retail firms. In Canada, the number of reported data breaches reached 20,456 in 2015, costing each breached company an average of $5.32 million according to the “Cost of Data Breach in Canada 2015” study released last year by Ponemon Institute. The study, which looked at 21 Canadian companies from 11 different sectors, indicates that data breaches cost an average of $250 per compromised record. Malicious or criminal attacks are the usual culprits of data breaches, but employee negligence, system glitches and human error contribute to the problem too. Aside from data theft, managing volumes of information is also a key challenge. Storing and organizing massive amounts of data has long been a challenge for information systems professionals, but integrating data from multiple sources in the ways required by advanced analytics adds another level of difficulty, as does ensuring that the data remains updated and accurate. It’s no wonder that the Smith School’s executive survey revealed that there is still some Continued on page 20
Currency planning a top priority as Canadian small businesses go global By Dave Dominy
t is an exciting time to be a small business owner in Canada. Global expansion and export levels are at an all-time high, with a recent McKinsey Global survey indicating that cross border electronic payments constitute 81 per cent of all payment flows worldwide. Evidently, the ideology that business size dictates global reach is obsolete. In fact, 54 per cent of business owners in Canada are planning to export to new markets over the next two years. For all of its opportunities, participation on a global scale carries inherent and unavoidable financial risks. One of these being the impact of currency exchange on a small businessâ€™ bottom line. The fluctuation of global currencies is inevitable, thus, it is more important than ever for small businesses to plan ahead for their currency exchange and global payment needs in order to retain reach and autonomy on a global scale. Despite their growth, many small businesses are often too busy or lack the in-house expertise to properly plan for currency risks and volatility. All sorts of economic, political and emotional factors can impact the currency market. Key drivers can be from interest rate decisions, GDP, trade balances, unemployment rates, crude oil inventories and other commodities to unexpected events like Alberta forest fires and Brexit. Adequately monitoring the international market for all factors influencing rate changes would require a full time resource. Business owners, finance teams and controllers are often too busy to take this on, being focused on the operational and managerial matters of running a successful business. Fortunately, small businesses can eliminate the uncertainty of going global in partnership with currency specialists who understand and anticipate trends that can influence currency rates, recognize the challenges that small businesses face when expanding globally, provide competitive rates and, most
importantly, can provide strategic counsel on how to mitigate potential monetary losses due to currency volatility. Currency experts allow business owners to make informed decisions about when to act by anticipating and planning ahead of market movement.
Why hedge currency? While some businesses are already making transactions in other currencies to expand their presence globally, small businesses often feel they do not get a competitive exchange rate when dealing with the cross border electronic payments that have become the global norm. The sheer number of options in the market can be overwhelming and many businesses explore just a single option. This often leads to noncompetitive rates, missed opportunities and potential financial loss. Partnering with a currency specialist organization with hedging expertise that monitors large scale events, global trends and factors on a daily basis is a good move for any small business. Currency specialists, like FIRMA Foreign Exchange, provide businesses with the solutions needed to navigate currency markets and make strategic decisions on when to lock in currency rates that work best for them before anticipated global events occur. For example, after Britain voted to leave the European Union, the price of the British Pound dropped significantly, by as much as 11 per cent. Businesses exporting to the UK that had not planned for or anticipated the results of the vote lost millions of dollars in revenue due to the influence it had on the currency. Closer to home, the Fort McMurray forest fires had negative consequences not only on the residents of the town but also on the value of the Canadian dollar. Having a plan in place to lock in at a desired rate with a currency expert Continued on page 20
Improving debt collection and agent performance using real-time data analytics and multi-channel communication
By Kevin Deveau
ver the past decade, technological, social and economic changes have had a profound impact on collections operations and organizations are being forced to adapt to the new environment in order to maximize recovered debt and revenues. Against this backdrop, companies, particularly those in hyper competitive industries like telecom and banking, are simultaneously competing for share of debt payments and customer loyalty— including the loyalty of delinquent customers. While these changes present challenges, they also create opportunities to adopt collections approaches that are ultimately less costly and more effective. Innovative companies and their collections operations and partners are adopting intelligent, agile approaches to debt collection, using tools such as realtime data analytics and targeted customer communications, which can lead to higher contact rates, improved response frequency and faster repayments.
The changing debt collections landscape The role and focus of many debt collections organizations has changed considerably in recent years. Economic conditions and technology advances have forced many organizations collecting debt into a balancing act: Maximizing their returns from delinquent accounts while ensuring they maintain positive relationships and retention with customers—even while the collection process is in progress. Running parallel to this, a number of market and consumer dynamics have unleashed new challenges into the collections operations landscape. While economic conditions have continued to improve since the 2008 downturn, a recent report from Equifax revealed that Canadians are taking on more debt. This trend is particularly pronounced among the large consumer base that is Millennials—consumers aged 18 to 36—whose delinquency rate rose 12 per cent in the second quarter of 2016. Another factor complicating debt collection is evolving communications technology and
Your Team the fragmentation of communication channels. For example, the move by consumers away from landlines and towards smart mobile devices makes it easier for consumers to avoid taking calls from collectors or to change their contact information. Collectors who do not maintain an ongoing relationship with delinquent and non-delinquent customers alike risk losing their up-todate information in the rapidly changing telecommunication landscape. Furthermore, changing consumer preferences and attitudes toward debt have undercut previous best-practice wisdom. People are taking on more debt and have become more casual about repayment; yet at the same time they want more control over the payment and collections process, while expecting better service and flexibility from creditors. Traditional collection tactics, like repeated letters, harassing phone calls and one-size-fits-all SMS blasts, have become outdated and unproductive in the new landscape, and can turn off customers who now expect a more convenient and personable approach.
Intelligent and targeted debt collection communication The good news is that many of these challenges can be turned into opportunities that maximize collections success, contact agent efficiency and a positive customer experience. In particular, the explosion of mobile devices and internet technologies means it has never been easier to contact customers, with a number of new avenues to efficiently reach those with outstanding payments. However, the mass SMS blasts some creditors send every few days to all delinquent customers are not effective. It is important for debt collectors to use specific communication so the customer feels like they are being treated individually. But in many cases, without the right technology in place, the creditor has no perception as to whether these one-way outbound messages were even delivered to a valid number. FICO’s research indicates that customers actually prefer to deal with well-targeted automated communications rather than live agents when it comes to
their debt management, because it saves them the embarrassment of discussing their debt and gives them more control over their repayment plan. Tailored, automated contact also enables personal, secure and convenient self-service options for making a payment, or even negotiating a payment plan. In fact, a recent survey conducted by a global digital engagement solutions software company, shows mobile payment systems using two-way SMS communication resulted in a 78 per cent rate of repayment within 48 hours of receiving a payment-due alert, compared to 26 per cent achieved with traditional collection methods.
Maximizing collections performance and repayment through real-time data analytics Intelligent, agile multi-channel communication is becoming increasingly important to collections organizations, as they look to leverage the gains in efficiency and success that can come from digital channels. The most effective platforms in today’s landscape are those which enable intelligent, automated, two-way communications for collections teams to reach out to customers in real-time, through voice, SMS, mobile applications and email. The future success of the collections organization and their ability to execute in the new environment is going to increasingly depend on how they manage, process and analyze their data. Data analytics software tools provide a wealth of valuable information on debtor profiles and are enabling collection teams to work smarter by identifying and prioritizing those with the strongest likelihood of short or medium-term payment returns. They also facilitate broad access to data, including real-time updates, which enable collectors to track individual customer behaviour and preferences and to connect with customers over the right channel—whether via mobile application or voice, the most effective combination of communications channels and methods, tone and frequency are identified and utilized. Using these systems, the analytics directing each decision receive realtime data, so any customer contact is recorded instantly and customer-specific
information is retained. The system recognizes positive contact from a customer and prevents further contact in the following days. Moreover, a customer who makes a payment via a web portal will not receive a collections call to their mobile 10 minutes later. In addition, because automated systems work 24/7 and cover all channels, there are no hitches when customers are contacted through one channel and respond via another, because the system can track all account activity. It can even recognize and record a customer’s preferred contact channel to tailor future communication, or track customer-specific information such as a disability, making future contact easier. Using customer information stored in the system, a company’s debt management platform decides every customer journey. For example, if a customer is flagged as a low risk, they would be sent a reminder letter and not receive a serious call. Leading companies and contact centres are also using analytics software to measure and improve the performance of their agents. FICO’s Engagement Analyzer tool provides real-time analysis of an agent’s conversation with a client and helps management understand the level of performance and identify where improvements can be made—and is able to help to boost agent productivity by at least 20 per cent. Organizations and their partners must rethink their debt collection communication strategies if they want to stay relevant and effective in a changing consumer and telecommunications environment. Treating debt like a personal problem and tailoring collection efforts to individual customers through integrated analytics are both key strategies for optimizing communication and maintaining customer loyalty without overlooking service in favour of debt collection. Kevin Deveau is vice president and managing director, Canada, at FICO. He is responsible for growing FICO’s Canadian market share and strengthening client relationships. FICO is a leading analytics software company, helping businesses in 90+ countries make better decisions that drive higher levels of growth, profitability and customer satisfaction.
Canadian banks cautiously embrace analytics
should be viewed as decision-making aids, not replacements. Managers can use additional data to test their assumptions and recognize new patterns but should never be forced to ignore their intuition.
Continued from page 16
Yuri Levin is professor of operations management, director of master of management analytics
Given these risks, what can banks and their customers do? Bank clients are perennial targets of malware attacks to steal passwords and banks are prime targets for hackers seeking access to their databases. Banks must actively monitor their networks and continuously upgrade their ability to ward off online threats to avoid disruption of customer service. On the customer-relations front, the risks posed by security breaches and the complexity of big data management can lead to customer backlash. As customers become more aware of the data that firms are collecting, they can become increasingly wary of sharing information and may demand more details of the uses of their data. To keep customers engaged, companies should be transparent on how they handle client information and should show tangible improvements in customer experiences as a result of collating more client data. For modern managers, striking an appropriate balance between analytics and intuition is a key aspect of success in decisions, particularly those relating to customers and employees. It is not either/ or with these two approaches to decisions. There are some lower-level decisions that may be effectively handled entirely with analytics—inventory control and smallitem forecasting, for example; however, formation of effective business strategies, even with good data available, needs intuition and experience. To be effective, and used, analytics solutions must have the capability to combine objective data with subjective data from managers to produce nuanced results. Analytics tools
and director of Scotiabank Centre for Customer Analytics at the Smith School of Business at Queen’s University.
Currency planning a top priority as Canadian small businesses go global Continued from page 17
Dave Dominy is the chief executive officer of FIRMA Foreign Exchange Ltd., a highly specialized currency and payments solutions provider to small and midsized businesses. Firma’s solutions are simple, oneon-one and optimize clients’ time and resources to
mitigates the risk of unnecessarily lost capital due to unexpected events. Sixtyone per cent of Canadian small businesses report the fluctuating value of the Canadian dollar had a significant impact on export sales. Considering 95 per cent of those same business owners expect export sales to increase over the next six months, a fluctuation, no matter how slight, has immediate and long-lasting impacts on finances.
Forward contracts A forward contract enables businesses to protect their future service commitments and mitigate the uncertainty associated with fluctuating markets by locking in today’s rates. By utilizing this option, businesses add certainty knowing that their global transactions only occur at the time and rate that they have agreed upon. In the Brexit example, a business could have locked in the value of the Pound’s rate through a forward contract at a price of $1.48 CAD before it fell by as much as 11 per cent in a matter of hours.
Spot orders Another option is a spot order. This allows businesses to buy funds now for immediate settlement. A foreign exchange company, like FIRMA, follows currency movements and works with businesses
take the uncertainty out of currency exchange and global payments. Firma believes business across borders can be less complicated.
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hesitation among Canada’s organizational leaders to fully embrace data analytics. Executives report limited availability of accurate or reliable data, lack of tools for data collection and analysis and shortages of expert analytics staff.
to find the rate at which they would like to make a purchase. Once that rate is reached, FIRMA then purchases and delivers their funds to where they are needed. Each of these hedging strategies can offer businesses a path to more business certainty. Just as important as the hedging strategies is working with a specialist firm to make it happen. With limited in-house resources coupled with the daunting task of managing day-to-day operations, small and medium sized businesses should consider these various currency planning options with the help of an expert that can provide strategic guidance on the right decision.
Integrated Payments Solutions September 11-14 RIMS Canada Resilience--Annual Conference Calgary, AB www.rimscanadaconference.ca September 18-20 CUMA CUMA Ontario Annual Conference Collingwood, ON www.cuma.ca September 20-21 Women in Payments Symposium Toronto, ON www.womeninpayments.ca September 21-23 Canadian Finance & Leasing Association Conference 2016 Niagara Falls, ON www.cfla-acfl.ca September 25-27 American Bankers Association Marketing Conference 2016 Nashville, TN www.aba.com September 26-29 Sibos Annual Conference 2016 Geneva, Switzerland www.sibos.com September 29 Tomorrow’s Transactions Unconference Toronto, ON www.chyp.com/thoughtleaders/unconferences
October 5-6 BAI BAI Beacon Chicago, IL www.bai.org/baibeacon October 13 Global Platform 4th Annual Trusted Execution Environment (TEE) Santa Clara, CA www.teeseminar.org October 17-18 Everlink Payment Services Inc. Connection 2016 - Payments Go Mobile Niagara, ON www.everlink.ca/connections2016 October 18-19 Smart Card Alliance Security of Things Chicago, IL www.sca-securityofthings. com October 23-26 Association of Financial Professionals AFP Annual Conference 2016 Orlando, FL an16.afponline.org October 23 -26 Money20/20 Las Vegas, NV www.money2020.com
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Introducing Canada’s newest Schedule 1 bank First Exchange Bank the first to focus exclusively on foreign exchange By Sarah O’Connor
n September 2016, Currency Exchange International, Corp. announced that Currency Exchange International of Canada Corp. had been continued as Exchange Bank of Canada (EBC) (Banque de change du Canada, in French) and is now operating as a Canadian Schedule 1 bank. EBC specializes in delivering wholesale foreign exchange solutions to financial institutions and businesses, including the exchange of foreign currencies, international wire transfers, sale of foreign bank drafts and foreign cheque clearing. “This is a major achievement for EBC,” said Randolph Pinna, president and CEO of Currency Exchange International of Canada Corp. and of EBC. “The entire EBC management team and its board of directors are very proud to have been able to continue as a bank in Canada. “Now as Canada’s foreign exchange bank, EBC opens greater opportunities to enhance existing banking relationships and build new worldwide partners. Customers will have access to a strong suite of FX solutions
using best-in-class technology, customer support and preferred wholesale exchange rates to provide all EBC customers with significant bottom-line improvements.”
The long regulatory road Achieving Schedule 1 designation included earning approval from the superintendent of financial institutions as well as the finance minister and the finance minister’s office. Pinna says that he was initially told the process would take about two years but it ended taking about three and a half: “Changes in the government may have slowed it down a bit and we are a unique bank, eh? We’re not a depository, we’re not a lending company, we are strictly a foreign exchange bank and so I think because of the uniqueness of it it took a little bit longer. “I don’t consider it the end of the journey, I consider it the start. So now we’re at the start line. It was nice to get where we are and we are very proud to be Exchange Bank of Canada and look forward to all the growth here in Canada and in the U.S.”
“We are a unique bank, eh?” The perks of specialization
Now the fun begins
Pinna believes that market trends that gave rise to industry consolidation and “one stop shop” financial services are now fading in favour of renewed appreciation for specialization. “Most of the smaller to mid-size and even some of the bigger companies are recognizing that it’s better to deal with the specialist in each industry and so the big banks, for example, would utilize Exchange Bank for currency because they don’t want to specialize in foreign currency. They don’t want that inventory and they don’t have the software to keep track of everything,” says Pinna. “You just look at your phone and look at all your apps and see that you have specific apps on your phone for specific needs. It’s the same for foreign exchange. Foreign exchange is a very large industry hence I believe there is room for a specialist to be in it and do it very well.”
“I want to acknowledge and thank our loyal customers and dedicated team at EBC for their support in achieving this milestone.,” says Pinna. “This provides EBC direct access to the global banking network, allowing EBC the ability to deal directly with central banks, further expanding and enhancing our pricing and solutions capabilities. I am looking forward to our EBC team engaging in conversations with Canadian financial and commercial businesses to demonstrate the consultative approach of Canada’s foreign exchange bank.” EBC will not be taking deposits or making loans or dealing directly with retail customers as it is focused specifically on establishing direct relationships dealing with select businesses and financial institutions that have requirements for superior international payment and foreign currency products and solutions.
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