2 Cash Flows Management 2024 Partiel

Cash Flows Management
The Cash Flows Process

Vendors
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Vendors C
s Employees
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Banking b
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Customers e Corp Customers
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Sector m
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o Tax / Govt
Others n
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Other
© Alain Rividi
2 A. Rividi, Corporate Liquidity Management 2 Cash Flows Management Neoma BS Jan 2024
The Cash Flow process
▪ Every transaction category raises a series of questions/concerns

– Volumetric in numbers, in amounts
– Periodicity, number of cycles
– Time sensitivity of the transaction
– Who generates the transaction (you or the counterparty)
– What internal processes are impacted and need to be interlocked
– What is the tool set available
– Who is (are) the counterparty (ies), what are their expectations, their capabilities
– What are the market practices
▪ This analysis will dictate the choice of the appropriate tool set to be used
– Maximize end to end efficiency of the collection or disbursement process
– Minimize TCO (Total Cost of Operations)
© Alain Rividi
– Ensure proper consistent security of the transactions
Payments and Collection
Instruments
© Alain Rividi
Instruments for payment or collection
▪ A payment instrument is any instrument allowing to use one’s money to settle a debt or
make a payment.
▪ Note that a payment instrument issued by you becomes a collection instrument from the
counterparty.
▪ There are a large number of different payment instruments available that differ by
– Their scope: some are limited to a country other can be used across many countries
– Their nature: some are embodied in a physical media like cash or cheques, others are immaterial
traces in a computer.
– Their cost
– Their automation potential.
▪ We will just give a high-level overview of the payment instrument scene,and concentrate on
the most widely used ones.
© Alain Rividi
Payment Instruments
▪ Payment instruments are usually complex

▪ Visible part may only be the emerged tip of the iceberg
▪ Two apparently similar instruments may have very different inner working with very different
costs and characteristics.
▪ The payment user needs to understand the hidden mechanics
▪ Other key issue is integration of the payment instrument with the internal environment of the
Company
– Disbursement management tools
– Accounting system
– CRM
© Alain Rividi
© Alain Rividi
A Typology of Payment Instruments
▪ Physical instruments ▪ Next Gen instruments

– Cash – Micropayments
– Cheques – Electronic wallet (Google pay, Apple pay)
– “Effets de commerce” (LCR / BOR), Letters of – Virtual (crypto) currencies (Bitcoins)
credit – Phone Payments (M-Pesa in Kenya)
– “TIP”
– “Mandats” ▪ And Many More to come
– CBDC
▪ Nonphysical (electronic) instruments
– Transfers (SCT), Giros
– Direct debit (Prélèvement Automatique)
– Credit / Debit cards
– Prepaid cards
© Alain Rividi
Cash
▪ Cash is still a widely used payment instrument
with very significant country differences
▪ In France cash represents only around 5% of the
total of transactions in value (10% in number)
▪ Studies concluded that the “cash threshold” was
between 15 and 20 Euros and decreasing
▪ Retailers experience shows, payments in cash
represent 1/3 of transactions but only 15% of
amounts
▪ Monetary circulation in France was centered on
lower amount bills compared to other countries.
▪ Use of cash may be limited by local laws (EUR
1000 in France)
© Alain Rividi
Cash
▪ Cash usage is impacted heavily by political decisions and environmental factors
▪ Some examples
– Covid >> strong decrease in usage driven by
▪ Fear of contagion through notes
▪ Increase in the maximum amount of contactless transactions
▪ Decision by stores to agree to smaller amounts
– Invasion of Ukraine
▪ Rush to get cash especially in the European countries closer to the front
▪ Increase in demand for Euros outside of Eurozone
© Alain Rividi
Source:L’avenir des moyens de paiement en France - Mars 2012 (Rapport commandé par le Ministère des Finances)
Georges Pauget, Emmanuel Constans, Rapporteur: Jean-Marc Lherm
Payment Instruments (except cash) in France in 2022
© Alain Rividi
Payment instruments (except cash) in France in 2022
© Alain Rividi
Significant geographical discrepancies
© Alain Rividi
Significant geographical discrepancies
© Alain Rividi
Also in other geographical areas
© Alain Rividi
A Changing Landscape
New Trends driven by circumstances
18.3 billion card payments in 2022.
746 billion euros.
o/w 9 billion contactless for 148 Billion euros
>20 euros: the average amount of a
transaction.
Contactless payments are still in full swing in

France, with an exponential evolution in 2020
favored by the health crisis and the raising of
the ceiling to 50 euros from May 2020.
Their volume was multiplied by 23 and their
value by 19 between 2015 and 2020.
They represent now 60% of the number of

proximity payments by card (done at a
merchant's terminal) and 27% of their value.
© Alain Rividi
New trends in Payment Instruments
▪ Wallet operators moving to another dimension

▪ Building on Payment Data
▪ Instant Payments
▪ New Payment Models (RTP)

▪ Added Value Services (BNPL, Buy Now, Pay Later) Cash back schemes
▪ Appearance of Digital Currencies
– Digital Assets (NFT)
– Central Bank Digital Currencies (CBDC)
– Other instruments (Bitcoin/Ethereum,…)
© Alain Rividi
Document Analysis
Documents in context
▪ In Course, you are proposed 4 Documents taken from professional Journals:

1. The Japanese Payments enigma (2015) tries to explain how a country may have a
peculiar approach to payment instruments usage.
2. « Cash Persist » analyses the resilience of cash
3. « The Need for speed » and
4. « Instant Payments, understanding the use cases » discuss Instant Payments
5. A press release for the launch of the IXB (Instant Cross Border) project by SWIFT and its
partners
Read, Analyse Feel free to ask questions via the forum or during next class. Elements from
these readings may be included in the exam
© Alain Rividi
Factors of Choices
and Integration
© Alain Rividi
Factor of choice of collection instruments
▪ Choice of instruments is often mandated by the nature of the commercial contact

– Payment in Presence
▪ Transactions in presence primarily use Cash, Cheques and Card although next gen payment
instruments allow to disconnect the payment from the purchase
▪ Physical instruments create a series of logistical issues to collect, store, count, secure and remit
the payment instruments.
– Payment in absence
▪ Instrument issued by customer (cheques, transfer)
▪ Instrument initiated by the vendor (direct debit, credit card)
▪ Transaction value
– Local laws, or payment instrument rules may limit possibility to use certain instrument above certain
amount.
© Alain Rividi
▪ Internal integration (especially reconciliation capability)
Factors of choice of disbursement instruments
▪ May vary depending on who is the counterparty

▪ Employees
– In most countries standard transfers
– In few countries foreign currencies or cash may be required
– Specific case of assignees
▪ Vendors
– Impact of Purchasing Terms and Conditions
– Market practice
– Domestic or cross border
– Trade finance impact
▪ Taxes
© Alain Rividi
– In many countries payment procedures for different types of Taxes are mandated by law
Payment Instruments Logistics
© Alain Rividi
Credit / Debit /Charge cards
▪ Cardholder
– This is a person holding a debit, credit or charge
card issued by a financial institution.
▪ Retailer / Merchant
– A merchant sells goods or services to their
customer (the cardholder)
▪ Acquirer
– A merchant will have negotiated a merchant
service agreement with its acquirer to process
payment card transactions on its behalf.
▪ Card Scheme
– Card schemes are organizations that manage
and control the operation and clearing of card
payment transactions according to card scheme
rules.
▪ Issuer
– The issuer is the bank, building society or
© Alain Rividi
financial organization that provides payment

cards (debit, credit, pre-paid or charge card) to
their customer or cardholder.
End to End process integration
▪ Even in small/medium size organization cash flow transaction volume in numbers

may be such that it can hardly be handled manually
▪ Requires automating:
– Acquisition of transactions from the accounting sources (for disbursements) or from
merchant sites
– Transmission of data to or from banks
– Security and authentication procedures
– Communication to the internal stakeholders
▪ Incoming customer payments to Accounts Receivables and Accounting
▪ Bank statements to Cash Accounting, Bank Reconciliation
▪ Rejections/incidents to the appropriate owner
– Reconciliation / Matching
© Alain Rividi
The Bank Transfer
The main transaction instrument Bank Transfer
3 main families of transfers, going through different process

▪ Bulk => large volume small amount (in English: Bank Transfer)
– Used for commercial payments
– Settled through ACH (Automated Clearing Houses)
– Net Settlements
▪ Individual => high amount / small volume (in English: Wires)

– Used for internal transfers, financial markets settlements
– Going through RTGS (Real Time Gross Settlement System)
– Gross settlements
▪ International transfers
– Used for all types of transactions involving cross border or cross currency
– Information transmitted through SWIFT
– Settled via bilateral mechanism
© Alain Rividi
▪ Names will vary from country to country: Giro, CHIPS, CHAPS, BACS
Net and Gross Settlements
Net Settlements Gross Settlement

▪ Each transaction is booked against the ▪ Each transaction is settled individually
counterparty
▪ i.e. funds are transferred immediately
▪ Creating debts and receivables between the
▪ There is no debt/receivables between the
various participants
participants at any point in time
▪ Net position of these debts and receivables
▪ Information to beneficiaries is faster
are settled either:
– Periodically on set times
– When one party exceeds its debt limit
RTGS systems are significantly more expensive than Net systems (5 EUR vs 0,05 EUR)
© Alain Rividi
so they are usually limited to large amount transactions requiring immediate final
execution.
Transfer process: Domestic
▪ Clearing System
– Where banks exchange and settle
transactions between their customers
Issuer Issuer Bank – STET, EQUENS, BACS, CHIPS, EBA, Target
▪ Net Settlement:
– All transactions during the day are summed
up
Clearing – Settlement takes place at the end of the day
System
▪ Gross Settlement
– Each transaction is settled real time
▪ Impact
– Banks need to have the funds available
Receiver – Therefore higher cost
Receiver
Bank
– Immediate conclusion of the transaction
© Alain Rividi
International Transfers: Information and Funds
Issuer Receiver
Transfer Order Credit Advice
MT202 Payment order
SWIFT Loro: DB’s Acct

DB
Mizuho at Mizuho
Currency MT900 Debit Advice
Buyer
Forex
Markets
Credit to DB’s LORO account with
Financial Counterparty currency
Currency Currency seller
© Alain Rividi
transaction
Internationl transfer: A simplified view
A transfer from a EUR Account in Germany to a JPY account in Japan
1. The Payer sends the Payment Instruction to its Banker (Deutsche Bank)
2. As the transaction requires a purchase of foreign currency in order to convert EUR to JPY, the bank
enters into a Foreign Exchange (FX) transaction on the market.
3. The FX counterparty receives the EUR and
4. Remits to Yen to the “Loro” account held by DB with Mizuho Bank in Japan. Major banks have
accounts opened for this purpose with their major correspondents in other countries. If the target bank
is not a direct correspondent, the local correspondent of the issuing bank will act as an intermediary.
5. DB sends Mizuho an MT202 payment order advising them of the transaction, and availability of funds
on the DB “Nostro” account
6. Mizuho answers with a debit advice, confirming they have taken the funds from DB’s account
7. Mizuho executes the payment using the local clearing system, and advise the beneficiary through a
credit advise
© Alain Rividi
The European Example and SEPA
▪ When EURO was introduced, payment clearing remained national
– Paying EUR from France to Germany was similar to any international payment
– Created important costs and complexity
▪ In 2000 the “Lisbon process” introduced the objective of building a unique

Payments Market in Europe: the Single Euro Payment Area
– New legal framework the Payment System Directive (PSD) in 2010
– A competitive area for clearing systems the Pan European ACH (PEACH)
– A set of standardized payment instruments with clearly set technical standards
▪ The SCT, SEPA Credit Transfer replacing all the local variants of transfers
▪ The SDD, SEPA Direct Debit, 2 variants of direct debit with cross border capabilities
▪ The SCF, SEPA Card framework, unifying the debit cards operations.
▪ Introduced in 2008, fully replacing the old instruments in Aug 2014

▪ Does not impact some local instruments like cheques etc…
© Alain Rividi
The European Example and SEPA
▪ SEPA relies on a set of agreed technical guidelines
– the “rulebooks” periodically updated define the operating rules that all participants
should respect.
– Message formats are defined by the stakeholders but should respect the rules of ISO
(International Standards Organisation)
▪ The rest of the process is left to the “competitive space”

– Several clearing mechanism (PEACH Pan European Automated Clearing Houses) that
banks can use
– Progressive disappearance of local trade barriers (like “commission d’interchange” in
France for Direct Debit
© Alain Rividi
Payment and Collection Factories
▪ In the past 15 years tendency to build heavy transaction infrastructures in medium

and large corporations
▪ Main expected benefits
– Easier to maintain
– Operational efficiencies
– Standardization of payment procedures
▪ Different designs for different purposes

– From a “pipe” approach: common technical infrastructure
– To a fully integrated operation
▪ Powerful drive towards international bank procedure standardization

© Alain Rividi
Intercompany aspects
The internal aspects of cash flows
▪ An increasing part of the cash flows transactions in a company or a group of

companies is internal
– Internal sales of goods
▪ Centralized factories servicing many markets to optimize production costs
▪ Operations spread across many subsidiaries (sub assemblies and sourcing)
▪ Recent development of structure optimization based on internal transfer prices
– and services
▪ Development of shared service centers (SSC) for various administrative activities
▪ Use of existing resources in another country rather than duplicating it
– Other elements:
▪ Royalties,
▪ Dividends,
▪ etc…
© Alain Rividi
Intercompany optimization
To optimize intercompany cash flows

▪ Ensure common payment terms and conditions are applied across the board
– Invoicing currencies
– Payment terms and settlement dates
– FX rates determination
– Intercompany procedures, including dispute resolution
▪ Define preset transaction schedules to reduce the number of individual

transactions
▪ Agree on Standard Settlement Instructions (SSI)
– to reduce risks of errors
© Alain Rividi
– Simplify transactions
– Facilitate reconciliation on the receiving end
Netting ?
▪ Explore netting opportunities

– If sub A owes 100 to sub B and sub B owes 20 to sub A,
– Make only one transfer of 80 from A to B
– Transaction cost is divided by 2 / If different currencies then Forex savings on top
▪ If a central vehicle exist, Multilateral Netting may be even more efficient

– All dues and receipts for each company from its peers are totaled
– Each sub pays or receives a single amount in its operating currency to/from the central
vehicle
▪ Netting requires adequate accounting system able to assess the respective
position of the various participants
© Alain Rividi

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Cash Flows Management

The Cash Flows Process

▪ Every transaction category raises a series of questions/concerns

– Ensure proper consistent security of the transactions

▪ Payment instruments are usually complex

▪ Physical instruments ▪ Next Gen instruments

Contactless payments are still in full swing in

They represent now 60% of the number of

▪ Wallet operators moving to another dimension

▪ New Payment Models (RTP)

▪ In Course, you are proposed 4 Documents taken from professional Journals:

▪ Choice of instruments is often mandated by the nature of the commercial contact

▪ Internal integration (especially reconciliation capability)

▪ May vary depending on who is the counterparty

financial organization that provides payment

▪ Even in small/medium size organization cash flow transaction volume in numbers

3 main families of transfers, going through different process

▪ Individual => high amount / small volume (in English: Wires)

Net Settlements Gross Settlement

Transfer Order Credit Advice

MT202 Payment order

SWIFT Loro: DB’s Acct

▪ In 2000 the “Lisbon process” introduced the objective of building a unique

▪ Introduced in 2008, fully replacing the old instruments in Aug 2014

▪ The rest of the process is left to the “competitive space”

▪ In the past 15 years tendency to build heavy transaction infrastructures in medium

▪ Different designs for different purposes

▪ Powerful drive towards international bank procedure standardization

▪ An increasing part of the cash flows transactions in a company or a group of

To optimize intercompany cash flows

▪ Define preset transaction schedules to reduce the number of individual

▪ Explore netting opportunities

▪ If a central vehicle exist, Multilateral Netting may be even more efficient

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