FXpress has built a reputation as a solid solution for managing FX exposure, FX hedge transactions and FX hedge accounting, but is really only selling it in the US.

Will such a merger work? It depends on what they are trying to achieve.  Both solutions have a competitive advantage in hedge accounting. So their current solutions cover to a large degree the same needs at clients. But they operate in different ends of the price scale.

Reval has a wide-ranging and pricey solution for hedge accounting but sees that the traditional system vendors add more and more hedge accounting functionality thus eating into Reval’s core market. Clients would naturally like to have one system supplier – if the standard system can do the job – and not having a separate system for hedge accounting.

FXpress have their own “problems”. They are very good in the complete process from FX exposure to FX hedge accounting but show weakness in cash management and interest rate instruments.

In my opinion, joining forces cannot solve the problem each of the systems has. In the best case Reval can now claim to have a hedge accounting solution for the lower end of the corporate market that cannot afford Reval’s offering.

It is even more surprising that these two should join up now as Kyriba announced a partnership with FXpress just a few months ago.

Given that Kyriba is strong in cash management – just where FXpress is weak – and quite weak on FX management and hedge accounting – just where FXpress is strong - it would on paper look like a much better complementary fit.

However merging treasury systems is notoriously difficult. Each system has been build with different logic, database structure, technology, and look & feel, which makes it difficult to merge without rewriting the system from the beginning.

Trying to build interfaces between components usually doesn’t work well either. You can still see it is a different system and data often has to be duplicated internally.  In the best case it takes years before it will work reasonably well. But users will still be able to see which part came from which system in the look & feel of the system even years later.

So what will Reval get out of the purchase of FXpress?

It will give their sales people a product to sell in the lower end of the corporate treasury market, but this is a crowded place with many players and low margins.

However, at the same time Reval announces that they have secured new funding – maybe these extra funds are for further acquisitions.

Maybe Reval would like to collect more systems in the Financial Supply Chain space just like SunGard has successfully done.

Even though SunGard has a hoarded more than 20 systems that to a large degree have similar functional scope, SunGard has managed to use the client base to cross sell products and to use their worldwide presence to better sell them into other geographical areas.

Is this also the strategy for Reval?

Is this maybe the start of a new powerhouse in corporate treasury?

It is difficult to assess the real reasons behind Reval’s takeover but just to get access to the customer base or technology of FXpress wouldn’t make much sense. And building a new superior product in the corporate treasury market is just too expensive and takes too long. We saw XRT breaking its neck trying.

There must be more behind the takeover than meets the eye.

But the most interesting thing about the latest study isn’t the costs but the banks attitude to the PSD. According to the study they are very complacent and relaxed about the introduction of PSD in November.

In the study it says that:

“Nearly two-thirds (63%) of respondents say they do not consider new entrants - such as new payments organisations, telcos and utilities - to be a significant threat to their business.”

In addition:

“Only 11% foresee serious competitive threats emerging from the directive.”

Further the survey finds that “… nearly half (48%) of respondents indicate that they have no immediate plans to launch new products under PSD.”

Maybe it is the slow adaption of SEPA that has lead to this lack of concern among the banks. Maybe the banks should take a look at what has happened for the securities exchanges since the introduction of MiFID two years ago.

MiFID is the Markets in Financial Instruments Directive which is a similar directive to the Payment Service Directive. The MiFID has harmonised the regulatory regime for investment services across Europe and opened the door for new entrants. These new exchanges have already gained about 25% market share for the most traded instruments – in less than 2 years.

The PSD has been introduced to increase competition for making payments in the EU and will take effect on November 1st.

It will force the banks to give better services, more transparent pricing and accept competition from non-banks.

This should lead to a sharper competition among the banks – especially in the corporate market which is much more price sensitive.

Never before have so many things been happening in the world of payments as at present:

•    SWIFT is providing access to banks for corporates simplifying the bank interfaces
•    At last XML has reached the world of payments with the new ISO 20022 format
•    SEPA Direct Debits will start November 1st
•    PSD will become law across Europe at the same time

This is the biggest collection of disruptions and changes that we have seen in the payments industry ever.

So for banks to believe that it will be business as usual is optimistic.

OK, things don’t change as fast in the payment industry as in securities trading. You cannot earn or lose million in a day on your bank interface, but we are never the less going through an interesting phase where we will see more changes to the industry than we have seen in the last 30 years.

And changes and disruptions aren’t normally good for the incumbent, so banks better get a strategy in place as to how to react to the new competitive threats, so they can use the new environment to their advantage instead of being a victim.

A CCP functions as the seller for all buyers and the buyer for all sellers of a standardised product. This has been known for a long time from the exchanges where futures and options are bought and sold. The counterparties don’t know each other and the exchange is the counterparty for all participants.

So if it works well for exchange traded instruments why should it not work well for OTC derivatives?

It is assumed by many people that derivatives are harming financial stability and that they played an important role in causing the crisis and they hope a CCP will magically change that.

First of all it was not the instruments that caused the crisis. The crisis came about due to poor (or lack of) risk management as banks were giving mortgages to people, who could not pay it back.

Different types of derivatives made it possible to hide, concentrate, and offload the risk to somebody else.

However for most corporates derivatives are simply insurance instruments that help them reduce risk of financial losses due to exchange rate movements or changes in interest rates. The risk of the derivatives doesn’t come from this activity. It comes from the financial institutions that use the derivatives for speculation and fast profits.

And with a Central Counterparty you don’t do away with the counterparty risk, you merely centralise it.

The next issue is that the OTC market is bigger than the exchange traded market, but it looks like there would be much fewer CCPs in the OTC market. Therefore the collapse of a CCP would have much worse consequences. We have then seen the birth of another group of organisations that will be “to big to fail”.

I believe that the way we fight the next financial crisis is not through centralisation but through transparency. It is the lack of transparency that brings uncertainty and fear and makes banks stop lending.

Now the CCPs will know the biggest positions in the market and they should be forced to share this information with the market: Which banks have which position in which derivatives? With this information you could move the risk management into the public instead of hiding it in the banks.

A super alliance called the End User Committee (EUC) has come up with a new report on SEPA and what is wrong with it – notably what is wrong with the forthcoming SEPA for Direct Debits.

The organisations within EUC are also sitting on the European Payments Council stakeholder consultation forum so it is a very heavy lobbying organisations that one should listen to. Among the organisations are European Association of Corporate Treasurers and The European Consumers’ Organisation.

SEPA Credit Transfers have now been live for more than 1½ years and still less than 2% of euro payments are SEPA payments. It is definitely less than even the pessimists had calculated before SEPA payments took off in January 2008.

The intensions of SEPA are good and absolutely correct - Europe needs a common market for payments just as it has for most other goods and services.

However, payments are today still very national with lots of national specialities that make them work well within the national borders but are useless outside the country.

And this is also one of the problems with SEPA – there are so many special cases to regard and so many existing systems with limits that cannot be ignored.

Therefore you have to have committees to design the new payment system.

Usually when you make designs by committee you end up with the lowest common denominator.

You don’t just start with a blank sheet of paper; you have to consider the history and system used today. Therefore SEPA have some limits, some restrictions and some missing parts.

As I have said before you can increase the usage of SEPA payments by using the stick or the carrot – the stick being the deadline.

The EUC didn’t recommend using the deadline – even though some of the committee’s members have in the past recommended a deadline – at least for SEPA Credit Transfers.

However there is still a big risk that we will end up with many “mini-SEPAs” due to national interpretation and implementation of SEPA and eventually just make SEPA payments just as complicated as the many national payments are today.

However, I believe SEPA will succeed – it has to – but it will take much longer than first estimated.

So why should we keep them artificially alive - as suggested by Martin Ruda in this article on Director of Finance Oline.

Those who live by processing cheques may have an interest in keeping them alive for as long as possible but they cannot stop the inevitable.

Cheques were practical and useful in the 2nd millennium, but not in the 3rd. Payment technology has been developed that can process payments much cheaper, more securely, and with a faster transfer time electronically.

Then why stick to the old medium?

In most cases it is just out of old habit and because people are afraid of the unknown – and to some electronic banking is an unknown.

Cheques are almost extinct in many mainland European countries, about time that UK (and the US for that matter) follow suit.

The new Payment Service Directive, which will regulate the payment industry in all of EU from November 1st this year, specifically excludes cheques, as they are national mediums and their importance are minimal in most European countries.

The future is with mobile payments, payment portals like PayPal and electronic banking.

Today the banking portals provided by most banks for SMEs are quite good. Some even offers liquidity forecasting tools that work well, giving the financial managers in SMEs predictability in future the cash flows – something that cheques don’t offer.

Any effort to extend the life of cheques (like Cheque 21 in the US) is a waste of time, money and effort.

Recently a Siemens engineer managed to get access to a FTSE 100 financial company for a week, and duped staff into giving out user-ids and passwords and managed to get access to places where confidential data were stored.

It is quite an eye opening example of how easy it is for the wrong people to get access to the right places.

Financial companies should have better trained staff, as they have a lot of information that criminals would like to get access to.

And it is all about better training of the staff and the right processes. For example all should be aware of what they, under no circumstances, should give to others, such as passwords; even if the other person has a very plausible reason to ask for it.

Of course you shouldn’t let your guard down when it comes to electronically protecting your systems from cybercriminals but it isn’t enough.

Today it is more important to improve the training of the staff than adding even more technology and software.

I am not saying that the technology cannot be improved, but the biggest risk today is the human factor.

In 80% of fraud cases against companies the criminals have had help from a person within the organisation.

Clearly the biggest risk is your own employees and not the external criminals. Your security system never gets better than your employees.

One bad thing and one good.

Let me start with the good.

At last the UK government has realised that green technology is the future and that we all have to get used to and live with low carbon emissions.

And we will find out that it is not even difficult or more expensive. We just have to further develop the existing technology and mass produce it. It will bring down costs and also have the benefit of the West becoming less dependent on the oil producing countries that we usually don’t regard as our close friends.

However had a good laugh when I read the opening paragraph in chapter 7 of the budget: “The UK has led the world in taking a strategic and long-term approach to the problem of climate change”. The UK is far behind most western countries in reducing carbon emission and building a future based on renewable energies. But at least now something is being done, even though I wish much more would be done.

Included is £60 million to fund engineering and design studies for carbon capture and storage. However I don’t believe carbon storage will work in the in long run, sooner or later the CO2 that was ‘captured’ will escape and we haven’t solved anything just postponed it. We should stop producing CO2 in the first place; not trying to deal with it once we have made it.

The bad bit

But let me get to the really bad point in the budget: The value destroying vehicle scrappage scheme. Germany has had ‘success’ with their “Abwrackprämie” that has been running for a few months now. Customers are queuing up at the car dealers to hand in their old cars to get 2.500 Euro for their more than 9 years old car, and producers of small cars cannot keep up with demand. Originally 1.5bn Euro was reserved for the scheme, but it has already been used up and been increased to 5bn, but it is a really really bad idea for several reasons.

It destroys value, is environmentally bad and plays havoc in the car industry.

Why destroy perfectly good cars that can still run? Completely crazy. It will just reduce the number of 2nd hand cars available and increase the price of the ones still available thus making it more difficult for people on low income to buy a 2nd hand car.

In Germany they even often refer to their scheme as an ‘environmental bonus’ scheme because new cars use less fuel than an old car. That might be true but it also costs a lot of energy to produce a new car. It would have been much better, seen from an energy reduction point, to drive in the old car for some more years and then buy a new car, once the old could not drive any more.

Further, once the schemes are over we will see the demand for small cars drop off the edge of a cliff. Most of the people now trading in their old cars would have got rid of their old car in the next few years anyway so no real new demand has been created. This year the car workers may have to do overtime, but in one year’s time they will be sitting idle, which of course is very bad for the car industry trying to adjust the production capacity to long term market demand. No new value has been created you have just moved some demand with lots of negative economic consequences.

Laughable

And the amount the UK government puts aside for this is laughable. If the German example is anything to go by you would need much more.

The first 1.5bn euro the Germans set aside was used up in a few months and has now been raised to 5bn euro. So to reserve just £300 for this is just a joke. I am sure this will be popular among people and the reserved amount will be used up in just a few weeks. Surely the UK government will be forced to increase this amount 10 fold to keep up with demand. With elections just a year away the UK government cannot afford to stop a scheme that is popular and seems to create a lot of demand and jobs in the UK. The German government has just learned that lesson where they face election later this year and therefore had to raise the reserved amount for the popular scheme.

The alternative

The money should rather be used to encourage people to insulate their houses better and replace single glazing windows with double glazing windows. That doesn’t destroy value, but creates lasting value and at the same time reduces the CO2 emission and cuts future heating bills. Yes maybe some people would have done it anyway, just like buying a new car, but I would accept this to get the economy moving again.

Or will we return to the 70’s stagflation with high inflation but combined with high unemployment and low growth?

Just a year ago we thought that the central banks now had inflation under control and had the knowledge, tools and freedom to keep it that way.

But then came the credit crisis that turned into an economic crisis and changed all that.

First with fear of deflation, now with fear of inflation returning due to increased government spending that is financed through borrowing and printing of money.

The inflation could even be combined with low growth and high employment creating stagflation. There has probably never been a more challenging time for the central banks steering the economy securely between the rocks of inflation and stagflation.

But what would be the best strategy?

The problem with the economy is that it is difficult to experiment on. If you make the wrong decision you cannot just repeat the experiment with another set of parameters.

I don’t know where this will end, but I am worried as to whether the world’s central banks will get it right. I think we will see a stretch of either increased inflation or deflation, but I just don’t know which one it will be.

The latest numbers in the study showed that the current level of free cash flow is still relative high, however, the figures only goes up until September 2008, so we haven’t yet seen the full effect of the credit crisis, which would actually be very interesting.

Free cash flow is what companies generate and have left to pay, for example, dividends or acquisitions.

We have already seen many companies cut dividend and stop share buyback programs. It must be because they have already seen the level of free cash flow shrink. I am sure we will see more of this in the coming months and even years.

The low levels of free cash flow will limit the companies possibilities especially now in a market where credit has never been tighter.

Cash flow is the blood of the company and when there is less of it around it limits the companies’ opportunities to move and improve their situation. So what can a company do?

Many companies can still improve the management of their working capital and free up cash stored in inefficient working capital management.

And this is not rocket science, but often just simple measures such as better liquidity forecasting or centralised payment factories.

I still meet companies that haven’t centralised their cash and payment despite the clear advantages such as reduced working capital requirement and cost savings.

This may not help solving the world’s economic crisis, but could still help some companies survive the economic downturn in better shape and maybe even help them take advantage of the crisis.

It is a question about globalisation. Do you want to accept it or not?

I believe there is no half way for globalisation.

If you are against it - you would have to draw the limit on globalisation and then have a good argument for this limit.

Should you be allowed to outsource services to Ireland but not to India?

Or should the limit rather be the UK borders, so you can outsource to Scotland but not to Ireland? Why not keep English jobs in England and disallow outsourcing jobs to Scotland and vice-versa?

To argue “British jobs for British workers” or “British Employment pays British Taxes” are not valid arguments.

Then Germans may just as well argue “German jobs for German workers” and stop buying British goods and services.

This is unconstructive thinking that helped turn the 1929 stock crash into a global economic disaster. Let us not repeat this mistake again.

Companies have to stay competitive, and if that requires outsourcing certain types of jobs, tasks or systems to suppliers in other countries then that is what the companies should do.

Globalisation is not about cutting the cake into big and small pieces, but about making the cake bigger, so we all can have a bigger piece.
Don’t forget that UK has benefitted hugely over the years from the increased globalisation.

UK in general and London specifically has reaped the benefit from the globalisation of the finance industry more than anybody else. UK attracted lots of very highly paid jobs, which then generated lots of other jobs supporting the financial industry and supporting the bankers’ consumption.

The financial industry now has its problems and that of course hurts an economy more when it depends on the financial industry for its vitality.

The way out if the crisis is not through protectionism, but through investments, as I have argued before.