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230 years of Data Show Rates Will Soon Hit to 0.50 Percent

rates

230 years of Data Show Rates Will Soon Hit to 0.50 Percent

While everyone has been concerned about the sell-off in the stock market in the past two weeks, this decline should be contrasted with the rapid rise in the price of government bonds. For the first time in history, the yield on the 10-year government bond fell below 1%.

As Figure 1 illustrates, the 75-year interest rate pyramid is continuing its path toward new lows. The pyramid began on November 30, 1945, when the 10-year bond yielded 1.55%. The yield gradually rose for the next 36 years, peaking at 15.84% on September 30, 1981. The yield has trended downward for the past 39 years and now has sunk below 1%. The past 75 years have provided a near mirror image in bond yields.  So what does it mean?

Before the current downturn, the lowest yield on the 10-year bond was 1.37% which occurred on July 5, 2016. We analyzed the 75-year interest rate pyramid in the blog “Government Bond Yields and Returns in the 2020s” which was published on January 8. We predicted the continued decline in government bond yields in the United States during the coming decade. With negative interest rates on most 10-year bonds in Europe and Japan, there is no reason why yields in the United States shouldn’t continue to decline.

The 10-year bond yielded over 3% in November 2018 and by December 31, 2019, the yield on the 10-year bond had fallen to 1.92%.  Today, the yield is half that. This decline has provided an 8% return to fixed-income investors during the past two months as the price of government bonds has risen. A 10-basis point decline in the yield rewards investors with a short-term gain of about 1%.

In the blog “300 Years of the Equity-risk Premium” published on February 5, we predicted that the total return to government bonds over the next 10 years will be around 2% per annum or less. This return can only occur through the continued decline in bond yields and increase in the price of government bonds. As we explained, government bonds have outperformed stocks since 2000; however, our analysis indicates that the return to bonds will be lower than the return to stocks over the coming decade.

The 5-year bond yield fell to almost 0.5% back in 2012.  So why can’t the 10-year bond yield decline to 0.5%in 2020? Figure 2 provides 230 years of bond yield data, which shows each decline building a deeper valley indicating that interest rates will soon reach a lower low. We believe it is only a matter of time before the yield on the U.S. 10-year bond hits 0.5%.

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Dr. Bryan Taylor is President and Chief Economist for Global Financial Data. He received his Ph.D. from Claremont Graduate University in Economics writing about the economics of the arts. He has taught both economics and finance at numerous universities in southern California and in Switzerland. He began putting together the Global Financial Database in 1990, collecting and transcribing financial and economic data from historical archives around the world. Dr. Taylor has published numerous articles and blogs based upon the Global Financial Database, the US Stocks and the GFD Indices. Dr. Taylor’s research has uncovered previously unknown aspects of financial history. He has written two books on financial history.

trade finance

Industry Advocacy Required to Enable Trade Finance Market Access and Growth

In a whitepaper released last year, the International Chamber of Commerce (ICC) urged the trade finance industry to work together to ensure that regulation does not hinder the availability of trade finance. Olivier Paul, Director, Finance for Development at ICC, explains how a fair regulatory environment across regions is key to the industry’s growth.

In the wake of the financial crisis of 2007, regulation and compliance requirements have had the unintended consequence of negatively impacting trade finance provision. As banks adapt to ever greater compliance and regulatory requirements, they seek to minimize risk by reducing their number of correspondent banking relationships. This phenomenon, known as “de-risking”, especially affects small and medium-sized enterprises (SME) in emerging markets that need financing the most.

Accessing adequate trade finance is already tough for SMEs, who often lack the collateral, documented history of past transactions and knowledge of the financial instruments available to them. This has led to a US$1.5 trillion gap between the demand and supply of trade finance – or gap – as SMEs find themselves most neglected by financiers.

In its report, Banking regulation and the campaign to mitigate the unintended consequences for trade finance, the International Chamber of Commerce (ICC) outlines how some post-crisis banking regulation has unintentionally led to the widening of this trade finance gap. The report argues that industry advocacy is necessary to ensure fairer treatment of trade finance, as several examples already demonstrate.

Unintended Consequences and Successful Advocacy

Despite well-meaning capital and liquidity requirements contributing to the resilience of the financial system, they have also limited banks’ ability to invest in cross-border relationships, leading to concerns relating to the treatment of trade finance instruments across regions.

For example, the Basel Committee on Banking Supervision (BCBS) introduced the third installment of the Basel Accords – a set of international banking regulation recommendations – in 2010. However, the BCBS does not have the authority to enforce its recommendations, leaving national – or supranational – institutions to write the recommendations into law.

What’s more, these recommendations allow significant room for interpretation, allowing each jurisdiction to adapt them accordingly. This results in inconsistencies across jurisdictions, leaving emerging market banks subject to the resulting ambiguity.

In particular, the Net Stable Funding Ratio (NSFR) for financial instruments supporting trade finance caused concern among many industry practitioners. The European Commission and Council, as well as the European Banking Authority, recommended that NSFR have a variable rate of 5%-15% depending on the maturity of the transaction. In many jurisdictions outside the European Union, however, the NSFR rate is either flat – at a maximum level of 5% – or non-existent.

This represented a clear disadvantage, and one affecting the whole market. As such, the industry-led by ICC – advocated for a fairer treatment of NSFR ratios for trade finance. This resulted in a significant reduction in the spectrum of rates which now stand at 5% for a transaction maturity of under six months, 7.5% for a transaction maturity of under a year, and 10% for maturity of over 12 months.

Early Start

To ensure the highest success rate, it is essential that discussions between industry members and regulatory authorities take place at the earliest stages of the decision-making process. With regulatory adoption and implementation processes taking up to a decade in some cases, the industry must work together with regulators and maintain a proactive approach to promoting fair regulatory treatment of trade finance.

The document outlining the finalization of the Basel III framework was published in 2017 but will only be enforced between 2022 and 2027. Action is needed today if the industry’s voice is to be heard and acted on.

Banks have already identified several areas relating to trade finance – such as the treatment of unconditionally cancellable commitments, the minimum durations to calculate risk-weighted assets and the treatment of subsidiaries in large groups – where discussion is needed. Over the next few years, banks and industry bodies will need to engage with these topics, as national regulators translate the finalization package into national legislation.

Next steps

Some 80% of international trade flows involve the recourse to a financial instrument, according to the World Trade Organization. To encourage the use of trade finance worldwide – and ensure the widest market access especially for SMEs – harmonization of regulations will be required.

Much work has already been done to promote the fair treatment of trade finance within banking regulations. However, regulations will not adapt unless all stakeholders voice their concerns. It is up to the entire industry – and ICC, as the largest and most authoritative voice in trade finance – to be at the forefront of this work.

cash flow

How to Take Charge of your Cash Flow

Small business owners in nearly every industry struggle with cash flow and how to best utilize their working capital. Nearly 60% of failed businesses cite cash-flow issues as a primary reason for their failure, which shows how cash flow management can make or break your business.

Here are 4 ways you can set your business up for cash flow success:

Better manage your inventory costs

Inventory can significantly sway your ability to stay on top of your cash flow because there are so many moving pieces to consider: Whether your business benefits from keeping inventory long-term or selling goods quickly, how much it costs to store and how much you can save by buying in larger quantities, are just a few considerations.

Regardless of the best inventory management strategy for your business, it is critical to keep a line of credit on hand to take advantage of the best deals from a vendor or ship items out quickly to maximize customer satisfaction.

Negotiate payment dates with your inventory suppliers to align with your known cash-ins and outs so you know you will have cash on hand to make your payments on time.

Get paid faster

Late payments from customers can really hurt your ability to manage your business, yet they are all too common. Worst of all, late payments create gaps in cash flow which can affect your ability to keep your business moving.

It is important to make sure you are using the best practices to invoice promptly and thoroughly. Using an online tool can reduce room for human error by automating recurring invoices, ensuring you send a confirmation of receipt and track to follow up.

Offering multiple, convenient ways to pay can reduce the payment cycle and improve your customer experience. With payment technology developing so quickly, you can find affordable payment solutions that help you accept payments in ways your customers like to pay, increasing the probability of more business and prompt payments.

Seek out same-day settlement options

Whether you’re borrowing or getting paid, new technologies allow small businesses to access the capital they need faster. FinTech companies are partnering with solutions such as INGO Money to receive loan funds immediately, allowing business owners to manage unforeseen expenses as they arise or on the weekends when typical bank transfers aren’t possible.

New solutions allow for same-date settlement of payments, too. Usually, business owners receiving credit card payments through customers would need to wait up to 72 hours for those funds to hit their accounts. Seek out solutions that offer a same-day settlement to ensure you have access to the funds you earned sooner.

Refocus your time on your business, not your books

A study of 400 small business owners showed that more than 30% of businesses will seek investments in new technologies to improve productivity. Consider how a similar strategy could make an impact for your business. Every hour spent selling your products and working with customers instead of managing your books is another hour you can proactively increase sales for your company, and, effectively, your cash flow.

Most new technology solutions are focused on solving this issue while providing greater customer experiences than previously available in the market. New lending solutions give you an approval in minutes, payment solutions reduce the time to be paid and disbursements are now nearly immediate. All of that adds up to more time available to business owners to focus on doing what they love and selling.

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Aditya Narula is the head of customer experience at Kabbage.  Kabbage has pioneered a financial services data and technology platform to provide access to automated funding to small businesses in minutes.  Since 2011, the company has helped more than 200,000 small businesses access more than $8 billion. 

baltic

The Silver Lining of the Baltic Banking Crisis

The continuing revelations as to the extent of money laundered through Baltic banking systems, most notably the dramatic accusations against Danske Bank (which are now pulling in Deutsche Bank as well) were an unfortunate blow to the Baltic states’ reputations as dynamic and safe markets for foreign investments in Europe. However, substantial media scrutiny and the public and private sector response may actually result in a safer financial environment for investments and business operations in Estonia, Latvia and Lithuania as well as an improved EU structure to deal with money-laundering.

A Series of Money-Laundering Failures brings Global Scrutiny to the Baltics

Danske Bank, the headlining financial institution at the heart of the massive $280 billion money-laundering investigation, has already pulled out of Russia and the Baltic States as a result of its misadventures in the region. Other banks, however, were also caught laundering funds from Russian, Ukrainian, Chinese and North Korean sources in the last few years, including Swedbank.  Although the majority of the scandal has been laid at the feet of Estonian and Latvian banks and financial oversight bodies, Lithuania has not survived unscathed and ongoing investigations will likely expose additional breaches in finance laws and EU and U.S. sanctions regimes.

While the scandal has put a dent into the business reputation of Estonia and Latvia, the resulting scrutiny and investigations are likely to improve transparency in the region and improve legal regimes and oversight structures for international business operations moving forward.  The heightened focus on anti-money laundering (AML) tools has also spurred tech innovation, leading to the creation of critical private-sector expertise to help consumers and businesses identify and fight money-laundering activities.

Exposing the Weakness in EU Mechanisms

The scandal exposed not just national-level problems, it highlighted an EU-wide gap in AML mechanisms. The decentralized nature of AML regulation and the lack of coordination amongst country regulators and oversight bodies across the EU provides opportunities for abuse. Lack of formal channels of communication, inter-agency / regulator dialogue and cooperation weakens the overall ability of any one country to effectively share information, pool resources and fight trans-national financial criminal activity.

Additionally, integral to the EU’s current challenges has been the deficiency in adoption vs. implementation. Larger EU states such as France and Germany traditionally maintain sufficient financial and human resources to not only transpose EU AML Directives into local legislation, but to ensure effective implementation. Scarcity of expertise, limited capacity and shortfalls in funding among smaller states such as Cyprus, the Baltic states and Malta, on the other hand, have hindered the effectiveness of resulting oversight processes and procedures to reduce money laundering. There is a growing recognition as to this weakness in the system, and a recent joint proposal from finance ministers of France, Germany, Italy, Latvia, the Netherlands, and Spain to create a centralized anti–money laundering (AML) supervisor with EU-wide authority may help to close this gap.

Finally, the anonymous nature of cryptocurrency and digital assets have made them attractive to illicit users interested in perpetrating money laundering and terrorism financing. Their use in recent cases has exposed the need throughout the EU for further innovations in their regulation and oversight to ensure transparency, accountability and legality of digital asset transactions.

In response to these challenges, the EU has adopted the 5th Anti-Money Laundering Directive which is required to be transposed into local law by Member States by January 2020. Although transposition into local law is required by January 2020, the key to determining the success of this legislation will be dependent upon the resources and ability to implement. Strong centralized technical support, human and financial resources should be provided – especially to smaller Member States – as they work to locally adopt and transform these concepts into practice.

The Revelations have Spurred Innovation

Concerns over money laundering have forced the government to take action (albeit rearguard in nature) but have also sparked concern from the business community, which is equally concerned about the stability of the national and regional financial system. Taavi Tamkivi, CEO of Salv, the Estonian AML-focused start-up funded by Transferwise and Skype employees, noted that although the incidence of such AML cases in Estonia is disappointing, the fact that they were brought to light speaks to the Estonian commitment to transparency, accountability, and responsibility. Recent scandals have brought into the open the weaknesses in the Estonian system and instead of hiding these scandals or shirking responsibility, the Estonian government, regulators and private sector have come together to learn from these investigations, strengthen their systems and develop world-class systems of AML. Tamkivi went on to note that Know Your Customer (KYC) efforts and risk profiling of new clients are important but must be coupled with monitoring the millions of transactions flowing through financial institutions every day for suspicious behavior.

Additionally, data sharing between and amongst banks and the government is needed to ensure comprehensive understanding and communication of suspected criminal activity. The only way to undertake such intensive oversight is through innovations in technology. Tamkivi noted that “Estonia is known for its e-residency and digital-centric culture, so I’m confident we can find smarter ways to share and use the data we all have; protecting individuals, but catching more criminals. With the right technology, we can really solve it.  Moving fast is the only way to keep up with the innovative organized criminals moving millions or billions around the world.”

Tamkivi went on to share an important aspect of the Baltic business environment which highlights the resiliency and affinity for innovation: “You can think of the Baltics nations, in many ways, as country-sized startups. We witnessed the mistakes and pitfalls of long-established nations from afar and, when we gained re-independence in the early 90s, we were able to start afresh. So, if you take a close look, you’ll find a dense web of fresh ideas and innovation woven into our structures. Sometimes, like Skype, TransferWise, and Bolt they do manage to kick off a profound change in the world.”

The Baltic Region Represents some of the Best Locations for Business Expansion in Europe

The innovative atmosphere that gave rise to tech companies such as Skype and Transferwise, vaulted Vilnius into the position of number one startup city for tech in the world, helped to launch the NATO Cooperative Cyber Defence Centre of Excellence and has all three countries listed in the top 20 for innovation globally by the World Bank Group is an astounding opportunity for foreign investors.  But the technology sector is not the only attraction to the Baltic economies.

According to the World Bank Group “Doing Business” assessment of jurisdictions, Lithuania, Estonia and Latvia rank 11th,  18th, and 19th respectively and all three rank highly on global lists for innovation, safety and quality of life.  The business-friendly nature of the Baltic countries coupled with their attractive cost of living provide a natural advantage in attracting a wide variety of global businesses. In 2018, Lithuania, Estonia and Latvia each outperformed the estimated EU hourly labor costs for the EU-28.

Closing the Gaps in the System

Estonia, Latvia, and Lithuania need to take quick and decisive action to prevent money-laundering in the future, as does the EU, which is facing similar problems in banking systems in Malta, Cyprus and other member states.  But while the Danske Bank scandal is a black mark on the region, a robust response to these concerns by governments and innovative private companies such as Salv and others will ensure that the thriving Baltic market becomes an even more attractive location for foreign investment projects by reducing investor exposure and political risk concerns.  As Taavi notes ‘…though many of the recent negative headlines came from Estonia, that may not necessarily be as bad as it first appears. Everyday Estonians are notorious for their commitment to transparency, and taking responsibility for mistakes. And, honestly, now that scandals are out in the open, we can all learn from the investigations. I wouldn’t even be surprised if, as a result, Estonia then grows some of the greatest AML experts in the region.”

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Gabriella Kusz, CPA is an international economic and financial sector development expert with experience in the areas of financial sector strengthening, governance, and regulation.  Ms. Kusz has held senior-level positions at the World Bank Group as well as with the International Federation of Accountants. 

Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market research, political risk assessment, and international negotiations assistance.  Mr. Samson is a former U.S. diplomat and international law advisor.

technology

The Surprisingly Long Life of Wire Technology

Those of us in dynamic, fast-paced industries have gotten used to keeping our eyes trained forward. We’re always exploring innovations—ways to evolve our processes and make them as efficient as possible. Technology grows at such break-neck speed that adults of any age can look back and marvel at the changes they’ve witnessed in their lifetimes. But surprisingly, many of these technologies aren’t actually new. In fact, most of our modern financial workflows have evolved from processes that are older than living memory. Cool, right?

As we ring in the new year, let’s take a step back and reflect on the origins of a very familiar process to many of us: wire payments, and the subsequent introduction of electronic funds transfers.

Humble Beginnings

Wires, direct deposits, and electronic funds transfers (EFT) have roots in the invention of the telegraph; a tool used in the United States from 1844 until 2013 (some areas of the world still communicate by telegram today).

The telegraph is the catalyst for all modern means of communication. It’s arguably one of the most pivotal inventions of Anno Domini, and it forever changed the speed at which critical information could circulate in and among developed countries. Instead of waiting weeks for mail to arrive by ship, train, and pony express, messages would take only hours to arrive. It was as pivotal to its contemporaries as the Internet is to us.

The invention of the telegraph came just after the first Industrial Revolution, in 1844, when Samuel Morse sent the first telegram from Washington, D.C. to his partner, Alfred Vail, in Baltimore, Maryland. The message: “What hath God wrought?”

Just over a decade later, preparations began to lay the Transatlantic Telegraph Cable across the seafloor—but the project took several years to complete. The first two attempts failed after the cable—made of copper wire wrapped in tar, hemp, and steel—snapped and was lost irretrievably lost at sea. The third attempt, completed in 1858, finally connected the two continents from Newfoundland, Canada, to Valentia Island in Ireland.

After a test message (“Glory to God in the highest; on earth peace, good-will towards men!”) successfully transmitted between the engineers, Queen Victoria and President Buchanan exchanged lengthy congratulations. The Queen’s message—the less flowery of the two, comprised of 99 words with 509 letters—took an exhausting 17 hours and 40 minutes to transmit by Morse code. This may seem lengthy by today’s standards, but at the time, the fastest means of overseas communication was by ship. Eighteen hours was staggeringly fast.

Success was short-lived. The power used to send the first messages was too much for the cable to withstand, and it corroded and fell silent within the first three months. Intercontinental silence ensued until 1866—two years after the American Civil War ended—when efforts to replace the cable began.

Despite the many initial setbacks, the telegraph became a beacon for human invention. It transformed not only the means but also how we spoke to each other. Telegrams were very expensive and usually reserved for affluent patrons and emergencies. Because of the high cost, telegraph companies encouraged senders to ditch the elaborate salutations of the day for succinct (cheap) messages.

For example:

-Sending a ten-word message in 1860 from New York to New Orleans cost $2.70—about $76 in 2018.

-Sending a ten-word message to England around the opening of the Transatlantic Telegraphic Cable would have cost around $100—just over $2,930 in 2018.

Because the prices were out of reach for most middle- and lower-class families of the day, physical mail remained the primary means of communication. This resonates with today’s concerns about the potential expense of newer technologies. The inventions of the telephone and the radio also likely contributed to the telegraph never becoming a common household item. Even so, it still had more to give to society—businesses found another use for this groundbreaking technology.

Incorporating the Telegraph into Bank Processes

The first funds moved via wire in 1872 when the Western Union opened a system to transfer up to $100 (about $2,120 in 2018) at a time. According to Tom Standage in his book The Victorian Internet: “The system worked by dividing the company’s network into twenty districts […]. A telegram from the sender’s office […] confirmed that the money had been deposited; the superintendent would then send another telegram to the recipient’s office authorizing the payment.”

This was a rudimentary, time-consuming process, but still similar to modern operations. It took a while for the concept of non-physical fund exchanges to catch on. Standage writes: “One [person] went into a telegraph office to wire the sum of $11.76 to someone and then changed the amount to $12 because [they] said [they were] afraid that the loose change ‘might get lost traveling over the wire.’”

Stepping into the Modern Age

The transition from telegraphic methods to EFT is somewhat obscured. The first mentions of direct deposit appeared in 1974, just over 100 years after the first wire payments transmitted via telegraph. Newspaper ads like this one in Florida’s Ocala Star-Banner promoted services for “Direct Deposit for Social Security,” which deposited Social Security checks from the government to individuals.

Even EFT payments initially met with some trepidation. In a 1976 article in the Ocala Star-Banner entitled “Computer Money System… Would You Bank On It?”, Louise Cook writes that the banks favored electronic means in order to limit the expensive manual paperwork they had to maintain.

Sound familiar?

When reading through old articles about initial EFT processes, I was struck by how many of the same arguments exist today against switching entirely to electronic procedures.

In Cook’s article, she broke down the cost for banks to maintain physical processes at the time. Banks were processing around 27 billion checks annually for 32 cents a check ($1.45 in 2019). They stressed that EFT was crucial to sustaining their businesses.

A separate 1977 article by Sylvia Porter in The Southeast Missourian entitled “Checkless society,” discussed her concerns about EFT payments. Some of the concerns are very dated. For example, Porter argued that disputes over electronic transactions at restaurants would require lawsuits to resolve. These days, banks frequently handle disputes on behalf of their clients and refund them up front. Other arguments, such as the value of float for companies, remain valid today and are resolved by fintechs.

Same Song, Different Decade

It’s the 21st century, and electronic payment options are already aging—wire transfers are almost 150 years old! Yet companies still struggle to get fully automated processes off the ground. Where is the disconnect?

There are several possible contributors, which include:

Perceived cost. Sending funds electronically is cheaper than ever, but checks now cost around $3.00 each. This equates to roughly 65 cents in 1976—a 106% increase from the original 32 cents (without even accounting for inflation). Despite the reduced cost of electronic payments, the transition, training, and scaling concerns are enough to make most companies too nervous to act. Payment solution providers ease this concern by offering fast implementation, logical user interfaces, andskilled support teams.

Smaller vendors still ask for checks. Checks won’t become obsolete until companies stop requesting them, which is unlikely—at least for now. Many smaller companies typically run their businesses on familiar, outdated processes. Vendors know everyone at their bank, and frequently pay their employees through paper processes. Even so, their business choices don’t need to affect the way your company handles AP. Fintechs like Nvoicepay offer pay file submissions, which enable AP teams to issue payments electronically. Then Nvoicepay disburses the funds in the vendor’s preferred format (credit card, ACH, or print check) without you having to chase down a single check-signer.

Security concerns. Payment fraud instances are more common than ever. Handing some control to a payment partner can be intimidating, especially if you’re not sure that partner is taking fully protective measures for your company. During the research process, be sure to ask prospective payment solution providers whether they will cover you for any issues that occur.

Looking Forward

What can we learn by looking back? Aside from gaining a healthy appreciation for our roots, reflection offers a great perspective on the future of modern AP processes. It highlights the fact that we haven’t changed all that much. Rather than introduce new concepts these past 150 years, we have refined and modernized existing operations.

If you’re researching ways to economize your back-office processes, but all the new-fangled technology sets you on edge, take heart! You may be surprised at how familiar this new technology feels because it isn’t really new at all—it’s evolved.

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 Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

payments

How to Make the Case for Optimizing Invoice Payments

What I’ve learned working in sales for a bank and two financial tech companies is that when it comes to payments, there is a clear difference between fintechs and banks. Banks look at business payments as a product, while fintech see them as a process to be optimized. 

What does that really mean? Optimization is a term we throw around a lot, usually in relationship to costs or processes. Costs are relatively easy to optimize, because they’re easy to see and measure. The business case is simple to make.

Making the case for process optimization is a lot harder, however, because the costs are hidden and hard to measure. And when we get really good at running a process, we no longer realize just how complicated that process really is. We’ve got something that’s working, so we keep doing it the same way. If we think about optimization at all, we look at pieces of the process and see if we can make them faster or cheaper. But then we often overlook new technology that can radically change or even eliminate part or all of the process. 

A serious dent

For example, smart phones have radically changed and/or eliminated the use of alarm clocks, radios, landlines, paper calendars, cameras, feature phones, weather reports, and more. Those all still “work,” but why have all those different pieces and processes for each when you could have a smart phone? 

Few people, if any, make the effort to figure out how much time and money they save by switching to a smart phone having all that functionality in a single portable device. You’d have to add up the hard costs, break down each process into its component parts, and then assign a value to the time you spend on each. No one would do that, because by now just about everyone realizes that smart phones offer a faster, easier, more convenient way to do things. But that’s exactly what you have to do to make a case for changing a business process.

To make the case for optimizing the B2B payment process, you need to evaluate three key areas: 

Transactional costs. This seems pretty straightforward: what does it cost to send an ACH or wire, or print and mail a check? This cost includes transaction fees, check stock, envelopes, stamps. But there can be additional fees for delivering standard or upgraded remittance information, PositivePay, returned checks, and research on lost or erroneous ACH payments. Be sure to consider all of these when making your business case.

Rebates. This also seems straightforward: how much spend can you get on card, and what’s that likely to yield in rebates? But there are some nuances. First, not all rebates are the same—they vary in terms of rules and payout percentages. Some rebates don’t kick in until you hit a certain threshold, while others pay out monthly, annually, or semi-annually and you must figure in the time value of money as well. Others pay less if you don’t choose to pay your balance off daily or weekly. Then there are exceptions like Level 2 and 3 processing and large ticket charges. I would suggest taking a look back at previous years to see what you actually earned vs. what you remember from the sales pitch.They are often vastly different.

Operational efficiency. This is where you can get sucked down a rabbit hole. But it’s also where you can really transform your business. Let’s take a look at all the pieces of the payments process:

Enabling suppliers for electronic payments. What does your go-to-market strategy look like?  Is it phone calls, mailers? Does your AP team participate?  Your procurement team? How many vendors accept card? ACH? Who collects, keys in, and updates the banking information? How is it secured? 

Creating payment files for transmission. How many different file types must IT work to create and test, and how often are you sending? How long does it take, and who does it?  Is the approval built into the system? Or is it manual and paper-based?

Collecting physical signatures on checks. How many people are involved? How much time do they spend? What is their hourly pay rate? 

Sending out remittance advice. Is it stuffed in envelopes and mailed? Emailed? Is it automatic or do you need to create, save to desktop, and manually send?

Fielding phone calls asking about payments. How many calls do you get per 100 payments sent? What’s the average time to fulfill a request? Who’s involved, and what’s his or her pay rate?

Tracking down and reissuing lost or erroneous payments. What’s your error rate per 100 payments sent? Who fixes errors, how long does it take on average, and what is his or her pay rate?  

Early payment discounts.  How often are you able to take advantage of terms offered by suppliers? What is the lost revenue opportunity when the payment process causes you to miss out?

Late payments. How many payments are late? How much are you paying in late fees? What is the effect on your discount and vendor relationship when payments are delayed?

Updating supplier banking and payment information. According to Nvoicepay internal data, suppliers change their banking setup about every four years, meaning you’re updating 25 percent of suppliers annually. But in this day and age, you can’t just accept supplier updates at face value. You have to validate those requests to make sure it’s not fraud or phishing. Who handles that, how long does it take, and how much do they get paid? Do you have a liability policy for fraudulent payments? What has fraud cost your business historically?

Escheatment and unswiped cards. This is the time spent following up on uncashed checks or un-swiped card payments and reissuing them and/or reconciling them back into the accounting system.

How much does it all add up to? Very few organizations really know. There are benchmarking studies out there on the costs of writing checks, and of processing invoices. But no study I have seen recently considers the entire process, beginning with supplier enablement and ending with a reconciled payment. 

Processes and sub-processes

Those detailed studies don’t exist because it’s difficult to discern how much time an AP team spends on all the required processes and sub-processes for completing a payment. Those task hours are often dispersed across the team and can be tough to measure. 

In accounts receivable, for example, there are staff members that only do cash application. So if you make your cash application process 70 percent more efficient, and you have a headcount of 10, it’s easy to say “Okay. I can assign a savings number to that and reallocate 6 or 7 people.”  It’s pretty straightforward.

That’s much more difficult to do on the AP side. For most companies, no role within AP focuses solely on handling errors, enablement, fielding phone calls, or escheatment. Team members need to be pulled from other duties to cover those tasks. I’ve even seen teams pull staff from the manufacturing floor to stuff envelopes during Friday check runs. It’s hard to adequately quantify the time that goes into all these components, let alone understand all of the costs that roll into the payment process. And why would you if you think your method works and there are no viable alternatives? 

The Fintech A-ha

There is a better way. Over the past decade, fintechs have made steady progress in optimizing the B2B payments process. Payment automation providers can now offer a single interface for all payment types, eliminating the need for multiple payment files.

Some, like Nvoicepay, use cloud networks to handle supplier enablement and information management securely at scale, taking those tasks off of AP’s plate. We even service the payment on the back end, handling incoming calls and error resolution. 

The combination of technology and services radically changes the process, eliminating some of AP’s most time-consuming and unproductive tasks, and freeing up staff time for higher-value work.

And that’s the fintech difference. Slowly but surely, technology companies have surveyed the fragmented financial services landscape and figured out how to knit processes together to replace complex, repetitive, non-value-added manual activities with a few button-clicks. To truly optimize business payments, you need to look beyond stamps and envelopes and consider the entire payment journey. Only then can you truly understand the massive optimization opportunity in front of you. 

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Kristin Cardinali is the Vice President of Enterprise Sales in the Midwest Region at Nvoicepay. Her experience in sales and sales leadership spans 16 years, and includes positions held with companies like Capital One and Billtrust. With Nvoicepay, she delivers scalable payment solutions to enterprise companies and other large organizations. Kristin has received several accolades, including Sales Rep of the Year & Quarter, and multiple President’s Awards.

marco polo

Marco Polo Network Welcomes BNY Mellon

The Marco Polo Network, a trade and working capital finance network powered by blockchain technology, welcomed The Bank of New York Mellon (“BNY Mellon”) onboard to conduct an evaluation program. BNY Mellon’s collaboration is aimed at developing a more open and connected trade finance environment that powers global trade and economic growth.

Marco Polo is a consortium working to make international trade more efficient. The network includes financial institutions, their corporate clients, service providers and the blockchain technology firms TradeIX and R3, leveraging R3’s Corda blockchain.

By engaging with Marco Polo, BNY Mellon is positioning itself to explore trade financing powered by blockchain, in an industry where many participants still rely on costly and inefficient paper-based systems to conduct trade. 

“We recognize tremendous potential to harness digital, data and advanced technology capabilities to transform essential trade finance processes to make them more efficient and secure. Collaborating with Marco Polo members is one more measure of our commitment to provide innovative opportunities to improve the client experience throughout the transaction lifecycle,” said Joon Kim, Global Head of Trade Finance at BNY Mellon. “To achieve our goals, we seek to work with forward-looking organizations, like the Marco Polo Network, that are harnessing digital to truly transform industries,” he added.

The move reflects BNY Mellon’s focus on fully digitizing the business to deliver new capabilities faster, unlock the power of data and put clients at the center of their ecosystem. BNY Mellon remains dedicated to broadening the scope of its digital ecosystem both by actively advancing its own products and services as well as seeking opportunities to collaborate with best-in-class external companies. 

Already strong in Europe, Asia and the Middle East, the Marco Polo Network now bolsters its U.S. presence with the addition of BNY Mellon. “We are accelerating the network’s growth and reach while our members are preparing and running programs with their corporate clients,” said Daniel Cotti, Managing Director, Centre of Excellence, Banking & Trade at TradeIX. 

 BNY Mellon joins Bank of America, BNP Paribas, Commerzbank, ING, LBBW, Anglo-Gulf Trade Bank, Standard Chartered Bank, Credit Agricole, Natixis, Bangkok Bank, SMBC, Danske Bank, NatWest, DNB, OP Financial Group, Alfa Bank, Bayern LB, Helaba, S-Servicepartner, Raiffeisen Bank International, Standard Bank, Intesa Sanpaolo, MUFG, National Bank of Fujairah PJSC, National Australia Bank, and Bradesco as a member of the largest network of financial institutions leveraging blockchain for trade finance.

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About BNY Mellon

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries. As of Sept. 30, 2019, BNY Mellon had $35.8 trillion in assets under custody and/or administration, and $1.9 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com. Follow us on Twitter @BNYMellon or visit our newsroom at www.bnymellon.com/newsroom for the latest company news.

About TradeIX 

TradeIX, is an award-winning technology platform provider driving innovation and driving change in facilitating the flow of goods, money, and credit in the $8 trillion trade finance market. Its TradeIX Platform is delivered to banks and their corporate clients via ERP-embedded applications. The TradeIX Platform is integrated with the Marco Polo Network, the world’s fastest growing trade finance network.

Some of the smartest financial institutions and companies in the world work with TradeIX, including ING, BNP Paribas, DHL, AIG, Oracle, and many other Fortune 500 companies from various industries. TradeIX is headquartered in Dublin with offices in London, Kettering and Singapore. For more information visit: www.tradeix.com

About R3

R3 is an enterprise blockchain software firm working with a broad ecosystem of more than 300 members and partners across multiple industries from both the private and public sectors to develop on Corda, its open-source blockchain platform, and Corda Enterprise, a commercial version of Corda for enterprise usage.

 R3’s global team of over 180 professionals in 13 countries is supported by over 2,000 technology, financial, and legal experts drawn from its global member base. 

Learn more at r3.com.

intermediary banks

Connecting the World: The Importance of Intermediary Banks

Whether you are initiating electronic international payments through a fintech solution or buying physical currency, the chances are high that a bank will be involved. The relationship between banks, as well as the role of intermediary banks, often eludes the general public, who are content with the process as long as it works.

However, understanding how the sausage is made can provide valuable insight into the way you conduct your business. Let’s take a closer look at intermediary banks and their subsequent relationship with currency exchange.

What is an Intermediary Bank?

In layman’s terms, an intermediary bank is where funds are transferred prior to reaching their destination, the payment bank. 

To transfer money, banks must hold accounts with each other in the same way that a typical client would. However, there are too many banks for one to hold accounts with all the others, so instead, they strategically choose where to open accounts. The result is a fragmented network of financial institutions. 

When a bank needs to send money to a location where their bank does not hold an account, the bank instructs an intermediary bank to act as a “middle man” to pass on the funds on their behalf. Funds can transfer between multiple intermediaries, especially if one of the banks is not networked with many larger banks. If the payment bank is across an international border, the intermediary bank may also act as the currency exchange provider.

The Role of Currency Exchange

Currency exchange refers to the use of one currency to purchase the same value in another currency. It’s required any time one entity wishes to pay another in a currency different from their default option.

Each country has either a “fixed” or “floating” exchange rate. A “fixed” exchange rate—also known as the “gold standard”—means that all the country’s money has a physical equivalent in gold or another precious material. “Floating” exchange rates may not have a physical worth, but are influenced by the market and politics, as is currently the case with the Great British pound’s relationship with Brexit.

Breaking Down the Cost

For businesses, currency exchange is vital to a true international payment process. Some vendors may wish to be paid in their customer’s default currency, which would not warrant an exchange. U.S. businesses may experience this when working with vendors in countries like China or Japan, who often prefer payments in USD. This happens when a vendor finds it cheaper to open accounts specific to currencies other than their own in order to avoid exchange fees.

Some vendors have opened multi-currency accounts, which enable vendors to accept and store more than one currency in a single account. Because this method is still gaining traction, it’s good practice to ask if vendors have multi-currency accounts before sending them money. If they don’t, and their account cannot support your currency, the payment bank will likely reject the funds.

Other hidden costs to consider when working with international payments are:

The exchange. If your origin currency is weaker than the payment currency, your money may lose some value in the trade. However, the market is continuously shifting, so the exchange will also gain value at times. The more international payments you make, the likelier that this cost will even out over time.

Intermediary bank fees. Some intermediary banks shave off a fee for their services, which is usually taken from the sum – the net amount is deposited into the vendor’s account. Not all intermediary banks will charge this fee, and it’s not immediately obvious which banks will do so.

Payment bank fees. Similar to the intermediary banks, certain payment banks also charge a fee for processing international payments. Again, not every bank charges this fee, but those that do will deduct it from the payment sum before depositing the net amount into the vendor’s account. Vendors can discuss this charge with their bank if it occurs.

Disrupting the Status Quo

With all these nuances to keep in mind, it can feel like involving a fintech will only add another cog to an already-overwhelming process. However, a fintech can determine the most efficient route through an intermediary bank, and assist in locating missing payments. If funds are returned for any reason, fintechs also act as a holding account while you decide if you want to exchange the funds back or resend them. Following a process like this ultimately saves time, money, and hassle.

If you’re on the fence about using a fintech for international payments, keep in mind that you aren’t losing out by mitigating an overly complicated bank processes. You’re merely side-stepping the complications in favor of usability.

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Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

How to Find Your Way in the World of International Payments

Credit card, direct deposit, check, cash, e-pay… making domestic payments is a breeze these days, with enough flexibility to offer optimization based on your vendor’s payment preferences. International payments, on the other hand, are much more complex, and bring to mind painful images of cumbersome wire submissions.

Alternate options, such as fintech solutions, enable companies to submit all their domestic and international payments in one file. If the fintech also includes vendor maintenance as part of their services, then the payment file draws banking details from the fintech’s vendor network, eliminating the responsibility of maintaining that data from AP teams’ plates.

But before we delve too deeply into the process, let’s take a step back and explore nomenclature. Over time, companies have imposed their own internal vocabulary over common terms. Terms like ‘wire’, ‘direct deposit’, and ‘ACH’ are often used interchangeably, even though they operate differently. Let’s synchronize our understanding of these words.

What’s in a name?

International vs. cross-border vs. FX

“Cross-border payments” is a self-explanatory term—the definition is right in the name. These funds cross international borders to reach their destination.

“International payments” also describes cross-border payment activity, but carries other specific interpretations as well. For example, it may also refer to funds transferred within a single country through a bank or fintech located outside of that country (e.g. Canada to Canada, but through a U.S. fintech).

The term “FX” (Foreign Exchange) is occasionally thrown around to describe international payments, though it typically refers to currency exchange instead of the transmission of funds.

At the end of the day, as long as your company recognizes the nuances, the use of any term is fine. For simplicity’s sake, the rest of this article will refer to “international payments.”

Stepping out of history and into the future

Wire vs. EFT

Wire is the most popular and recognizable form of international payment processing. From a simplistic, yet technical standpoint, wire payments transmit account data from one bank to another. It’s sometimes the only method for sending money from one country to another, especially when working with specific currency exchanges or infrequently paid countries.

The term “EFT” (Electronic Funds Transfer) is quite a bit broader. It is a catch-all phrase used to describe any electronic payment process. Wire, ACH, direct deposit, and other methods fall under this umbrella.

Standardized codes

Codes are commonly used to determine various international payment factors. Use of the wrong codes can cause downstream payment issues, so it’s worth identifying each type, since they often appear to be very similar to one another.

Country Codes

ISO (International Organization for Standardization) country codes are country-specific abbreviations with varied uses.  Although three ISO country code variations exist—ISO Alpha-2, ISO Alpha-3, and ISO Alpha numeric—the ISO Alpha-2 code is used most in the international payment scope, in IBANs and SWIFT codes. 

As the name suggests, ISO Alpha-2 codes are 2-character codes assigned to each country for identification purposes.  For example, the United States is “US”, the United Kingdom is “GB”, and China is “CN.”

Currency Codes

Currency codes are 3-digit codes that identify currencies. Their resemblance to ISO Alpha-3 country codes may cause confusion, so it’s always worthwhile to make sure you’ve got the right code before adding it to payment instructions.

For example, the ISO Alpha-3 country code for the United States is “USA” while the currency code for U.S. dollars is “USD”. Similarly, “CHE” is the ISO Alpha-3 country code for Switzerland, while the currency code for Swiss francs is “CHF.”

Payment specifications

Information requirements for international payments are far less cut-and-dried than those for domestic processes. The details often vary depending on the payment type, currencies, and the countries involved.

SWIFT/BIC Codes

Veteran AP personnel are likely very familiar with the SWIFT system (Society for Worldwide Interbank Financial Telecommunications), which is known as the BIC system (Bank Identifier Code) in some countries.

SWIFT codes were introduced in the ‘70s as a way to streamline the global money-transferring process and reduce the possibility of human error. SWIFT codes are a series of characters that identify the bank, country, and branch location to which a payment should be sent. Decades later, they still play a significant role.

Routing Numbers

While SWIFT codes are still essential to send international payments, the growing financial industry has highlighted the need for additional details.

Routing numbers are the collective answer, and play a fairly large role in the modern payment structure.

The caveat is that they may not always be called “routing numbers”, which is a U.S. term. For example, Australia has the “BSB Code”, China the “CNAPS”, and India the “ISFC Code”.

While it may seem redundant to provide both the SWIFT and routing details, it is an excellent way to clarify the payment destination.

IBANs and Account Numbers

IBANs (International Bank Account Number) arrived in the ‘90s as a way to further standardize banking information, and have been adopted primarily by countries in the European Union, the Middle East, and several countries in Africa. While IBANs vary in length depending on the country, they contain these common factors:

ISO alpha-2 country code

Check digits

Bank identifier

Branch identifier

Account number

Because IBANs often include the bank identifier (which shares digits with the SWIFT code), further account information isn’t typically necessary, which massively simplifies the payment process.

Countries that have not adopted the IBAN must still provide the SWIFT code, routing details, and the account number, as well as any country-specific requirements with their invoices.

Country-specific details

Additional details can include purpose of payment, tax documentation, and company phone numbers, amongst other things. Since each country requires specific information, it can be tricky to know exactly what to supply.

When in doubt, ask your payment solution provider—they can outline each country’s requirements, as needed.

Putting it all together

While international payment processes have evolved over time, the task is still nothing to sneeze at. Fortunately, fintechs like Nvoicepay have simplified the process, and store and maintain banking details on your behalf. That way, when you’re ready to pay your international vendors, you’re good to go in just a few clicks of your mouse—no more painful single-payment submissions through the bank.

Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.

 

sanctions

Getting Caught on the Backswing – Will US Sanctions Undermine the Dollar?

Since the Bretton Woods Agreement in 1944 there has been one currency that eclipses all others for international trade: the U.S. dollar. The dollar dominates when it comes to reserves and the settlement of trades, a hegemony that affords U.S. foreign policy incredible strength on the world stage. However, the U.S. reliance on the strength of the dollar to pursue far-reaching sanctions is also beginning to cut at the roots of that strength, as allies and global trading partners simultaneously pursue their own economic agenda and react to perceived over-reach by U.S. policymaker. 

A View from the Top

In 2019, the dollar comprised over 60% of global debt, more than 60% of global reserves for foreign exchange, and was the medium used in 40% of international payments, according to the European Central Bank (ECB). Despite the economic output of the Eurozone roughly matching that of the U.S., the euro accounted for only 20% of foreign exchange reserves and just over 20% of international debt (1).

This allows U.S. foreign policy a potency lacking in other international currencies. The Trump administration has relied heavily on this dynamic, imposing coercive economic measures on a wide spectrum of targets from Venezuela to North Korea and exponentially increasing the number of sanctioned entities. In fact, the U.S. sanctioned around 1,500 Specially Designated Nationals and Blocked Persons (SDNs) in 2018 alone, almost 50 % greater than in any other single year. 

Growing trends have become noticeable in the financial streams flowing between borders; a rise in the use of the euro, RMB and ruble as forex currencies, development of routes around the conventional financial sector, and flurry of interest surrounding the nascent potential of cryptocurrencies. The major drivers of these changes are unrelated to sanction policy and are more tied to the politicization of U.S. monetary policy or the inherent economic interests of other nations and trading blocs, including turning their own currencies into global standards. Regardless of the drivers, these developments suggest an international system ill-at-ease with the power of the dollar.

Secondary Nature, Primary Threat

The unrivaled strength of the U.S. dollar affords U.S. policymakers a weapon unavailable to any other nation. This is built on by the ‘secondary’ nature of U.S. sanctions – extending the impact of sanctions to non-U.S. entities who do business with sanctioned entities or individuals – that leaves few avenues to evade the regime. 

As virtually all dollar-denominated transactions pass through the U.S. financial system, even if just momentarily when they are “cleared,” very few businesses are able to trade with the targets of primary sanctions without themselves falling under the secondary regime. Violators are potentially liable for sizeable fines or other punishments, including being locked out of the U.S. financial system themselves. 

While this is a useful tool for closing down avenues of terrorism, crime or other illicit activity, it also means countries that disagree with the targets of U.S. sanctions must either comply or place their own industry at risk. The EU-U.S. divergence on the Iranian Nuclear deal, or on U.S. sanctions towards Cuba, are good example of this. 

This increasing sanctions activity provides the seedlings that may undermine the dollar’s strength, as it prompts allies that disagree with sanctions regimes to develop alternatives to the dollar – such as the Euro, Chinese RMB or Russian ruble. Special Purpose Vehicles, such as the EU-Russian INSTEX, are created – albeit with difficulty – to provide routes around the conventional financial system. 

Alternatives

Against this politicization of the dollar, various countries are developing alternatives. The euro is staking its claim with the development of the INSTEX vehicle and a declaration by Jean Claude Juncker, then-president of the European Commission, “to do more to allow our single currency to play its full role on the international sector” (2).

Similar gauntlets are being thrown by the ruble – Russia has been developing its own payments system since the Crimean sanctions in 2014 – and the RMB, with the Chinese Cross-Border Interbank Payment System (CIPS) launched in 2015. Given the size of the Chinese market and its growing world position, the RMB could theoretically pose a challenge to the dollar. However, the politicization of the RMB’s value – witnessed most recently in its rapid devaluation targeted at injuring the U.S. as part of the trade war – undermines its use as a global currency in the near to medium term. 

Another potential pitfall for the dollar is the development of new financial technologies, including the much-discussed Blockchain and cryptocurrencies. Such systems allow for the circumvention of the U.S. financial system and enable payments in relation to sanctioned activities, and have already have been used to facilitate illicit payments in North Korea and Iran. 

Mobile payments are also on the rise, further reducing global exposure to the dollar. However, as with other examples above, the use of some of these alternatives are being driven in significant part by illicit activity, which may lay the seeds of its own demise or limited adoption. 

The dollar’s strength on the international stage is undeniable, affording U.S. foreign policy unparalleled reach and potency. However, increasing international attention is being given to the Trump Administration’s fondness for relying on coercive economic measures in foreign policy, including the imposition of sanctions, tariffs, export controls, and investment restrictions. 

Each time a trading partner or ally objects to the U.S. policy goals but is forced to accept a new sanctions regime because of the dollar’s dominance, that dominance is eroded. While the dollar remains by far the best safe-haven for investments, backed as it is by a resilient economy and a history of stability, the potential corrosive effect of sanctions cannot be ignored. The future use of sanctions should factor in this unintended consequence and overall sanctions policy designed to ensure the long-term dominance of the U.S. dollar. 

 

Matthew Oresman leads Pillsbury Winthrop Shaw Pittman’s International Public Policy practice, carrying out high-profile activities in many of the world’s capital cities. He principally advises governments, political leaders, businesses and NGOs on achieving their most important objectives. He regularly designs and implements legal and policy solutions, including managing integrated U.S. and Europe-based initiatives. He advises global businesses on entry into emerging markets and compliance with U.S. and international regulations.

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(1)https://www.ecb.europa.eu/press/key/date/2019/html/ecb.sp190215~15c89d887b.en.html

(2) See Juncker, J.C. (2018), “The Hour of European Sovereignty”, State of the Union Address 2018 – https://ec.europa.eu/commission/sites/beta-political/files/soteu2018-speech_en_0.pdf