Event Transcript

Transcription

Event Transcript

FINAL TRANSCRIPT
DH Corporation
Global Payments Deep Dive Investor and Analyst Day
Event Date/Time: November 1, 2016
Length: 195 minutes
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DH Corporation Global Payments Deep Dive Investor and Analyst
Day
CORPORATE PARTICIPANTS
Anthony Gerstein
DH Corporation — Head of Investor Relations
Gerrard Schmid
DH Corporation — Chief Executive Officer
Ed Ho
DH Corporation — President, Global Payments Solutions
Chris Zingo
DH Corporation — EVP, Global Head of Sales at D+H GTBS
Rob Coakley
DH Corporation — EVP & Head of Global Payments, Americas
Moti Porath
DH Corporation — Head, Product Management, Global Payments
Kellie Bickenbach
DH Corporation — Chief Risk Officer
Karen Weaver
DH Corporation — Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
Wayne Johnston
Raymond James — Analyst
Geoffrey Kwan
RBC — Analyst
Trevor Johnson
National Bank Financial Group — Analyst
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Graham Ryding
TD Securities — Analyst
Stephanie Price
CIBC World Markets — Analyst
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PRESENTATION
Anthony Gerstein — Head of Investor Relations, DH Corporation
So good afternoon, everyone, and thank you for joining us today in New York for the 2016
D+H Global Payments Deep Dive Investor and Analyst Day. My name is Anthony Gerstein, and I’m
Head of Investor Relations for D+H.
With me today are Gerrard Schmid, Chief Executive Officer of D+H, and Karen Weaver, our
Chief Financial Officer.
Today you’ll be hearing presentations from several of our senior management team of our
Global Transaction Banking Solutions, or as we refer to it, GTBS. We’ll start today’s presentation with
opening remarks from Gerrard, and then we will hear from Ed Ho, President of GTBS; Chris Zingo,
Group Head, Sales and Account Management; Rob Coakley, Head of Global Pre-Sales; Moti Porath,
Head of Product Management; and Kellie Bickenbach, the Chief Risk Officer of D+H.
We’ve scheduled Q&A sessions throughout the presentation. I’ll say this in advance: we
know that you have many questions post-last week’s events. I want to reassure you that we will
answer those questions to the best of our abilities, but I would ask that you hold them until Gerrard
makes his closing comments at the end of the day’s presentations.
We’ll turn now to the disclosures please. So let me now draw your attention to our
disclosures and our forward-looking statements. During our presentations and in response to your
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questions, please be advised that statements made by D+H may include forward-looking information
within the meaning of applicable securities laws.
Such forward-looking statements involve unknown risks, uncertainties, and other factors
that may cause the actual results and performance or achievements of the business, or developments
in D+H’s industry to differ materially from the anticipated results and performance achievements or
developments expressed or implied by such forward-looking statements.
Information about the factors that could cause actual results to differ materially from
anticipated results or performance can be found in our MD&A, which is available on our website or
at sedar.com.
As a reminder, we may also use several non-IFRS measures in our presentation, including
adjusted revenues, pro forma, constant currency adjusted revenues, and adjusted EBITDA, among
others. These terms are described within our MD&A, where you also see reconciliations to revenue
and net income.
All figures are presented in Canadian dollars, unless otherwise stated.
With that, I’d like to now introduce Gerrard Schmid, CEO of D+H. Gerrard?
Gerrard Schmid — Chief Executive Officer, DH Corporation
Good afternoon, ladies and gentlemen, and thank you for joining us today in New York for
our Investor Day. We really are pleased to be able to share with you more about Global Transaction
Banking Solutions and have you join us today.
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Our goal is to give you much deeper insight into this business, and why we believe it is an
important source of long-term growth for D+H. We scheduled this event several months ago, but in
light of events of last week, we appreciate the opportunity to share more with you about the
technologies and the operational capabilities within GTBS, and the strategies that we’re employing to
drive short- and long-term growth.
I remain firmly of the view that GTBS offers strong, long-term potential for D+H. As we
discussed the financial results of D+H in the third quarter last week, including those of GTBS, our focus
today is to focus on the operational nature of the Company. How we sell our products. How
competitive they are. And a bulk of the comments won’t come from Karen or I, but from the senior
management team of GTBS, whom I will introduce shortly.
But before we shift to a focus on Payments, I’d like to be able to take a step back and provide
a little bit more context on how Payments fits into the broader part of D+H, especially for those
investors that are less familiar with the Company.
On a consolidated basis, we’re a leading FinTech company, serving 8,000 clients in over 70
countries, with revenues over $1.5 billion annually. Our business is profitable, reliable, and
systemically important. We provide complementary and growing segments in global banking. And in
simple terms, D+H provides the solutions that banks need to operate themselves, to succeed, to
comply, and to grow.
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Today, we have a range of capabilities, many of them that you’re already familiar with. In
Lending, D+H offers financial institutions technologies for several loan types: consumers, mortgage
lending, commercial lending; automating everything from lending application to closing, supporting
clients as they seek to drive higher volumes, while remaining compliant with applicable regulations.
We have a broad range of solutions, and in many cases, like our LaserPro and Collateral
Management Solutions business, we have clear and established market leadership positions. Today,
our US and Canadian Lending accounts for 42 percent of our global adjusted revenues.
On the Integrated Core Systems side. We offer a portfolio of core banking software
solutions, critical for the day-to-day operations and business management of community banks and
credit unions. And in Canadian Payments, we serve millions of bank customers with products and
services such as our cheque programs, as well as our multi-channel SaaS programs around credit
monitoring, as well as web-based, preauthorized payment services. On a combined basis, these areas
account for 36 percent of our consolidated adjusted revenues.
All of this complements our GTBS segment, where we have market leadership in global
payments. Today, we provide solutions to banks and corporations of all sizes across the world and
address fundamental client needs. As you will hear in our presentations today, GTBS accounts for 22
percent of our consolidated adjusted revenues.
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We achieved these market positions organically and through a disciplined program of
acquisitions that brought us strategic FinTech capabilities and products, as well as access to new
markets, new clients, and diversified revenue streams that have enhanced our risk profile.
Stepping back, we believe that the portfolio of assets—each have different and yet
complementary reasons for being part of D+H. Our legacy cheque business provides us with solid free
cash flow and is a low-capital business. Our Canadian Lending and US Integrated Core businesses are
stable, defenseable businesses, and our US Lending and GTBS business segments offer competitive
differentiation and long-term growth potential.
In April of 2015, we acquired Fundtech, and it brought us significant capability in one of the
most sought-after markets within the FinTech landscape globally. Over the past 18 months, we have
integrated the capabilities into our GTBS segment and have used it to add new clients with banks in
the US, Europe, United Kingdom, South Africa, Southeast Asia, and Australia.
During our due diligence of Fundtech, we came to the view that payment capability was the
primary asset of that company, and we believe that given the product capabilities and demand for
payment modernization, that we could achieve organic growth rates in the high teens from payment
technologies. As you can see from the slide on the left-hand side, payment technologies account for
60 percent of GTBS revenues on a 2016 year-to-date basis.
While our customer contracts are largely written in US dollars in this segment, we do have
contracts in other currencies. And, therefore, we believe that the correct way to think about organic
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growth is to consider constant currency revenue growth as a key metric. As you can see from the
right-hand side of the chart, Payment Technologies delivered 16 percent constant currency growth in
2015, and 13 percent on a 2016 year-to-date basis, which is inclusive of the weak results in Q3. Prior
to Q3, our 2016 year-to-date growth in payment technologies was 17.5 percent. In our view, with the
exception of Q3, our payment technologies have delivered in line with our expectations from that
acquisition.
And as we have noted in the most recent quarter, we have seen moderation, due—we
believe, largely—to slowing bank technology spend. But despite recent results of this quarter, we
remain of the view that this is a highly attractive segment with long-term growth potential.
Earlier this month, McKinsey published their global payments study and predicted that by
2020, the industry will be generating an estimated $2.2 trillion of revenues from payments, up over
$400 billion since 2015. Within that report, you’ll see that payment modernization is a key enabler to
realizing that payment revenue growth for banks. We have copies of this report available for you, for
those of you that are interested. And we believe that we sit right at the intersection of that growth.
Looking to the future and to our opportunity. Company-wide, we believe that we sit as part
of an attractive segment. Financial institutions globally spent $90 billion on technology, and that’s
growing in the mid-single-digit range. In the case of our Global Payments business, over the long run,
it’s a segment that’s expected to grow even faster. None of this opportunity would’ve been available
to us without the Fundtech acquisition.
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Our opportunity is also buttressed because our product portfolio is aligned with the key
trends shaping the banking sector of tomorrow. We help banks put technology in the hands of
consumers, and hence, we’re an engine of consumerization. We help banks seize the opportunities
created by faster global settlements and payments, as well as alternative payments, including
blockchain. And we are an enabler of both.
We support multiple payment channels and payment types, so we’re a gateway to mobile
banking, which is obviously the way of the future. And we automate key banking processes, which
makes us increasingly important in the era of enhanced regulatory oversight, as well as tighter
competition in a low interest rate environment. And because of our broad capabilities across
payments, lending, enterprise, and retail applications, we’re well-positioned towards the trend of
banks consolidating their supply chains.
With that background, it’s now time for the main event. I’ve asked various members of the
GTBS management team, beginning with Ed Ho, to provide a perspective on our key growth drivers
within that business, our competitive position, our go-to-market approaches, our differentiators, and
our product sets. Ed is a member of my executive team and joined D+H via the Fundtech acquisition,
where he was COO of that company.
Ed will be followed by Chris Zingo, at the end of the table. Chris leads our GTBS sales and
account management activities, and Chris joined us as well from the Fundtech acquisition. He will
cover our go-to-market activities and what we’re seeing in the market today.
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He’ll be followed by our colleague Rob Coakley, who leads our pre-sales activities in
payments, who will demonstrate specifically how our products work, to give you a more on-theground feel for what we do today.
Followed by Rob, you’ll hear from Moti Porath, who’s one of the most seasoned veterans in
payments in the industry today. He leads our Payments’ product management group, and he’ll talk
about our Payments IP, explain why our products are at the forefront of the industry, and discuss our
product plans.
And finally, you’ll hear from my colleague, Kellie Bickenbach, who is our chief risk officer,
and she’ll talk about the context of the investments we’ve made in risk management and how it
buttresses our competitive position in Payments.
I’m also pleased to note that I have several other colleagues from D+H with me today:
obviously Karen Weaver, our CFO, as well as some of my colleagues at the back of the room.
So with that, let me hand it over to my colleague, Ed, for his comments.
Ed Ho — President, Global Payments Solutions, DH Corporation
Thank you, Gerrard. Well, good afternoon, ladies and gentlemen. It’s my pleasure to be here
as President of D+H’s Global Transaction Banking Solutions business, as a member of the D+H
leadership team.
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Today, my goal is to give you greater insight into our position as a market-leading payment
technology solutions provider to the largest of today’s banks. Payment technology is a top IT spending
priority for banks and corporations, and we have the right products to meet these needs.
As I go through my presentation today, I want to provide you with six items for you to
consider. D+H is a market leader in payment solutions. We provide point solutions for our customers
in the US wire transfer and the ACH markets, and we provide a payment hub for our larger customers
globally in this growing market among Tier 1 through 3 banks.
The industry is very dynamic, impacted by tailwinds from regulation, increased compliance
and reporting spend, improving the customer digital experience, and transformation of legacy front,
middle, and back technology. Our systems are mission-critical; they represent the heart of a bank’s
payment infrastructure. These systems are very difficult to replace once they are in. As with the rest
of D+H, we maintain recurring revenue streams from maintenance, from licences and hosted-service
bureau-based deployments of our software.
Additionally, as I will discuss, there is a recurring revenue aspect to our global rollouts for
our customers. They buy additional modules and services annually to support their program. We’ve
had rollouts that have gone from 3 years to over 15 years. We believe that the market will continue
to have a promising future with the digital growth of payments and the need for payment processing
speed. We have an experienced management team in the financial software industry. Each has a
proven track record of success and deep experience in this sector.
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GTBS is focused primarily on two segments: payments processing and cash management.
We provide mission-critical, multi-currency, multi-channel, cross-border payment capabilities to our
customers. We also provide mission-critical cash management capabilities, enabling banks to transact
with their corporate clients. We are a strategic partner to many of our customers, maintaining multiyear relationships with them. In the area of payment hubs, our solutions maintain high performance,
scalability, and reliability.
We are the market leader in payment hub technology. With our payment hub and related
technology solutions, we serve a growing global client base of approximately 1,200. That includes: 17
of the world’s 25 biggest banks; 59 of the top 100 US banks, including 7 of the top 10 US banks; as
well as government-sponsored entities and large corporations.
Our global reach has made us a growth leader in our industry, primarily due to the expansion
of our international client roster, the growing number of payment transactions processed by our
existing customers, and the additional revenues generated as clients roll out new features and
functionality in existing and new geographies.
One element of our success has been our ability to serve customers around the world. We’ve
invested in growing our employee base to enable scale and capacity, covering the largest and most
important geographies. We have experts situated in 19 offices worldwide. We have a pool of highly
skilled subject matter experts with 15 or more years of deep experience in our domains.
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We believe that we are the leading vendor in payment hubs. Our next-generation SOA
product execute in real-time, global payment processing capabilities. We have been expanding the
value proposition of our solutions to encompass new payment types and delivery methods, such as
blockchain and Payments’ platform as a service, a managed service offering.
We believe that we are the first payments vendor to announce and conduct a proof of
concept with our closed-loop, blockchain payment solution, which we announced a few weeks ago
with our customer, Rabobank. With the deep domain skills that we possess, we continue to create
innovative solutions to help our customers achieve success.
The electronification of corporate payments creates significant opportunity for D+H. As I
mentioned, the industry’s very dynamic, impacted by tailwinds from regulation, increased compliance
and reporting spend, improving the customer digital experience, and transformation of legacy front,
middle, and back technology. Banks continue to face increasing competition from non-bank
providers, and investment must be made to keep their market share with their customers.
New technologies and channels, such as tablet and mobile, require banks to adapt to the
new behaviours and requirements of their customers. Legacy and internal systems at financial
institutions are unable to keep up with regulatory initiatives, and are not easily adaptable to meet the
new digital real-time world.
Our products are mission-critical and our products support valuable, fee-based transaction
banking revenue streams. Payment hubs are tightly integrated within clients’ systems, interfacing
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with many critical systems, including their core ERPs, and payment hubs are very difficult and costly
to replace. It would take years to replace the payment hub within a bank.
We have provided strong service and support to our customers, and when severity 1 outages
occur, which is infrequently, we respond very quickly with a triage team. Replacements only would
occur if products did not work as specified, and/or the vendor did not supply the proper support to
the customer.
Over 55 percent of GTBS’s revenues come from recurring maintenance and hosting fees
from our customers. I would note that we generate more than 70 percent of our revenues from
existing customers annually, as they choose to purchase more modules and deploy our software
across more regions of the world. A large portion of licence, maintenance, and services bookings are
derived from existing customers and their multi-year rollouts of our software. We do provide
enhancement services for our customers as well, and those engagements can run across several
years.
Industry and regulatory tailwinds will continue to drive IT spending for payment system
modernization. A great example is the introduction of real-time payments around the world, which
we will dig deeper into, later this investor day. Celent forecasts that banks’ IT spending will grow 4.2
percent on a CAGR basis from 2013 to 2018. New investment spending in the same period is up 5
percent to 17 percent, depending upon which region of the world you are in.
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McKinsey forecast that banks’ payments revenue will grow 5 percent on a CAGR basis from
2015 to 2020. And lastly in 2015, McKinsey reports that the number of cashless payments grew by 9
percent, and the value of cashless payments grew by 5 percent. We expect to see these trends to
continue well into the future, as legacy payment types such as cheques are replaced by simpler and
faster payment methods.
As I have said before, D+H maintains a deep bench of talent and operational expertise in
payments, cash management, and the software industries. Expertise is critical to success and provides
a high barrier to entry for new competitors into this field. We cannot solve our customers’ deepest
issues without having very specialized skills in the domains that we operate in.
Now a few words about our business lines. In payments technology, the largest portion of
our revenues come from our global payments hub. We provide globally deployable, single- instance
payment hub software that enables banks to originate, process, transact, and settle every type of
payment in any currency, anywhere in the world, at any hour of the day, and in real-time. Our single
instance of software capability is the key competitive advantage, as it means that all of the banks’
global and domestic payment transactions flow through one single, integrated, multi-channel, multiinstrument payment hub, powered by our flagship solution Global PAYplus.
This solution eliminates the need for multiple payment systems and sits at the centre of a
bank’s IT architecture. It is, therefore, deeply entrenched in each client’s ecosystem. The system
integrates payment types—wires, ACHs, credit card, debit card, cheque, et cetera—currencies and
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systems into one centralized payment hub and provides processing capabilities for mass, high-value,
and immediate payments. Our target markets are the large global Tier 0 through 1, and regional Tier
2 and 3 banks. We have approximately 100 clients in this unit, all using our software on a licensed
basis.
In our US Payments business, we enable our customers to originate, process, transact, and
settle wire transfers and ACH transactions to their respective clearing houses. We have over 400
customers using our point solutions, which target the Tier 2 through 3national and regional banks.
We allow our customers to licence the software, but also provide a hosted-service, bureau-based
solution. Approximately 67 percent of our US Payments customers are hosted in our service bureaus.
In our Cash Management business, we enable our national and international bank
customers to provide cash management capabilities to their corporate customers anytime, anywhere,
and through any channel. As you may know, many banks drive a large amount of wholesale
banking business through their cash management portal, making it a mission-critical solution.
Our target markets include national and regional banks, Tier 2 through 3, for hosted service
bureau solution and a licensed product for our global banks, Tier 0 through 3. We have approximately
60 global clients in this line of business. We are in the process of implementing one large Latin
American bank, who’s acquired both our cash management and payment hub solution on an
integrated basis, to enable their corporate customers to transact digitally, anywhere in the world, in
real-time.
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As some of you may be aware, we are repositioning this business. We are focused on two
elements: one, changing the focus of our sales and marketing efforts to a smaller number of markets,
including the United States, where there exists a large, homogeneous market with an attractive
system turnover rate and better pricing; and two, completing a much more out-of-the-box product
requiring less customizations and more configurability, multi-tendency for a hosted version in our
data centres, and faster deployment with customers.
Our financial messaging product unit enables our valued customers to connect to interbank
secure networks, such as SWIFT, on primarily a hosted service bureau basis. We have a number of
solutions in this area which we provide to large global banks, as well as regional and national
corporations. We provide our services to approximately 650 customers, largely through our hosted
service bureau solution. We are the second-largest SWIFT service bureau in the world, only to SWIFT,
and we have the highest operational award from SWIFT with their Premier Operational Practice label,
indicating that the service bureau is able to maintain high standards for risk mitigation.
Our Merchant Services unit provides white label, remote deposit capture, Internet
payments and electronic invoicing presentment and payment products, for large international and
regional banks to sell to their merchant customers. D+H also supports merchants directly. We target
national and regional banks, Tier 2 and 3, for our US SaaS solutions and UK European Banks, Tier 0
through 3. We have 600 bank clients and thousands of merchants as clients. We provide our solution
primarily as a hosted service bureau based solution.
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We have approximately 1,600 employees and contractors working for GTBS globally. The
largest proportion of employees are within our payment hub unit, which has employees situated
globally, but a large R&D team centred in Herzliya, Israel. Our Cash Management group is
headquartered in Pune, India, although we have created an offshore in-centre there for our payment
hub group. Within the US, we have employees spanning six locations, with major hubs in New York
City, Salt Lake City, and San Francisco.
GTBS is operationally managed by a group of senior executives with extensive experience in
the FinTech sector. Each executive has worked in a number of firms in the software industry, and
some at banks. These executives were hand-picked and recruited into the organization to serve as
leaders for our subject matter experts globally. This management team is based around the world, in
Toronto, New York City, and Israel.
GTBS typically sells term and perpetual licences to a portion of its customers. Customers pay
an initial licence fee, based on the size of project and expected volumes. Increasing transaction
volume results in licence fee expansion in the US for D+H. Customers typically pay ongoing
maintenance revenues for continued use, which is an annual revenue of approximately 20 percent of
the initial licence fee, with annual CPI escalators. Recurring licence and services revenues are
generated as banks pay for new licences and projects to deploy software across different geographies
and purchase additional modules.
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GTBS provides many of its products to customers as a hosted service bureau solution.
Customers typically pay an initial subscription-based contract that stipulates a fee per transaction and
minimum transactions per period. Customers use the hosted solution and pay the greater of the
amount based on actual usage, and minimum amount. Every year, most fees per transaction are
subject to increases, based on CPI escalators.
D+H has initiated a new service called payments platform as a service to the market. It is
essentially a managed, hosted service where D+H and Accenture, a premium D+H partner, build, test,
implement, and support a hosted solution for the customer. The customer typically enters into a 10plus-year term contract that stipulates a fee per transaction and a minimum number of transactions
per year. Customers use the PPaaS solution and pay the greater of the amount based on actual
volumes or a minimum amount. The PPaaS solution is structured in such a way that customers pay an
annual operating expense to its partners, thereby preserving its capital expenditures for other
purposes. The PPaaS solution could be lucrative and based on minimum volume guarantees, D+H’s
revenues over the term of the service should exceed what it would have earned in a standard licence
and maintenance model. It is too early to tell whether this type of delivery service can go mainstream
but D+H is the first payment software vendor to engage in this model.
GTBS generates almost 50 percent of its revenues from the US, given the broad presence of
its payments—US payments and merchant services businesses, coupled with a growing number of US
institutions acquiring our payments hub. As mentioned, greater than 55 percent of our revenues are
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recurring maintenance and SaaS-like. Our implementation services usually run multiyear
engagements with our customers and represent 35 percent of our revenues. Payments technology
represents over 59 percent of our total revenues. Cash management is only approximately 12 percent,
and other businesses in merchant services and financial messaging are 28 percent.
Let me turn your attention to our solutions. To position themselves to capitalize on highmargin transaction banking and to differentiate themselves with corporate customers, financial
institutions must be able to capture, manage and process all types of payments including credit card,
cash, wire, and automated clearing house among others, through multiple channels including the
Internet and mobile devices, and then clear them through the various clearing facilities. Additionally,
real-time clearance and settlement are becoming increasingly important to banks and their corporate
customers. Banks need the right technology to make it happen.
It would be an understatement to say that banks’ legacy payment infrastructures are
complex. They are exceptionally complex. Banks maintain a myriad of payment solutions across
various businesses and geographies, which are interfaced to many other downstream and reporting
systems. The technology that prevails in many financial institutions is a combination of old and new,
dating from the 1980s and ‘90s and 2000s. There is little room for scalability or agility in older systems,
which are not designed for flexibility or the need for real-time processing. Financial institutions keen
to create clear differentiation between themselves and their competition as quickly as possible, have
placed great emphasis on a rapid time to market for new products. More often than not, the
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temptation has been to import and bolt on a new platform for the new service rather than build new
functionality into existing systems. Once a financial institution succumbs to that temptation, it
becomes a vicious circle. The more complex the platform, the more siloed existing functionality
becomes, and the harder it is to add the necessary new features.
Financial institutions face a number of significant hurdles, including navigating new payment
channels, conducting multicurrency and multiproduct payment operations in many different
countries, exchanging multiple payment and security information in a safe and secure way, all while
offering superior customer service in a highly competitive and increasing regulated environment. At
the same time, financial institutions must deal with pressure from management and shareholders to
increase revenues, reduce risk, and lower overall operating expenses. D+H offers best-of-breed
payments and financial messaging solutions that enable financial institutions and their business
customers to manage cash, process payments, exchange information, and transfer funds costeffectively, securely and reliably within and across national boundaries. Our automated straightthrough processing and interbank messaging capabilities, which include SWIFT connectivity amongst
many others, will help our customers to improve customer support, expand into new areas of
business, and reduce the operational cost and risk throughout the entire payment life cycle. Virtually
all of our payment hub deployments require a multiyear rollout of system across the globe. Customers
generally purchase a package of modules to deploy over specific regions and countries around the
world. A good example of the effectiveness of our payment hub is a major Asian bank deployed our
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hub globally within three years and was able to eliminate over 85 legacy systems and deploy common
processing methodologies around the globe.
Many of our engagements run much longer than three years. D+H earns revenues through
sales of payment module types, regional deployments of the software, and services engagement over
multiple years with a single client.
D+H develops and markets globally-deployable single-instance payment hub software that
enables banks to originate, process, transact, and settle every type of payment; credit card, debit
card, ACH, cheque, wire transfer, blockchain, or real-time payments in any currency anywhere in the
world and in any hour of the day and in real-time.
Our single instance of software capability is a key competitive advantage, as it means that
all of the bank’s global and domestic payment transactions flow through one single integrated multichannel, multi-instrument payment hub powered by our flagship solution Global PAYplus. The
solution eliminates the need for multiple payment systems, and sits at the centre of a bank’s IT
architecture. Since transactions flow through a single instance, customers can also easily obtain its
global equity position in payments in real-time.
Global CASHplus is a software platform used as an online banking channel for financial
institutions. It enables banks to optimize their clients’ working capital management via an integrated
suite of modules, cash and liquidity management, comprehensive payment initiation, wires, and ACH
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for example, integrated payables and receivables management, supply change finance, cash
forecasting and balance reporting, and mobile.
As with our Payments hub, D+H’s cash management solution is a single instance of software
that can be deployed across the globe. Many of the customers utilize this software across the globe
or on a region basis; pan-Asia, pan-Africa for example. The software is highly parametrized and
configurable.
Financial institutions and corporates require the ability to exchange sensitive information
through a reliable and secure global network. D+H’s financial messaging solution introduces
automation to improve the efficiency, reduce risk, and save money and time. Over 33 million
messages are processed each month through our secure data centres on three continents. Our
platform integrates easily with other banking applications and provides message conversion,
connecting to interbank services such as SWIFT, CREST, Fed, CHIPS, and SIX.
As mentioned, D+H is one of the world’s largest SWIFT service bureau operators and the
only company with two Premier Operational Practice certifications, the highest SWIFT rating
available. We serve more than 650 SWIFT clients in 70-plus countries covering the Americas, Europe,
and Asia Pacific, including data centres in the US, United Kingdom, Switzerland, and in Singapore via
partnership.
Through D+H’s Merchant Services group, financial institutions are able to extend their
portfolio of business services for commercial customers to include e-invoicing, remote deposit
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capture, what we call RDC, image cash letter processing, and payment gateway services for credit
card and e-cheque payments. They can also provide convenient RDC functionality to consumers and
mobile customers.
D+H gives small and medium businesses direct access to a complete suite of payment
processing solutions to support multi-channel payments, acceptance, card and e-cheque payment
origination, and deposit processing, all of which help to accelerate receivables and improve business
management.
GTBS’s total addressable market is greater than $4.5 billion across its various lines of
businesses. As you can see, our market share is strongest in our two-payment units. There remain
many opportunities for us to expand with our payment hub offering as penetration globally is still
low. However, our strategies for the next several years are also to expand our addressable market by
offering solutions with strong value propositions to Tier 2 and 3 banks globally with our flagship
solutions.
Our delivery of software is expanding to include multi-tenant SaaS versions to make our
solution affordable, easy to use, and support quick deployment, and with strong value propositions.
The US market is certainly an attractive market for us to further expand, and we’ve also made
investments and sales in Latin America and Asia Pacific where we see opportunity.
GTBS’s three-year business strategy is multi-pronged. We will be launching new solutions in
the US market for payments and cash management into the Tier 2 and Tier 3 space with multi-tenant
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solutions, expanding our addressable market for products by providing strong enterprise capabilities
to smaller customers on a more cost-effective basis, execute US real-time payments penetration
when The Clearing House and clearXchange launched their new services in the second half of 2017.
We’re going to continue to attack the Tier 1 and Tier 2 banking space for enterprise payment hubs,
where penetration rates still remain low.
A word on our markets and trends that we have seen and continue to see. Although we had
a flat quarter in Q3, we believe that the long-term trends and prospects for payment infrastructure
modernizations are very solid.
Noncash payment volumes have grown 11 percent between 2010 and 2015. Every category
of noncash payment has grown except for cheques, which is expected to decline. Our expectation is
for digital payments and credit cards will continue to lead the way for noncash payment instruments
to grow. CEB TowerGroup reports that financial institutions that are able to integrate disparate
payment channels and systems will be best positioned to capture market share and reap value added
benefits from steadily growing electronic payment volumes. Payment hubs are key components of
that equation.
Capgemini’s 2016 World Payments Report found that global noncash payment volumes
grew by a record 8.9 percent during 2014, reaching 387.3 billion. That’s over the largest year-overyear volume increase since Capgemini began publishing the report 12 years ago.
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In 2009, the Swedish government initiated a plan to reduce the use of cash in the country
and reduce the expenses maintaining cash. Cash transactions today represent no more than 2 percent
of the value of all payments made in Sweden and may drop to below 0.5 percent within the next five
years. According to Visa, Swedes use debit cards three times more than other Europeans. The spread
of debit cards has had a strong effect even on the street level, with fruit and vegetable traders and
retailers accepting cards or electronic payments using the smartphone app Swish.
While Sweden appears to be at the extreme end of the scale, many more countries will be
promoting noncash payments. One third of the Swedish population uses Swish. Cash and cheque
usage has declined dramatically, and there appears to be little cannibalization of other payment
types—debit and credit for example. Bills and coins represent only 2 percent of Sweden’s economy
versus 7.7 percent in the US and 10 percent in the Euro area. A large percentage of Swedish banks’
branches actually no longer carry cash.
One important trend that we follow is our customers’ revenues from payments. Banks’
revenues from global payments increased marginally in 2015, but McKinsey expect revenues to grow
a solid 5 percent per year over the next five years, to a total of 2.2 trillion. In 2015, the global number
in value transactions grew by 9 percent and 5 percent respectively, with payment fundamentals
expecting to continue and remain robust. Continuing challenges from nonbank attackers and
increasing regulatory mandates will fuel persistent pressure on pricing, but McKinsey sees continuing
shifts in cash to digital payments, which would more than offset these challenges.
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For us this is important to see that banks continue to see transaction volume growth and
the ability to generate profits from this sector. A key driver for banks to succeed then are their
continuing technology infrastructure modernization programs, which includes the necessity of
payment hubs to support the increasing requirement for better digital experiences with our
customers, address regulatory mandates such as Payment Services Directive 2 which require banks
to open their customer data to trusted third parties and potential competitors digitally as well as
increased compliance and reporting requirements.
Payment hubs still remain a key area of focus for banks. Celent’s survey of large global banks
revealed that 54 percent of respondents would focus on an enterprise payment hub in one to three
years, 44 percent in four to six years. Forty-three percent of the respondents said that they would
invest in payment hubs to gain a competitive advantage, while another 31 percent would invest for
process improvement. Lastly, 64 percent of respondents said that they would moderately increase or
significantly increase their spending on payment hubs.
Banks are impacted by a number of factors, the economy, regulations, profitability,
demographic shifts, change in customer behaviour and technology. We believe that many of these
factors are forcing banks to invest in their payments infrastructure modernization. However, IT
spending in financial services can fluctuate depending on market conditions and particular
circumstances affecting the bank.
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Banking IT spending is being pushed and pulled by opposing forces. On the investment side,
spending is driven by regulatory mandates, increased compliance in reporting spending, and the need
to improve the customer digital experience, transforming the front, middle, and back technology.
Offsetting investments are banks’ revenue and margin pressures, the need for expense reductions
and continuing efficiency gains from branch right-sizing, asset divestitures, automation, and IT
outsourcing. But we know that a multiyear significant investment is required to deliver a long-term
digital strategy to transform a banks back-end legacy systems, and although banks priorities may
temporarily shift, the completion of the investments are required to deliver that long-term strategy.
We’ve experienced some of those volatilities in 2016 as some of our large customers and
prospects have postponed or elongated project time lines in order to save money and spread the
spending across years. We’ve not seen any market slowdown in interest in payment hubs and
modernization. There remains a continuing level of RFPs in vendors’ collection processes being
completed. Our win-loss ratio this year is very strong, and comparatively to 2015 is a third higher.
Our challenge has been the time it takes to complete the sale process after being selected
the preferred vendor in a competitive bid process and then sign a contract for deployment. Key areas
where we see extra time being spent are in organization and planning across operations, technology
and business groups, approvals and procurement negotiations. We conservatively recognize both
licence and services revenues on a percentage of completion basis over the life of the
implementation, but the recognition clock does not start until a contract is signed.
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It’s also worthwhile noting that we’ll be holding our annual customer conference in the
Americas tomorrow at this same venue. As always, I am excited by the prospects of bringing our
valued customers together to discuss our strategies, product roadmaps, demo our new software
capabilities, and engage in panel discussions on current industry issues. We have a great set of
customers, about 100 that are registered, and the agenda is packed with highly relevant topics such
as real-time payments in digital banking, blockchain, and PPaaS. We have over 14 external speakers
including The Clearing House, Visa, Accenture, Hilton Worldwide, and a few of the top 10 banks.
I would also like to note that we are very proud of our payments expertise, and part of how
we share that with our customers is via our Payments and Treasurymagazine that we distribute to
over tens of thousands of clients and that we have copies sitting at your desks for you to take away.
For 2017, we have five key operational priorities that we will focus on, execute on sales
activity in the pipeline, which means we drive greater pipeline coverage. We focus on progressing our
prospective deals through the sales process and drive to deal closures with our customers and
prospects with predefined close plans.
We will continue to enhance our payment hub with our new payment types such as US realtime payments, and for other countries such as Hong Kong that will also want real-time payments,
and for new regulations and market requirements. We are launching several new next-generation
solutions in the payments and cash management areas to lower tier institutions that will increase our
addressable markets.
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We continue to focus and complete our repositioning of the cash management business as
mentioned previously. We will also continue to improvement our information, security, compliance,
regulatory, and risk management postures.
We have come a long way in 2016, and we continue the momentum into 2017.
We continue to believe, and industry analyst data and industry sentiment lead us to believe
that the banking IT spending for modernizing payment infrastructures will continue in 2017 and
beyond. Certain customers have curtailed their bank spending for bank-specific reasons or for
regulatory reasons which diverted their attention. We expect to return from moderate to expected
revenue growth levels in 2017 as deals we are currently in negotiation will turn into revenue backlog
and enable us to start projects to implement our software.
We also remain optimistic as new regulations and industry drivers such as real-time
payments around the world and Europe’s Payment Service Directive 2 will continue to push banks to
further pursue payments infrastructure modernization.
To address future volatilities that we may encounter, we have also taken proactive steps to
build out more out-of-the-box software, improve our delivery and implementation timetables, and
also offer our key flagship software in other delivery forms for faster deployments and OpEx spending
such as SaaS and PPaaS.
I wanted to conclude my remarks by saying that D+H is a market leader in payment
solutions. We have a large global customer base with best-of-breed solutions. The industry is very
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dynamic, impacted by tailwinds from regulation, increased compliance and reporting spend,
improving the customer digital experience, and transformation of legacy front, middle, and back
technology.
Our systems are mission critical. They represent the heart of a bank’s payment
infrastructure. These systems are difficult to replace once they are in.
As with the rest of D+H, we maintain recurring revenue streams from maintenance, from
licences, and fast deployments of our software. Additionally as I have discussed, there is a recurring
revenue aspect to our global rollouts for our customers. They buy additional modules and services
annually to support their program. Again, we have had rollouts that have gone from three years to
over 15 years. We believe that the market will continue to have a promising future with the digital
growth of payments and the need for payment processing speed.
We have an experienced management team in the financial software industry, each has a
proven track record of success and deep experience in this sector.
Thank you for your time, and now I’ll turn the session over to Chris Zingo, GTBS’s global head
of sales and account management for further remarks on our sales process, pipeline build and more
colour on the market dynamics. And later, Moti Porath, our head of product management, will come
and discuss our competitive advantages, our products, and these new regulatory initiatives I have
referred to such as PSD2, open APIs, SaaS, and blockchain.
Thank you.
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Chris Zingo — EVP, Global Head of Sales at D+H GTBS, DH Corporation
Hello. Thank you for the opportunity to share my perspectives about our business with you
this afternoon.
My name is Chris Zingo. I am the group head, sales and account management for D+H. In
my current role, I’m responsible for our global go-to-market strategy for our payment solutions,
establishing best practices across all SBUs with respect to sales and account management, and the
management of our Centre of Excellence for sales and account engagement. I’ve been with D+H for
three years, as I’ve joined Fundtech on the back half of 2013.
I will begin the discussion today with a review of our global market strategy for the GTBS
division, particularly with respect to our distribution, our partner ecosystem, and our global
participation and market opportunity.
I will then discuss our global sales methodology, walking you through a typical sales process,
time frames associated with each stage of the process, and the current market dynamics impacting
the timings of bookings.
Next I will discuss our solution strategy, providing specific insight into our pricing model and
revenue of a typical customer journey on their path to payment transformation.
Finally, I will review our value proposition of our solution and discuss the general outlook
we have for our business.
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So to start, our global go-to-market strategy. It’s comprised of three key pillars. First, our
internal sales channel and coverage model, secondly, our global partner ecosystem, and thirdly, the
relationships we enjoy with industry analyst firms.
First, let me discuss our internal sales coverage model. The model is designed to ensure that
we have consistent local engagement within our target accounts in our addressable market.
To ensure this, we undertake a bottom-up analysis of our market by solution. From that
analysis we then define geographical areas that require local engagement, we initiate a go-to-market
strategy within those geographies, and we manage our market engagement weekly. This analysis is
done annually and refreshed quarterly.
Second, a key element of our global go-to-market strategy lies within the quality and the
effectiveness of our strategic partner network. This network is comprised of three core types of
partners: the first, global advisory firms, second, system integrators, and third, the industry analysts.
Global advisory firms, which specialize in global banking transformation initiatives
principally with respect to digital banking transformation and target operating model design, are
essential as they make us aware of new payment initiatives months before there’s any indication of
a new project.
The system integrators are essential, as they complement our delivery by providing
customer-side integration services, system configuration support, and manage the overall testing of
our software within the customer’s environment. It is important to note that we manage these
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relationships using an end-to-end joint delivery model to ensure the right expertise is injected to the
customer sales process at every stage.
Furthermore, as the economics are complementary and transparent to both us and our
partners from the beginning, our partners are extremely motivated for our success.
While each bank may have its own particular interest in certain SIs, we find that by having a
select number of deep system integration partners around the globe reinforce our value proposition
and enable us to scale our success uniformly.
Finally, we complement our market engagement with thought leadership programs
supported by the industry analyst firms. These programs are designed to expand our influence,
particularly our role in global banking transformation.
Each of these three channels represent an important source of the insight and influence we
acquire within our markets today. As such, we believe we have high visibility into the new RFPs and/or
RFIs coming to market annually, and why we have such a high participation rate.
For example the chart on the left side of the screen displays the number of total available
new RFIs and RFPs that have come to market since 2013. On the right side of the graph illustrates our
participation in those RFIs and RFPs, and you can see since 2013 our participation in the market has
dramatically increased.
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The next slide expands a bit on the summary of our go-to-market. It provides a visual of our
distribution strategy globally, particularly with respect to our geographical focus, our direct sales
channels, and our partner ecosystem.
Geographically we are focused around three core regions: the Americas, both North
America and Latin America; EMEA, principally UK and Continental Europe and selective areas of the
Middle East and Africa; and third, Asia, principally Southeast Asia and Australia.
This geographical function—this geographical focus is a function of, one, our adjustable
market, i.e., the opportunity and projected investment trends happening in the market, second, the
strength of our local distribution and partner ecosystem, and third, our global product delivery
capabilities.
As discussed in the previous slide, to complement our direct sales channels we’ve developed
primary partnerships with three global system integration firms. These partnerships revolve around
joint go-to-market strategies developed for the following end-to-end solutions, some of which Ed
alluded to: first, payment platform as a service, immediate payments where we’ve developed an endto-end use case, and finally, standard payment transformation programs.
These partnerships were developed in union by the management teams of both
organizations. They leverage the product synergies of both firms, and they are implemented globally
in a uniform manner. In addition, we have in place today six local partnerships in select emerging
geographies, such as Africa, the Middle East, Latin America, and Southeast Asia. We have found that
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with respect to emerging market strategies local firms have much more influence, deeper customer
engagement, and a better overall understanding of the target accounts. Such partnerships serve
today as an extension of our brand in those markets, as well as extension of our local delivery
capabilities.
With respect to our internal sales channel, we have 35 territories in production today. Each
territory is assigned to on average 12 target accounts.
We believe that the quality of our direct sales channel in combination with our go-to-market
strategy is a unique differentiator in and of itself and has positively contributed to our overall success
in the market. We believe so for the following reasons.
First, the average tenure of our sales organization is just under five years. This is a critical
factor for success, as our sales team in aggregate possess strong product and domain expertise and
has been deeply engaged with the same target accounts for multiple years.
The second lever is our global presales capability, which you’ll hear more from from my
colleague, Rob Coakley.
Over the past three years, we’ve developed strong presales support to direct our sales—to
support our sales efforts globally. Such capabilities include deep subject matter expertise in global
payments; a common product provided in a cloud delivery model for rapid deployment for proof-ofconcept executions; and local expertise that we bring to bear regarding the structure of payment
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schemes in each jurisdiction around the globe, the combination of which enable us to respond to
market opportunity much quicker than our competition and with much more effectiveness.
The last element is the sales management. Through our sales management team we’ve
developed a global platform to enable scale. During the back-end of 2013, we unified the sales
organization globally. As part of this unification, we developed a common global sales methodology
and sales process, we implemented a single CRM designed to support our operating model, and we
developed best practices for performance management. Furthermore, going into 2016 we added to
our sales management capacity in EMEA to exploit the acceleration of the sales growth in the region.
In summary, our go-to-market discipline, coupled with our expertise and experience, gives
us better visibility into market opportunity and improves the execution in the sales process. Across
2014 and ’15, in global payments we averaged north of 55 percent win rate against the available total
number of projects in the market. In 2016, as Ed mentioned, the win rate is trending about 33 percent
higher.
In this next section I would like to discuss the typical sale cycle associated with our solutions.
I’d like to provide an overview of the sales process, key milestones, and summarize some of the
current market dynamics impacting sales cycles in 2016.
For both our payment and cash management solutions, we can typically bucket the sales
process into two categories: one being the typical sales cycle for enterprise licence delivery, and the
other being the sales cycle for software as a service and/or hosted delivery. This speaks to the natural
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segmentation associated with each delivery method, with the enterprise licence projects typically
pertaining to the larger Tier 1 and 2 institutions and the SaaS or hosted delivery typically pertaining
to Tier 3 or 4 institutions.
For both categories we have implemented a common sales methodology that defines the
required behaviours for success. The methodology revolves around four key pillars: discover,
diagnose, design, deliver, in that order.
Discover refers to a series of sales activities that are focused on the establishment of a
business case for our solutions. These activities include influence mapping and development, the
creation of our value hypothesis, and overall win strategy.
From the customer perspective, it usually manifests in a request for information, which is a
formal process that precedes the request for proposal. Typically this process of the sales cycle takes
between three and six months for enterprise delivery and about two to four months for SaaS or
hosted delivery in the Tier 2, 3, and 4 market.
Diagnose is the second stage. Diagnose refers to a series of activities focused on proving
both the customer business case and establishing our competitive differentiation. From the customer
perspective it always manifests into an RFP, and typically takes between three and six months to
complete for enterprise project delivery and about one to three months for SaaS or hosted delivery.
And finally, design. Design refers to a series of required sales activities focused on proving
the viability of our solution. From the customer perspective it typically manifests into a formal proof
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of concept where we are required to fulfill a series of customer use cases defined by the client. This
process usually takes two to four months. For SaaS and hosted delivery the process is actually less
formal and takes about one to two months.
In each segment, this is an area where we typically excel, as our product proposition and
our presales capability are exceptionally strong. If we’re involved in a POC, or Proof of Concept, we
typically win. I will describe further when I summarize the value proposition in subsequent slides.
And then finally, delivery. Delivery refers to a series of activities required to originate and
execute the customer agreements. For enterprise delivery this process typically takes two to four
months. For SaaS or hosted, the process typically takes between one and three months, okay?
In 2016, we have seen an elongation of the enterprise sales process. On average—and we’ve
seen that elongation for one primary reason. On average, the elongation has come from the proof of
concept phase in the sales process. This is the result of the current market climate, as many of our
banks have implemented a series of committee reviews for most large or major projects.
This has manifested itself in the sales process by the introduction of requirements,
validation work, historically performed after the execution of a traditional contract. It is important to
note that the requirements work mandated now is not a new process; simply a reordering of a
standard project milestone.
While this dynamic may extend the signature of the full project, it dramatically increases our
probability of success as we typically win proof of concepts. In addition, it improves the quality of our
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delivery and provides us with strong visibility into future sales bookings. As such, we continue to
remain optimistic in our view of the market momentum and our current sales pipeline.
Earlier today, Ed discussed our solutions strategy and provided detailed insight into the
utility we provide to our clients and to our market. The schematic on the screen represents the
functional architecture of our global payment services hub.
The main components of the hub are functional modules; payment capabilities; market
settlement schemes, i.e. country clearings; and volume tiers. By modularizing our commercial and
delivery strategy, we enable our clients to systematically implement our hub over time to mitigate
project risk and shorten their time to revenue of new projects. Furthermore, our pricing model is
structured to ensure that as our clients expand we expand with them.
Our pricing model has four inputs. The first input is the number of modules a client acquires.
Modules describe the functional capabilities of our solution, and are independent of the payment
capabilities and/or country clearings.
The second input is the number of payment capabilities the customer requires. Payment
capabilities refer to the standard industry payment rails, i.e. standard mechanism to connect to
country settlement schemes.
The third input is the number of country or settlement schemes we actually put into
production. And the last input is volume of payments processed through our system.
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Based on our experience, we have seen the customer journey take two primary paths. As
Ed mentioned, these relationships span multiple years.
The common path to transformation begins with the implementation of a functional or a
fundamental payment module in a specific geography followed by a succession of new projects
designed to layer on new payment capabilities and country clearings over time until they achieve
payment transformation.
The second most common path to transformation begins with an end-to-end payment
capability implemented in a specific geography requiring the simultaneous licensing of functional
modules, payment capabilities, and clearings. In this journey, the customer will continue to add new
end-to-end payment capabilities over time until they achieve full transformation. As in the previous
journey, when they add new payment capabilities they require a new licensing agreement, and that
equates to new bookings, okay?
The next slide actually depicts an actual customer journey to payment transformation. This
particular client, a global US bank, selected the most common path to payment transformation. This
path began with a primary functional capability in a specific geography, then layered on new payment
capabilities and new country clearings over time. Each time a new licence agreement is required.
As you can see, the initial booking throughout the entire six-year period represented 17
percent of the total booking value over that period. Additionally, as we were part of the
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transformation agenda and planning from the beginning, we had strong pipeline visibility into the
scope, value, and timing of future bookings.
It is important to note that in this journey this particular client sunsetted 78 legacy payment
systems and removed over $100 million of operating expense from their annual budget. Okay?
So now, why do we believe that we win? Why do we believe we win? There are three main
elements of our competitive differentiation that I believe drive our success today.
First and foremost, implementing a payment hub is a complex exercise for a bank; therefore,
the more we can do to deliver a rapidly deployed product the better. We provide enterprise solution,
what we call COTS, commercially off the shelf.
In our COTS model, we have integrated business logic into a single branch of our software
to deliver out of box solutions with embedded business logic. Now this is logic, payment logic, IP that
we've developed over the course of a 23-year period implementing the payment systems around the
globe; very difficult to replicate.
Effectively we've taken this IP built over many years of deployments and embedded it into
a common production branch, relieving the bank of having to develop on their own or with a partner
new payment process flows. This helps our clients to transform their own payment operations,
facilitate automation and operational scale, and dramatically reduce delivery—the risk of delivery and
delivery cycles, giving us significant benefits over the competition.
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And the last element, which is critical, is what we call future proof. Given the pace of change,
today's innovation risks becoming tomorrow's legacy.
A key element of our competitive differentiation lies in our ability to demonstrate how our
solution can evolve and adapt and innovate quicker than our competition. While most claim they have
this ability, we have demonstrated this ability in the following areas.
First, we are the first payment provider to implement blockchain into a production
environment of our software to enable real-time cross-border flows. Also, we are the only solution
that was engineered by design to process all transaction types in real-time. As such, we're able to
illustrate the implementation of new payment schemes without the need for development and within
a short time frame.
And the last bucket is integrated solutions debt strategy. Ed talked a bit about our portfolio
of capabilities. And given the depth of our assets and payments, we're able to integrate diverse new
functional capabilities quickly to evolve existing solutions and/or to create new solutions without the
need for complex development.
For example, a large Latin American bank was trying to solve the problem of a reduction of
market share in the United States and Europe due to substandard cash management capabilities
required for their large multinational segment of corporate clients. Together we defined a strategy
that deployed our cash management solution pre-integrated with our payment hub.
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By enabling the real-time processing of diverse payment types through the hub the bank
was able to launch new cash solutions to their clients that provide their customers with real-time
visibility of their global cash, creating a significant differentiator and a new revenue generator for the
bank.
In addition, we actually diminished the role of the competition in that process because we
took apples-to-apples and we turned it into apples-and-oranges, right, which is a key element of our
success.
So the short-term headwinds that Ed mentioned impacting Q3 bookings to date have been
the result of two primary factors. The key, the first factor is the reduction of the pace of the
acceleration of new spending in select global accounts, and second, as I mentioned before in the sales
process, is the elongation of the sales cycle for new projects.
These factors are driven by the macroeconomic environment, principally poor financial
performance in global banking. It is important to note, however, that this reduction does not indicate
a shift in demand; simply a temporary shift in timing. We believe this dynamic is temporary because
of two key factors.
One factor is regulatory tailwinds continue to require banks to invest in their global payment
infrastructure, as evidenced by the immediate payment investment happening around the globe. The
second factor is the changing competitive landscape within banking.
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Changing customer demographics, coupled with the acceleration of emerging technologies,
are requiring most institutions to transform their banking services simply to remain competitive.
We've seen that that dynamic continues to be one of the most significant factors driving investment
in our space.
In 2016 to date, we've already secured strategic new projects in our existing account, most
of which are planning to accelerate the implementation in 2017, giving us strong visibility into the
projected spend of 2017.
In summary, we believe that the overall spending in our market will remain strong. As
discussed, industry tailwinds like digitization, regulatory mandates, and banking innovation will
continue to force financial institutions to transform their payment capabilities, create automation and
efficiency, and innovate new customer solutions.
Today we discussed the strength of our product proposition, and have described why we
are uniquely positioned to capitalize on these trends. Furthermore, the visibility we have into our
customers’ transformation journeys provide us with a comfortable level of confidence in the quality
and depth of current sales pipeline.
Lastly, our technology architecture and product strategy enables us to adapt and innovate
quicker than our competition. You have heard several proof points today. This competency ensures
that the innovation we implement today will continue to evolve to solve not only the problems of
today but the problems of tomorrow.
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Thank you very much for your time and attention.
Gerrard Schmid
So thank you, Chris. I noticed that some of you were using your phones to take pictures. Just
for everyone's benefit, we will be posting a copy of the slides and a script of our comments on our
website for those of you that are interested.
So we will take a break shortly so that we can get ourselves set up for a product demo, but
before we do we thought we might open up the floor to Q&A for Ed and Chris. And if you want to ask
a question, if you can kindly press the green button on your microphones and once you've finished
your question kindly un-press it so that you don't seize up the channel. Thank you.
Q&A
Unidentified Speaker
The comment about win rate going up 33 percent, is that 33 percentage points? So from 55
to 88 or from 55 to one-third above 55, which would be 67 or something like that?
Gerrard Schmid
The former.
Wayne Johnston — Raymond James
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Hi. Yes. Good afternoon. So in the pipeline, unless I missed it, did you give a breakout kind
of where we are today versus where you were a year ago, two years ago? How we should think about
next year?
Okay. So for the first—
Wayne Johnson
Can't hear you.
Chris Zingo
Hello? Okay. There are two parts to that question. One is pipeline relative year over year
and then the other one is outlook, or just confidence in forward-looking pipeline. In terms of the
pipeline year over year, again, going back to 2013, there have been significant growth in terms of the
level of qualified pipeline opportunities in our pipeline, and that's been a consistent trend year over
year.
I think with respect to our current view of the pipeline, while some of the dynamics around
the elongation of the sales process in certain enterprise projects, while that creates a short-term
challenge, it gives us strong visibility into what our future pipeline is. So a very high percentage of our
existing pipeline is in late stage of maturation, many of which are going into contracts as well. So we
feel pretty good.
Wayne Johnson
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I appreciate that, but can we put a little bit—some more numbers there to work kind of like
percentage year-over-year gain? Like where are you today versus the same time a year ago and how
you’re thinking about next year for the pipeline build? Level of certainty of execution? That kind of
the thing.
Chris Zingo
Okay. In terms of pipeline growth year-over-year, on average on the global payment
business, and it's slightly different depending on the nature of the solution, but in aggregate the
average growth of the pipeline has been just under 20 percent and it varies year by year.
If you look at the number of new projects in earlier stage of maturation going into this year,
that number dropped—increased, excuse me, 33 percent on the new project side. With our existing
projects in our existing customer base that pipeline remained in 2016 relatively consistent.
We've got strong visibility in many of those accounts and what their planned spend is in
2017, as we've already begun that journey with many of them. And with respect to new projects, a
very high percentage of them have already passed the proof of concept stage and are going into that
last stage of delivery, which gives us high visibility into what the expectations are.
Gerrard Schmid
Let me build on that as well because Chris’ team certainly is very, very active in terms of
pipelines of activity and conversations. The part that we obviously cannot give you a certainty around,
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Wayne, is when do they convert to contracts because as Chris said, one of the newer phenomena
we're experiencing in 2016 is this elongation of the back-end of the sales cycle.
So while we have a lot of confidence in the maturity of the conversations, the part that adds
some uncertainty to our outlook from a growth perspective is the conversion to contract signing. And
I think that one of the things we want to be a little bit careful of before we provide too much more
colour on the expected growth rates in 2017 is to really get a better appreciation for the sales activity
in Q4 before we'd be willing to put a more definitive perspective on our growth rate in 2017.
That elongation of the sales cycle, do you see that as a temporary phenomenon, just given
the macro conditions? Or do you see this as a longer term sort of this is a change in the way banks
are spending and doing their RFPs?
Chris Zingo
In terms of the elongation of the sales cycle, one of the things I want to stress is that the
additional requirements are not additional requirements. Those are requirements that typically
would have happened historically after the execution of the project.
I think that as the implementation of payment hubs have accelerated around the global
since 2013 essentially, there's been a lot of lessons learnt in terms of best practice of implementation
delivery. Again, this is a dynamic that I think is going to remain in terms of the level of rigour customers
expect in a proof of concept, but again, we think that's a positive dynamic because, a, when we're in
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that stage, we typically win. And b, it gives us much stronger pipeline visibility into future projected
group bookings because of the level of depth of that milestone.
I also like to point out that we also get paid for that work in the sales process, right. So again,
I just think it's a simply reordering of requirements, and I think it's just the deeper education of what
customers have to go through to validate our solution.
Ed Ho
And I would just add that in this current market environment there’s higher scrutiny coming
from all levels of an organization as the teams go for approvals. And they want to ensure that there's
proper coordination and collaboration across the organizations. And at many times proposals are put
together to execute a plan and you could have someone very senior at a bank, such as a CEO say, I
would like to see revenues faster; rework that plan. And that has happened too.
Anthony Gerstein
Sorry, just I can see people over there. So if you want to make sure you get my attention.
Thank you. Traditionally I understand that Europe and Asia has been a big market for
demand for payment hubs. Can you maybe touch of what you're sort of seeing maybe year to date or
the evolution of demand in the US and Canada for payment hubs? Thank you.
Chris Zingo
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So if you look at demand, I think universally in each of the three core regions around the
globe we've seen an increased demand, but we've seen it for different reasons. In Asia Pacific the
focus on payment hub is really around innovation and growth. If you look at Europe, the focus around
payment hub has been really around operational scale.
If you look at the institutions in Europe, they've suffered from high-cost structures and
overhead going back to the SEPA implementation days and the increase in cost structure that they've
seen there.
So in order to continue to scale growth we've seen an investment in automation and
consolidation in their payment structure so that they can create a real-time backbone that enables
innovation, particularly as they prepare for things like PSD2.
In Asia we see strong interest, but the investment in Asia from what we've seen is lagging
the pace of the investment typically in payment hubs as we've seen in EMEA and the United States.
That being said, many of the customers we're talking to in Asia in early stage of pipeline development,
and we expect that to kind of follow the similar trends of Europe—
Gerrard Schmid
Chris, can may just want to clarify because I think you mentioned Asia twice. So I think you
might have mentioned, your first comment might have been applicable to North America, so maybe
you just want to—
Chris Zingo
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I'm sorry. Excuse me, US. EMEA and US. Asia, although the interest is there, the actual
investment in payment hub has been lagging a bit. We expect that they'll follow the same trend as
EMEA and US, but we do see a lag.
Ed Ho
I would say that in the US as well in North America there’s been significant growth in
payment volumes. And the legacy platforms that exist today that are 10, 20, 30 years old are running
into scalability issues and performance issues.
Some of the customers that we are working with may not take advantage of all of the
functionality within the payment hub. For example, they have no interest in the US if you're a
domestic player on SEPA payments. That doesn't make any sense. But when they look at their own
throughput of wire transfers, or ACH volumes on a daily basis and a monthly basis, those are growing
very, very rapidly.
The payment hub itself scales very significantly. It can process upwards of 10 million
transactions per hour, and so we meet the needs of the market very, very easily.
What we are doing is taking that payment hub, which was designed for large-scale
enterprises, and packaging it in such a way to host a solution for our customers, and let them take
advantage of those global best-of-breed capabilities on a more cost-effective basis. So we see that
opportunity in the US.
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I will also say that in Europe, for example, there are banks that are challenged. You read
about their earnings being slashed and stock price reductions. At the same time, I'll give an example
of an institution that announced thousands of job cuts that are also very interested in upgrading their
digital capabilities and are pursuing a payment hub process, but perhaps in the form of a PPaaS. So at
the same time that they're transforming their organization, reducing costs because they have to,
they're at the same time saying I must upgrade my digital platform.
Thanks. Just a quick question on the pipeline; number one, are you also seeing the
elongation due to some of the enterprise deployments potentially moving to an on-premise SaaS
solution? And then the second comment, just from Ed's point of view, are you also seeing any pricing
pressure? You talked about obviously financial institutions looking to cut cost. Thanks.
Chris Zingo
Let me address the pricing pressure. I think in our core markets the payment hubs are a
systematically important IP for the market. The impact of those projects is significant in terms of the
impact to our customers.
Typically we don't see dramatic pricing pressure with respect to commercially how we
deliver our software and what they pay because, again, the impact is so high. It's inconsequential to
focus on price discounting and things like that. So we typically command a relatively strong premium,
right?
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With respect to your second part of your question regarding the time lines, we've seen the
concept of payment platform as a service actually accelerate the time lines of the engagements of
the customers because it's bringing new customers to us quicker than they normally would have come
to us, because the proposition of the solution has commercial dynamics that are very compelling.
Certain elements of that is fixing their cost structure in terms of the cost of processing that
payment, et cetera. So we do see that as an accelerant of earlier-stage opportunities.
Ed Ho
The only—the other thing that I would add is that—and Chris is absolutely right—we haven't
seen pricing pressure on our side, if you will, but what does happen is that since it's a multiyear spend,
what could happen is that they break the project into smaller pieces within any given year so that
they risk manage their spend. So that could happen.
Sorry, just to clarify. My question on the—moving to the on-premise cloud is more targeted
for Tier 1s as potentially they could look an on-premise deployment versus—on-premise SaaS versus
on-premise enterprise, so I just wanted to make that’s—I’m clarifying that.
Chris Zingo
Yes. That's what I was referring to. Mm-hmm.
Yeah.
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Geoffrey Kwan — RBC
I just wanted to clarify, so if I'm understanding from what you're saying today is on the
business that you’ve got in place and contracts you’ve got right now, you have pretty good visibility
around on the revenues and whatnot. For the RFPs that you’ve kind of—kind in the process, I mean
there may be a little bit of a delay, and that may be more temporal in terms of ultimately translating
into revenues. But then in terms of just new RFPs and new clients kind of looking to implement your
solutions, it sounds like there’s still generally very good demand for it, but you’ve also got this dynamic
of banks facing earnings pressures and kind of balancing that. I just wanted to make sure—
Gerrard Schmid
So, Geoff, let me just take that for starters. So if you go back to Chris’ earlier slides, right,
the total number of RFPs that are in the market in 2016 are higher than 2015. We haven’t seen any
evidence of banks cancelling those RFPs.
And when we take a look at the maturity of the conversations of RFPs that haven’t yet
closed, they remain very robust. So we feel very good about where we’re at with regards to those
sales cycles even though they’re elongating.
Chris Zingo
I would just add that when you look at the market as well, while they have those pressures
they’re also being pushed by regulators to continually improve and transform. So the whole PSD2
initiative in Europe, for example, is highly invasive to a bank exposing all your data in a digital form to
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other parties that may take away your business, but they’re required to do that. And their back offices
are not necessarily geared to get that done, for example.
And you look at around the world, and it’s not just now in the US, but it’s going to Hong
Kong—there are several other countries in Asia Pacific that are moving to real-time payments—legacy
systems cannot handle real-time payments processing at all. You need to transform. You need to build
in those capabilities and interact with the new infrastructures that are being placed.
So I think most of those institutions know that they have to transform, and we’re really early
on in this process, but the regulators are actually helping us, if you will.
Can you talk a bit about the demand you’ve seen for PPaaS so far? And whether you think
it’s going to have any impact on revenue growth in the near term?
Chris Zingo
Let me take that one. So I think we’re very early on in the cycle. It remains to be seen if this
is a trend that will become much greater than it is today.
We’re the first vendor to be able to do that. We have partnered with Accenture to get this
done for one major European bank. So we think that it’s a model that first would apply to the largertier institutions that want to share the risk and some of the upside with us.
As we’ve discussed, from our standpoint the benefits, financial benefit for us are much
larger than a standard licence and maintenance model over the term of that contract by multiples,
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but it’s elongated over time. And so sometimes there are no upfront fees that we could recognize
when we deploy, but over time we expect to get that.
For some institutions it’s attractive because they move from a CapEx model to an OpEx. And
that’s predictable and they know exactly what they’re going to spend, so it’s attractive from their
standpoint.
But these are mission-critical systems. Every institution treats these differently. And some
large IT organizations will not want to relinquish control. It’s a very political discussion that’s being
made.
So we’ll have to see. I’m sorry for the long answer, but we’ll have to see where it goes.
Yeah. I have a question just related to you guys’ building strategy for this segment and how
it’s changed when Fundtech was a private company versus now being part of D+H? And kind of what
the major benefits you guys have seen thus far? And what you expect from here?
Ed Ho
That’s—thank you for the question. Sorry. They only allow four of these on at the same time,
so you can get automatically disconnected.
So the answer to your question is that we have a great home in D+H. When we were private
equity owned, as you can tell, there’s limited capital that you can spend. The goals of your own are
very different than if you’re part of a publicly large company like D+H, which has a focus on growth.
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So I’d say that the number one benefit that we’ve received so far is increased investment in
everything that we do. We’ve also been able to take advantage of the larger infrastructure and the
capabilities of this wider organization. We’ve also been able to engage with some of D+H’s customers
and begin that cross-sale process.
So we hope that we will be able to come back to you and show you some of that, but it’s
also caught up in the processes that Chris is in right now.
Just a couple of things; one, I’m curious, it sounds like real-time or some of the other drivers
that are leading to increased demand it seems like it might differ a bit, depending on what region
we’re talking about, but I’m curious about what the strongest driver is, whether it’s from customers
or from competitors or from regulators? I can wait, but I have a second thing.
Ed Ho
So let me try and answer that. Real-time payments can be driven by the industry, or it can
be driven by regulators. It depends on the market that you’re in.
So there are several countries that have real-time payment systems in place, many of which
were driven by regulators, for example. So Singapore; Sweden; the UK; Australia is in the process of
launching in 2017; and the United States will be launching in the second half of 2017 is our
expectation. And so in the United States, for example, it was industry driven, not regulatory
mandated.
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So make that clear, but the Federal Reserve Bank plays a very active role in advising the
industry on what it should look like and the standards. But there are independent vendors who are
building the infrastructure, such as The Clearing House, which is currently involved in automated
clearing house ECH transactions. So they’re putting up an infrastructure and a group of banks that put
up an infrastructure called clearXchange. And so our objective is to work with the banks, our
customers, to allow them to interact with either one of those infrastructures and to send and receive
real-time payments.
We see the adoption rates—and there was a map that we had shown—are increasing at a
faster rate across the world. And in Europe, for example, they’re currently working on a pan-European
faster payment scheme involving several different countries.
Our software can enable, for example, banks to interact and engage in real-time payments
on sending and receiving. And in the case of Sweden, our payments hub is actually driving with the
Swedish clearing house the actual eight banks that are involved in the Swedish real-time payment
scheme. So they’re using our software on the other side, if you will, in driving and managing the entire
payments—real-time payments program.
Mm-hmm.
Ed Ho
So I hope that answers your question. It depends on the market.
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Yeah. Yeah. The other thing I was thinking about is I guess I was a little bit surprised at the
percent of revenue; I think you mentioned 70 percent revenue that is from existing customers. So the
customer the year before they had similar revenue carrying into the next year at 70 percent in
aggregate to 55 percent with that maintenance kind of number thrown out there. I was a little bit
surprised that it wouldn’t be higher than 70 percent.
Chris Zingo
It depends on the year, so if 70 percent happens to be a particular average, but in some
years it could be much higher. Our expectation this year is it will be higher. It was a little higher last
year as well.
Thank you.
Gerrard Schmid
Johnathan (phon), I’ll take maybe one last question from Johnathan; then I’m going to
suggest we do a short break, and we can ask questions obviously in the break. And then we’ll get set
up for the next session.
Sure. I just had a clarifying question. You talked about—
Chris Zingo
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Could you just move the microphone closer?
Sure. So I just had a clarifying question. You talked about total number of RFPs are up and
you’re winning a percentage of those. Just that means that you’ve won them, but contracts haven’t
been signed? And just another question is what impact did the cash management changes that you’ve
made have on the overall business in terms of the revenue growth of year?
Chris Zingo
Do you want to take the RFP question and I’ll take the cash—
Ed Ho
Yes.
Chris Zingo
Yes. On the RFP, that is correct. Some of those contracts we haven’t fully signed. Some of
those contracts we’ve signed, but in a small capacity, i.e., the proof of concept, so we’re actively
engagement, again giving us good visibility in our current pipeline.
With respect to cash, from a sales standpoint one of the things that we did going into this
year is we really wanted to focus our go-to-market strategy in those geographies where we can create
a scalable sales proposition and accelerate the growth of the solution. So we pulled out of certain
markets that were more price-sensitive. And it did have a short-term impact in the bookings number,
simply because we weren’t selling there.
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Ed
On your cash management question, as we have discussed before, we’re currently in the
position of we’re repositioning that particular business. It’s a very good business in the sense of we
have almost 60 customers using our global CASHplus software, and we have other things within cash
management.
The challenge that we run was the business model that was employed was much more
towards a customized model by customer. That’s not in our view a scalable model, and therefore part
of what we are doing is pivoting to what we call a minimum viable product, a core solution that can
be sold multiple times and create scalability, if you will.
And the second piece of what we’re creating is multi-tenancy in a software as a service
environment, to enable other customers to take advantage that don’t have the right budgets that can
take advantage of that software.
The software that we have already out in production around the world works. We have
customers in Africa, for example, that go pan-Africa across 29 or 30 countries, but they’re on a
customized version of software.
And so our new model going forward in both the payments business, as well as in cash, is
we want to have core minimal viable products, and we want to reduce the amount of customizations.
We can increase the amount of parameterization and configurability of the software, but we want to
be able to replicate the sale of a single version of software multiple times.
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I hope that answers your question.
Gerrard Schmid
Great. Well, thank you, everyone. We’re going to take a 10-minute break, and then we’ll
continue with our product presentations. Thank you.
Anthony Gerstein
If we could all take our seats, I think we’ll get moving with the second half.
Well, great. Why don’t we move on now to the second half of the presentation. I’m going to
introduce Rob Coakley, who’s head of our global presales for GTBS. And Rob’s going to give you a
demonstration of a global hub.
Rob Coakley — EVP & Head of Global Payments, Americas, DH Corporation
Thanks, Anthony. Good afternoon, everyone. Over the past 26 years, I’ve provided financial
institutions and corporations, including 21 years as members of D+H and Fundtech. Over my career
and through the roles I’ve held I’ve had the opportunity to work closely with clients to understand
their business plans and needs, and be part of a team creating effective solutions.
In my current role as head of global presales, I’m responsible for the efforts of functional
and technical subject matter experts.
You may wonder why we use the term presales. It’s because my team defines and executes
the events leading up to onboarding new clients. Together, we support solution sales to banks,
financial institutions, and corporations.
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D+H defines a payment hub as a single modern new standards-based platform capable of
supporting any customer over any channel with any format using any instrument and any transaction
type across modern standards and schemes. Since a payment hub is deployed within a client’s existing
banking ecosystem there are numerous value-added business cases that I could talk about today.
For today’s discussion, I will focus on just two areas for demonstration purposes. The first
shows how our product can be used by banks to monetize the consolidated customer and transaction
data that is captured in the payment hub. The second is enabling a bank to execute its digital strategy
by providing its merchant customers access to payment and accounts services, thus streamlining the
payment process for that merchant.
I will preface these demonstrations by saying that our solutions do much more than what
I’m presenting, but these examples will give you a good understanding of why our products are
unique, in demand, and considered best-in-class.
If we think about the concept of a payment hub within a bank, it means that naturally it is a
centre of something. In this case, it is the centre of all payment transactions that are originating from
or destined to the bank. In other words, all bank payment activity for all of its customers end up in
one repository: the payment hub.
This can quite simply be viewed as a record of transactions that have occurred over a period
of time, or more powerfully, a repository of customer behaviour over a period of time. With the latter
we begin to see the potential value of this repository; that is, the bank’s ability to mine this data for
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customer patterns, determining how each customer consumes the products and services of the bank,
and positioning the bank to create new and derivative services to offer these customers.
Many times banks can mine the data and then run consumer campaigns to test their new
offerings. With this data in hand, our clients are positioned to alter existing products and services, or
to create new or derivative products and services in order to increase market share, and of course, to
enhance their bottom line.
To demonstrate the power of this central repository of data, I’d like to show you an example
of an interactive dashboard that is connected to a payment hub.
Okay. I’m going to show you an example of an interactive dashboard that’s connected to a
payment services hub. So what you see here is a dashboard that shows me a heat map of all my
payment activity by city that could be further segmented by segment, by sector, and by instrument.
So why is this important?
If I take the role of a product manager within a bank, it’s important for me to understand
how my consumers are using my payment hub. And in this view, I can see all of my payment activity
by city.
If I drill down and I look at my segments, segments being type of payment, like person-toperson, or person-to-business, or consumer-to-business, I can get a more granular view of my data.
For example, under B to C I can see that I’ve paid for salaries, I’ve paid for other, and I’ve paid for rent.
Under C to C, I’ve got payments for entertainment, for rent, for food, and other. Okay?
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I can also sort this list by instrument, instrument being, for example, channel. I can tell how
many branches have originated payments in which city; how many cheques have been originated in
which city; how many Internet banking payments have originated in which city? The power of this
data at the hands of a product manager within a bank is useful because what is their role? Their role
is to understand how to introduce new products and services for their customers. Okay?
Without a payment services hub, this data typically exists in several legacy systems with
several legacy formats. And it’s not cost-effective, nor easy to get, so they cannot make these realtime decisions about products and services based on doing this type of mining or analytics.
Another view that we could have in a dashboard is by customer. If the treasurer of a bank,
for example, is interested to know the activity of their most important customer, this type of tool
could create a heat map based on customer that could give that treasurer the very same interactive
real-time information. Again, the tool is pointed to an active data repository payment hub; all the
data is consolidated into one place. So that’s the heat map.
Another view I’d like to show you is a time line. So with a time line, I can do some historical
analysis of my data within my payment hub. In this example I’m showing you historical data from
2012 through 2016, and in this specific case I show you the instruments by city from 2012 through
2016.
I can do manual analysis of this data to see what type of activity has occurred each year, or
I can just do some playback and I can look at how the volume of my data has changed year over year.
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Again, for a product manager this is very important because they are seeing the customer patterns
within a repository within a payment hub that they wouldn’t otherwise see if the payment hub within
a bank did not exist. It’s a very powerful tool to be able to mine the data in near real-time.
With that, I will switch to my second example, which is a personal online purchase with an
immediate payment from a bank account. Before I show you a demo of actually purchasing a phone
over online commerce, I want to actually explain to you what’s going on behind the scenes.
For this year’s case the actors are John (phon), which I will play John who is the consumer;
there’s a merchant, which we call Big Z; there’s John’s bank; and then there’s the merchant’s bank.
So John wants to purchase a phone. So he’ll browse his online store, he’ll pick out his phone, or his
electronics, whatever he chooses.
The merchant will then ask John for his payment details. Now today this is typically a credit
card or PayPal. In the open API world or in the banking in the box world that’s going to be potentially
John’s bank account. So the merchant now has access directly to John’s account information through
John’s bank to be able to validate the account is correct, and the balance he has enough funds to
make the purchase.
So John will select which bank account number that he chooses; give that information to
the merchant; the merchant will then because of open APIs will then talk directly to John’s bank
through their computer systems; validate the account; validate that John has enough funds in his
account; and actually request payment.
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Whereas today the merchant will have to ask his or her bank to ask John’s bank to make the
payment, this process becomes more efficient because John’s bank—or John’s merchant, Big Z, can
ask for that payment directly. Once that occurs, John’s bank transfers the money to the merchant’s
bank. Under an immediate payment scheme or a faster payment scheme that money is made
immediately available to the merchant, and that merchant can then ship John’s merchandise.
Those are the actors involved in the next use case, and I’ll show you a demo. But what I
wanted to say was, our solutions, Global PAYplus, our payment services hub, is involved in every step
or every sequence of this use case from connecting to the merchant to connecting to John to
connecting to John’s bank and connecting to the merchant’s bank. It orchestrates and manages every
interaction in this use case.
So what I’d like to show you now is I’m playing the role of John and I’m going to—one
second, somebody told me we were in Trump’s Hotel; I hope the Russians aren’t messing with my
signal. There we go.
So I will take my Android phone. And the time when you want the signal to work—
Gerrard Schmid
So, Rob, why don’t you do it afterwards?
Rob Coakley
That’s what I’ll do. I can show you the online purchase that John makes, which is the use
case which I’ve just shown you. Okay.
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So what’s in the box? Slide 12? Okay. Our solutions provide the necessary orchestration to
process any payment instructions from any channel through user-controlled workflows interoperating with the banking’s existing ecosystem and clearing and settling via the selected market
infrastructure.
So our payments services hub in addition to providing channel connectivity connects our
merchants to our channels, it connects to our banking infrastructure, and provides services such as
validation; routing; foreign exchange calculations; authorization; notification; et cetera. Basically it
orchestrates the entire payment flow from merchant through clearing and settlement.
Thank you. And with that, I’d like to introduce Moti to talk about our products.
Moti Porath — Head, Product Management, Global Payments, DH Corporation
Good afternoon, everyone. Can you hear me? My name is Moti Porath. I’ve been with
Fundtech and now D+H for the last 19 years. I manage various developments, presales, and I currently
head product management for GTBS. I’m a rather long 34-years professional career.
I’ve been responsible for the teams that designed, managed, and launched many of our
solutions over time, including our payment hub, Continuous Link Settlement products, and immediate
payments clearing hub used in Sweden, as you heard earlier, one of the most successful immediate
payment initiatives in terms of functionality, ubiquity, and market uptake.
During my presentations, I will focus on providing you will an overview of market position,
our product strategy, mostly for payment hub, but touching also on cash management and messaging.
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Our product management focus is to prioritize, execute, and deliver the market the best,
most competitive, and most technologically advanced payment products. We maintain our payment
domain leadership by working with customers, regulatory and industry bodies, partners, and industry
analysts to ensure that we can hold our leadership position with payment and cash management
solutions for both global and regional need.
For example, we are engaged in understanding and creating solutions for European
immediate payments, Hong Kong immediate payment, and same-day ACH solutions that ensure
timely and comprehensive end-to-end competitive product capabilities.
We strive to sustain and extend these leadership positions with a 12- to 24-month execution
approach and three-to five-year market and technology visibility. In other words: supporting shortterm and long-term market requirements, evolving technology, and maintaining and extending our
business and technology superiorities.
Examples include enhancing our product to support platform deployment dynamics, such
as enterprise in-house or host SaaS solutions, blockchain distributed ledgers, and open API to facilitate
growth and extend market openness and participation.
We recently switched to Agile Delivery to increase productivity, time to market, and quality
of our product delivery. We constantly strive to create synergy and economics of scope between our
products. For example, we extend US immediate payment solution to cash management users and
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apply open API technology that will enable third-party solution providers to participate in the market
in an efficient and secure way.
So of course, an interesting question is why we win. And we win because our product
leadership and our customer franchise, as you can see on this slide, we highlight what we see; what
our competitive advantage that have led to many of our successes.
So the first is brand reputation based on over 20 years of successful delivery. The depth and
breadth of our product functionality and deployment and delivery options have also led us to
successes in the market.
Our architecture that is based on services architecture and efficient integration—and I want
to make a comment here. Payments, somebody described to me payment integration is like open
heart while you run marathon. And being able to do it you need very, very skillful surgeons. And we
are very skillful surgeons in this exercise.
And our ability to basically integrate the new payment infrastructure, the payment
transformation with the core of the bank business requires extensive and complex integration. And
the tools that we provide and unsurpassed experience have been critical to many successful complex
integration.
We have referenceable blue-chip client base. And because of our product reliability, the
stability, scale of performance, we have reached out of the box functionality, and yet this functionality
is highly considerable and customizable. So they can configure the system to meet their own
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operational needs, and thus each bank, although using the same software, can actually create its own
competitive edge and install operational model.
Here are some customer perspectives on why D+H wins as shared with us by a large
European bank, large non-bank financial institutions, and that’s important to emphasize that our
solutions also fit not only banks, but also large non-banking financial institutions, and a large African
bank.
And then you can see that many of them emphasize our faster deployment capabilities; our
ability to scale our solution from as little as a few thousand transactions a day to millions of
transactions an hour; the confidence in our ability to deliver; and the impressive knowledge of our
team that is proven by a very successful proof of concept, both functional and nonfunctional.
The non-bank FI talked about, again, about faster deployment and out of the box solution,
successful proof of concept, and very deep industry expertise that led to referenceable customers
and also meeting our commitments.
If you go overseas to our African enterprise, again, we were able to prove to them that we
know much more than the core mechanics of payments, but we understand it very well in the context
of wholesale banking; the ability to demonstrate and have a track record of delivering successful
projects; being able to add value to the bank evaluation process by inserting our own experience in
the market; and the confidence that D+H is able to deliver what we promise. And we believe that all
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of these are really the things that make us—have made us so successful in the market over the last
20 years.
So payment hub really, as we see it, is something that includes all-in-one, as we said, a
proven global reach. We have currently—we can currently support about 70-plus country clearing
around the world in a mission-critical, high availability, and scalable and resilient solution, but we can
also deploy and deliver in a modular way.
So we can allow the banks to gradually migrate into this in their journey to payment
transformation. And as I mentioned earlier, very strong integration capabilities that come right off
the box. And very important to the banks, of course, is very quick time to market with a very highly
profitable system.
So moving to the next slide, you can actually see that—you can switch the next slide, if you
would like to—that a single-purpose payment system really creates a complexity. And the complexity
stems from really high maintenance costs because you need to maintain multiple systems;
inconsistent user experience; difficulty in adjusting to regulations; and lack of visibility on liquidity,
which is one of the most important capabilities that every treasurer in the bank requires.
Our model is really highly competitive to win. We can deploy one solution that can span all
payment products within a bank with great deployment agility, either its geographic payment
scheme, special flows that are needed, or interoperability. Once in the bank our system it’s core with
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a 10- to 20-years’ lifespan. Because it’s so deeply integrated, the lifespan usually of these solutions
has been very, very long.
I want to give you one example that has already been described several times, but how we
really take our solution, integrate it with IT capabilities and also with data centre capabilities, and
create what we call a payment platform as a service. It’s an example of responding to market
dynamics and delivering the full SaaS-deployed payment solution. This solution is attractive to banks
that wish to outsource all components of their payments: IT services, payment application engine,
and their data centre operation.
We enrich the payment hub deployment options and enable operational, namely
nonfunctional capabilities, integrated with an IT service layer and complete data centre solution, and
offer an alternative way for the bank to operate their payment.
We see interest in this, as you heard earlier, in super-regional banks across EMEA as a means
for reducing capital expense and increase competitiveness with both local banks, as well as large
money centres.
So overall, what you see is that we combined operational efficiency, business acumen, and
regulatory and operational compliance on one payment platform. This way we help really the banks
to manage total cost of ownership with very high straight-through processing of their payments
because by being able to streamline their transaction processing they can maximize customer
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retention, stickiness, and agility, and then they can accelerate the rollout of new payment product
services to the market by deploying it either as an enterprise, cloud, or a SaaS solution.
Let’s move from here to other products that we have. We’ve been working to completely
revamp our offering in cash management, in order to meet increased competitive pressures by
supporting both traditional banking transactions to the bank corporate clients together with
unsurpassed richness and time liness of information and analytical tools. It will better help the
corporate treasurer manage with his or her bank relationship with full control over working capital
and cash.
And that’s really the purpose. And this is our mission in how we revamp our cash
management solution. Our strategy is to provide strong data visibility and control combined with
advanced data analytics. We support a variety of operational and management services, and deliver
tools to tightly and seamlessly integrate between the bank and the corporate ERP.
Our cash management strategies are delivering superb customer experience through
mobility and other means. And one of the really enhancements that we’re doing is improve the
mobility, which becoming more and more the key and the core of the way corporations use their cash
management.
Our solution set provides a span of products to support all corporate cash management
needs under one roof, and help banks in their sales marketing while building strong long-term
innovation and technology enabling.
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Just to show you one thing, this is one of the new capabilities that we added, which is a
tablet banking dashboard in our cash management where a corporate treasurer can get all the
information that he needs to run his business: balance information; alerts; announcements; being
able to approve wire transfer; ACH payment; wire template to positive pay; and receive automated
report. All of it in his hand using his tablet computer.
As we progress we continue to advance and enhance and improve our products. We are
intensely focused on innovation. I will share with you three major initiatives with high future
importance and potential impact that are already highly engaged with our customers.
Those are the three that I will focus on will be blockchain and distributed ledgers, immediate
payments that you heard a lot about—I'll give you basically more product perspective—and open
APIs.
I want to focus for a few minutes on really the forces that drive innovation in our business.
And really these forces are interconnected. So margin pressures come, of course, from competition,
but also from regulators. For example, if a regulator imposes an interchange cap, as it happened in
Europe, then you need to basically provide a competitive solution to meet those pressures.
Competition is organic, but also fosters by regulation.
Payment Services Directive 1, which is the one that was issued a few years ago years ago, it
basically it is easier to form a PSP, or a light bank, and PSD2 formalizes the space between the bank
and its customer.
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As competitive, ISO 20022 is both industry and regulatory response to emerging need in the
market. It provides a platform for innovation because you get more data; more timely data; data is
more granular; and also you receive additional remittance information that can lead to new solutions
and improve offering, and of course, for better analytics of data.
Let me start with blockchain. Again, blockchain is a complex and broad issue. Just to
highlight two points, in every analysis that you see blockchain applies to mostly to finance, 77 percent
of the application in the finance area. And every analysis will tell you that the top application is
payments.
So we have basically successfully integrated blockchain, as evidenced with our POC with
Rabobank. And our payment hub technology and functionality, the market presence and deep insights
into the industry, really position us well into the distributed ledger technology space, as evidenced by
the high interest by banks to utilize our distributed ledger technology blockchain payment hub as part
of their blockchain strategies.
And the reason is because we developed a unique approach that is driven from our product
from the payment hub, creating closed user group of payment communities; creating a very efficient
and sophisticated clearing and settlement mechanism that is immediate and safe; and also provide
efficiency into the market, both in creating a network that there is no single point of failure, provides
immediately settlement, and creating a trusted liable party to hold liquidity.
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All of these are extremely important elements of a successful DLT solution, and we have
proven with our POCs that we can actually accomplish it.
Looking at immediate payments, we already know that immediate payments are poised to
transform banking. And if you look at our presence in the market and the solutions that we have
already in production, in Singapore we have four banks. Barclays, who clears 25 percent of faster
payments, which is the equivalent of immediate payments in the UK, top 10 US bank, all of them use
basically our technology for immediate payments.
And immediate payments are going to transform the industry and the way we actually pay
and handle payment because immediate payment is almost as close as equivalent to cash.
So to move forward, our technology supports millions of faster payments throughout
Europe. And we do all type of transactions: person-to-person transactions, customer-to-business, et
cetera, et cetera.
As I said earlier, 25 percent of Faster Payment in the UK. We power Sweden’s award-winning
real-time payment system, Swish, that won the Celent Model Bank Award for payments in 2015.
We support major banks in Singapore on the fast payment system. And we also are very
engaged in various industry initiatives: the Fed Faster Payment Task Force; Canada Payment
Association; The Clearing House in the US; NACHA; ISO 20022 bodies; and EBA for the pan-European.
And we’re actively involved with industry consultants around faster payments initiatives globally in
order to basically keep ourselves ahead of the competition.
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There’s an interesting phenomena of what’s going to happen with immediate payments,
and we believe there are two things. The first one, there will be explosive growth and shift in volume
of customer usage and patterns.
Just to remind you that in most places in the world today electronic payments on a real
settlement are limited to the open—the open—the hours that the clearing is open, so it’s either sameday only daytime, or if you have to do it overnight. Immediate payment will be available 24 by 7. We
are ready for the challenge. We have excellent design for meeting this challenge, including five-nines
availability, which means the system never goes down, and 24 by 7 365.
The other things that we notice is that immediate payments will probably will have very
little impact, if at all, on other payment rails. So we still expect ACH payments and high-value
payments to grow as they used to grow in the past. So we’ll still have to see—need to support all the
multiple rails that are out there, plus immediate payments.
Moving forward, I want to really focus on open APIs and really talk about why is it important
and why it matters. Sometimes people make statements like open APIs are going to de-intermediate
the bank. It’s absolutely not correct.
Open APIs are going to empower the banks because they will basically bring more and more
participants into the banks network. And that’s our role, to provide the solution will increase
accordingly.
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We see it already in some of the banks that we work with. And they need—the tendency to
really participate in faster payments and can transfer payments immediately with certainty, and they
can actually have third-party participants really be part of the scheme.
Where do—let me—I think—can you move it forward because that doesn’t work? No, back,
back, yes.
So where does D+H play in the open API arena? We will be basically the enablers for the
banks to connect to third-party providers by providing them transformation services and all the access
to the applications within the bank and between the banks and these third parties for both account
information, payment initiation, payment processing, and clearing. We will continue to stay at the
centre of this enterprise.
So in conclusion, what we have really are robust, scalable, and proven solutions with deep
domain expertise in payments globally, and we remain active in future proofing of our solutions.
Kellie Bickenbach — Chief Risk Officer, DH Corporation
Thank you for the opportunity to speak with you today. Hopefully this works, and I will be
advancing my own slides.
So let me just start with saying that as investors you know that managing risk well is
paramount to success, and that is no different in the market as it is within D+H.
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I joined D+H December of last year as part of the executive management team to bring
together what were previously distributed functions, such as business continuity, information
security, and regulatory services into global risk management.
We did this to drive company-wide consistency from the strong foundation established to
managing our risk within our tolerances. Bringing these risk management functions together allows
us to take advantage of synergies, and also scale more effectively.
Prior to joining D+H, I held the chief risk officer role at US Bancorp where I was the chief risk
officer for the tech and ops division. I had responsibility for risk management and regulatory
compliance spanning software development; payments processing; information security; business
continuity; disaster recovery, among others.
Prior to US Bancorp I was with Bank of America for 12 years where I held senior positions
from leading businesses and operations to driving operational risk management improvements in
compliance with Basel II and Basal III and resolving other regulatory matters.
I’ve also served as a member of the Bank of America National Trust Delaware board of
directors and on the enterprise risk committee for The Clearing House.
So why did I leave banking to join FinTech? From my perspective, it is clear that banks are
struggling with the complexity and expense of technology divisions and developing strategies and
capabilities. Banks around the world are absorbed with regulatory compliance and competitive
disadvantage due to the drain this puts on their resources.
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The D+H GTBS business is and continues to be well-positioned to serve the global banking
market and payments needs of merchants and companies in a way that is win-win.
So why invest in risk management you may be asking yourselves? Why is risk management
important at all to keeping our payments business competitive?
First and foremost, our approach to risk management supports the strategic growth
objectives for our payments business and helps to ensure we protect the interests of our key
stakeholders, our clients, our shareholders, and our employees.
Strong risk management protects our brand. Our interests are aligned. And we don’t like
surprises, and we don’t want to read about D+H in the new the way we have seen SWIFT this year.
This requires offence and defence strategies within and for our payments business by
focusing on key areas with the greatest potential to serve our primary risk management objective:
grow the Company; return shareholder value; be an admired FinTech by clients and employees; and
do so safely and soundly.
To do this, what are we focusing on in risk management? A fundamental tenant of payments
processing is low to no tolerance for business disruption of any kind from any source. To meet this
broad and complex expectation, our foundation serves us through effective business continuity
planning, integrating payments regulatory compliance into our products, and evaluating on a riskbased approach our reliance on third parties.
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And because payments are the lifeblood of an economy, areas like protecting data and
cybersecurity are table stakes in managing risk. As D+H has grown over the past few years, we
continue to evolve these capabilities to scale globally and deepen certain capabilities in parallel.
When we look at our GTBS business through the lens of the global payments risk landscape,
today we focus on key areas: operational risk, including cybersecurity; privacy; regulatory; and
strategic risks. We’ve taken an objective approach by establishing our risk appetite and tolerances for
each category. This institutes further the already established discipline of monitoring, tracking,
reporting, and addressing issues.
I’d like to focus for a moment on operational risk and why this is important to us in delivering
value to our payment clients and shareholders.
Operational risk broadly defined is the risk of loss resulting from inadequate or failed people,
systems, or from external events. So thinking of it in the context of our payments business, we see it
this way.
First, we must use software development process and controls which result in code with
defects delivered on time, and meets the market’s regulatory compliance needs. This year we moved
our software development to employ Agile and brought in an experienced leader from SAP to further
evolve our practices in this area. Deploying Agile is an important approach to evolve our practices of
software development to accelerate our speed to market, as well as drive up the quality of our
software solutions.
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Hence, our risk management approaches are attuned to the needs of the market. It’s
actually very simple. What are the current processes? What are the risks associated? And what
controls do we have in place to inform us if we are not meeting our expectations? And then rapidly
responding to these indictors.
Next, our clients depends on our support globally. They want certainty that our systems will
not go down. Therefore, we must have end-to-end business continuity of our processes and seamless
disaster recovery. With the integration of GTBS, we have expanded the D+H brand globally, and it’s
critical to us to ensure we are running 24 by 7 365.
As payments are systemically important to the banking system, we play a key role in
ensuring the continuous flow of payments globally. We made investments to expand our business
continuity plans to include end-to-end processes company-wide, as well as investments in our global
data centre strategy, which ultimately improves our operational stability and disaster recovery
capability. As you know, in the payments world there is no tolerance for latency or outages.
And cybersecurity, what conversation on operational risk would be complete without
cybersecurity? We must build and deliver products which are without vulnerabilities, and ensure that
our infrastructure and environments can withstand the ever-evolving threat vectors, given the highvalue and high-volume nature of the payments business.
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To do this our global information security team partners closely throughout the design and
development phases with our product team. This year we made significant strides in further our
practices of cybersecurity risk management.
We built a highly capable team by bringing seasoned veterans from the industry in. Their
focus is to ensure we get it right by keeping us in line with international ISO standards and driving
continuous improvements globally. We also formed a company-wide cybersecurity team to stay well
ahead of threats with effective use of threat intelligence.
To complement the global information security functions, we built out regionally focused
information security capability to ensure our company-wide information security program is
embedded locally, tangibly as it pertains to our tools and processes for managing information security
risk, and culturally adopted as well. Practically speaking, we have invested extensively in the detection
and prevention tools resources to safeguard our information assets, including our intellectual
property.
Payments are also impacted by evolving privacy laws globally that continue to evolve. Banks
and software providers like D+H are facing more stringent requirements when handling personally
identifiable information, with material sanctions for those failing to comply.
For D+H in the global payments landscape, protecting personally identifiable information is
core to our payments business, given that our customers entrust highly sensitive data to us.
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Compliance with privacy law is our responsibility, and we are focusing now to meet the 2017
requirements in the EU.
We are actively engaged in the global conversations of topics such as privacy shield and
general data protection regulation. The regulations stand to ensure additional safeguards for data
transfers from the EU to the US.
As many of our GTBS clients are global banks that support payments across and within both
jurisdictions, this is an important area where we evaluate our processes and systems to ensure the
utmost protection of the data we are entrusted with.
D+H as a key technology services partner in the payments space is committed to making the
required investments to ensure the services we offer our customers meet global regulatory
requirements.
Hopefully these examples make it clear that while payments is a dynamic and growing
opportunity, it is one where one needs the requisite risk skills to navigate an increasingly complex
global operating environment.
Technology service providers to the financial services sector are experiencing heightened
levels of regulatory oversight, either directly or through their banking sectors clients’ regulatory
compliance requirements. As you know, legacy Fundtech Corporation has a consent order from
December 2013.
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For all intents and purposes, the circumstances from which the consent order arose no
longer exist. We focused the Company’s management, resources, and engaged third-party experts to
ensure our full compliance with the requirements of the agreement. We continue to work with our
regulators in resolving the matter, and made meaningful strides in this regard in 2016. We’re pleased
with our progress.
More broadly, regulatory compliance is not something we take lightly. This year we hired a
head of global operational and compliance risk management, who most recently led a compliance
function for Bank of America to meet the bank’s regulatory requirements. Our goal is to always
understand current and emerging regulations, and ensure we are well-positioned to demonstrate
compliance without issue for our operations and our products.
Strategic risk, the areas to evaluate, monitor, track, and report on to ensure we are heading
in the right direction. Risk professionals, some at least, like to use lots of frameworks and models;
heavy quantitative analytics when we start talking about capital reserves for losses and so on.
However, fundamentally, risk management truly starts with the strategy: what is the strategy we are
striving to achieve?
I work closely with the executive team, as well as the leaders of the business and technology
operations to ensure we are monitoring the key dimensions of our strategic risk. As I shared earlier,
we have a defined risk appetite, and this includes defined key indicators as it pertains to our strategic
risk, such as competitive risk.
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We believe we are getting the balance right in how risk management supports the payments
business, and that smaller FinTechs who don’t have the wherewithal to address the risk landscape
will not be competitive.
Hopefully this gives you appreciation for how our investments in risk management impact
our ability for long-term growth and to remain competitive.
Thank you, again, for your time.
Gerrard Schmid
So before I open the floor to questions, I think I’ll just wrap up with one or two closing
remarks.
We’ve taken a deep dive today into our global payments business, and you’ve met a number
of the people that are responsible for these activities. You’ve heard about our sales activities, our
products, our risk management activities in support of our payments business, which really enhances
and protects our reputation as a global payments leader.
I think what I’d probably leave you with are some top of mind thoughts as I think about this
business.
First off, we have a unique, proven, and effective payment product set that is really trusted
by a growing number of the world’s largest financial institutions.
Secondly, we’re at the very forefront of the most important trends in payments, and that by
positioning ourselves accordingly that positions us for long-term growth.
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Thirdly, we’re executing on a very well-defined product set that captures the long-term
growth opportunities in front of us.
And fourthly, we are right at the forefront of this ongoing trend for banks to have to
modernize their payments infrastructure. And we’re doing so in a very risk-based managed approach,
which I think sets us up to be one of the stable providers of this business going forward.
So with that, let me wrap up. And we’d be more than happy to take your broader questions.
Thank you.
Q&A
Geoffrey Kwan
I just have a question for Kellie. When you were talking about cybersecurity, I just wanted
to better understand how you guys are approaching it. You mentioned you brought in—you’ve
brought some people in from the industry. Is this something that it’s—the evolving cybersecurity
threats can get pretty complex.
Kellie Bickenbach
Mm-hmm.
Geoffrey Kwan
Is it something that you guys are able to do in-house? Or how much do you kind of work
with third parties to try and stay ahead of everything?
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Kellie Bickenbach
We have a blended approach or a hybrid approach where we have core capabilities inhouse, but we also do partner with cybersecurity third-party experts at times.
Gerrard Schmid
So if you think about that, Geoff, there are certain scale-based providers in the cybersecurity
industry, for example, partners that would support us if we came under a DDoS attack. Those scalebased providers are naturally partners of us for some of those large-scale attacks. But we also have
expertise that’s unique to our own space too. So we have to use both.
Thanks. Can you just—shifting gears—can you guys give us just an update on the covenant
issue since the quarter and your conversations with your lenders and how we should be thinking
about that? And then also just on the dividend as well?
Gerrard Schmid
Sure. So, Karen, why don’t you comment on the covenant—
Karen Weaver — Chief Financial Officer, DH Corporation
Yeah.
Gerrard Schmid
—and I’ll cover the dividend question.
Karen Weaver
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So I would call our discussions with the lenders which have occurred mostly—sorry. Our
discussions with the lenders have mostly occurred since quarter-end. We did have a discussion with
our one lead lend prior to earnings release to let them know that we were going to come to talk to
them with regard to the extension of our term facilities, and at the same time we would also look at
the covenant pattern.
So subsequent to the quarter-end, we’ve now expanded those discussions to the entire
lender base, which is both the full banking syndicate and with the private noteholders. We’ve actually
now decoupled the term extension for the banks from the covenant pattern and are focused on the
covenant pattern deferral.
So we had a normal stepdown that was planned for December 31st down from 3.5 net debt
to EBITDA down to 3.25. And then there was a further stepdown in June, so we are now going to ask
for a deferral in the stepdowns.
And really our primary issue is a couple of matters. We want to always be able to operate
with a certain amount of what I call headroom for quarterly changes. Also we have an FX environment
that’s getting increasingly, I would say, variable. And the FX serves to influence our period-end
balance sheet differently than it affects our trailing 12-month EBITDA that’s used in the calculation.
So it’s a little bit of a technical issue, but it has to be part of the dialogue as well.
And so we have a very positive tone. We have great relationships with all of our lenders.
They’ve been with us quite frankly longer than I’ve been with the Company. I’m not going to tell you
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anything that we’re asking because I don’t want to negotiate in public. We will announce to the
market because of the deep interest in this topic as soon as it is done.
And I just want to let you know that from a company perspective, our number one objective
is to de-lever the Company. And that has not changed. So we're very focused on that.
Did I miss anything?
Gerrard Schmid
So any sense of the timing for the resolution?
Karen Weaver
Well, assuming that all goes as planned on the current timetable, which has been discussed
with all the lenders, we should have an announcement within a few weeks. And if we don't—and it
could be sooner than that—and if we don't it would be surprising to me, but I consider this to be fairly
straight forward.
I don’t know if I could just follow up. I mean has the conversation—is it different just than
what it would have been had you had it a month ago, just given the results of the quarter? Has the
conversation with the lenders changed in any way?
Karen Weaver
No, I would say it's not changed at all. The lenders don't want to have a difficult relationship
with a company. They actually want to be your partner in your success. And I see no change here.
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Gerrard Schmid
So let me talk about the dividend. I mean clearly it's become a very heightened focal point,
especially after events of the past week. I think I'll give a very cursory comment here for all the obvious
reasons.
Clearly the dividend policy is the purview of the full Board, so I don't want to get ahead of
myself in that topic, other than to say the Board and management has continued to have a very active
dialogue around the right capital structure that's appropriate for the long-term needs of the
Corporation, and we’ll continue to have that topic top of mind in our discussions with the Board.
Trevor?
Trevor Johnson — National Bank Financial Group
Thank you. So since the quarter last week there's been a lot more kind of discussion amongst
stakeholders with respect to the sum of the parts valuation for DH, and just kind of the two
mechanisms being the domestic portfolio and then obviously the FinTech. Can you just talk about
maybe the willingness or the potential for some transaction to try to crystalize some value on the
domestic side?
Gerrard Schmid
Yeah. So, Trevor, I don't think it would be appropriate for us to publicly ever discuss any
specific transactions of any nature. I don't think that's helpful to any company, and it's not general
practice with others. Yeah. I think I would just say to you as long as I've been with the Company the
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Board has always maintained a very, very active dialogue at assessing the overall portfolio and what
do we need to do to continue to crystallize shareholder value.
So that's a normal course dialogue that has and will continue. But I don't think it's
appropriate for us to comment about any specific transactions at this point in time.
I'm sorry. I just wanted, Karen, if you could just kind of clarify the time line there. If I was
understanding you right you were saying post the quarter-end, so that's September 30th you started
talking with the lead lender.
Karen Weaver
No, no, no.
I just wasn't sure when you were talking about—
Karen Weaver
Post the quarter-end release
Oh, the quarter-end release. So that was when—
Gerrard Schmid
So just to be clear—
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Yeah.
Gerrard Schmid
—we've had a preliminary discussion with our primary lender before the quarter-end.
Okay.
Gerrard Schmid
Subsequent to the quarter-end—
So before the quarter-end, not the quarter-end release.
Karen Weaver
No.
Gerrard Schmid
That's right.
So before September 30th you were talking—
Gerrard Schmid
It was before September 30th. That's right.
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Got it. Okay. And then everything in terms of bringing in the rest of the syndicate was after
the release.
Karen Weaver
Correct.
And before the quarter-end was that in relation to terming it out? Or terming it out plus the
covenants?
Karen Weaver
Correct.
On both?
Karen Weaver
Terming it out.
Yeah.
Karen Weaver
And the covenant stepdown also came up in that context.
Okay. And then—got it. Good.
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Gerrard Schmid
I can see you, Graham.
Graham Ryding — TD Securities
Yeah. You'll just have to hear me. I can't see you. You're obviously investing in the risk
management side of the business. It looks like you've built out the team pretty extensively. Can you
just give us a little bit of colour of where you feel you're at today from sort of an expense run rate on
the risk management side of your business? Should we expect a certain amount of growth to
continue? Or should it taper off as we sort of move into 2017? Thank you.
Gerrard Schmid
So why don't I lead off, and then I'm sure Kellie will have her own comments. So you're
absolutely right that there's been a fair amount of risk management expense buildup in our P&L in
2016. From my vantage point, I don't anticipate incremental material growth going forward.
I think what we will see in the 2017 P&L is obviously the annualization effect of the
investments to date. But I don't anticipate anything material going forward.
Kellie, you want to add anything to that?
Kellie Bickenbach
Gerrard, I support that. We've had nonrecurring and recurring, but moderating going
forward.
Gerrard Schmid
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So there's roughly 7 million to US $8 million of nonrecurring risk expense that we incurred
in 2016 that we don't anticipate going forward. Obviously the big unknown is any material step up or
change in the regulatory environment that may cause us to have to react, but based on what we see
today and based on the landscape, and Kellie and team maintain a very, very close dialogue with the
regulators, we don’t anticipate a change, subject to any changes in the regulatory environment.
Anthony Gerstein
I’ll go to the second row first.
Related question on GTBS. The expense base has also been growing. Is that something that
we should expect? Is that onetime in nature? Or should this be the new—if we dollar adjust that—
should that be the new steady state?
Gerrard Schmid
So there’s a few things that are flowing through the expense base, right? We’ve talked
already about the nonrecurring expense items related to risk management. There is a heightened
level of recurring risk expense that will sustain itself, but it will be at these sorts of levels.
The other area that we are investing in, and I think Ed and the team talked quite extensively
at that, are the higher level of product development expenses that we’re incurring in particular
because we think there are some particularly interesting net new product launches that are coming
down the pike that position us more effectively for markets like the US.
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And then the fourth driver of the expense base would be the ongoing repositioning of our
cash management business. So when I look at all of that on a go-forward basis, we would start to
anticipate our cash management expenses, as well as our product development expense to start to
taper off in the second half of 2017.
Quick follow-up; on lending and integrated core, I believe the non-personnel direct
expenses have also been rising. Is that repeating? Or is that onetime in nature?
Karen Weaver
Yes. They’re actually related to revenue growth activities, so there’s a direct correlation to
the growth in lending in Canada and into the integrated core card payments in integrated core.
So maybe I can just add, there also is in integrated core into direct operating expenses.
There’s also some onetime nonrecurring, but on the smaller side of a couple of million dollars that
relate to just continuing efficiencies and outsourcing activities that we have. And that will lead to
slightly expanded margins in the future.
So they’re small, but we’re always undergoing activities that will help us reduce our
expenses in the future.
Thanks again. So on the cheque business, how are you now thinking about the rate of decline
in that business and getting comfortable with it? And then the follow-up would just be are you
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thinking about when you look across the assets does anything seem a little more nonstrategic? I guess
just in general, big picture, how are you thinking about that?
Gerrard Schmid
Yeah. Sure. So obviously in Q3 cheque volumes fell off at a more accelerated pace. We saw
a 12 percent decline in volumes. That was most noticeable in the month of September; much more
pronounced than we’d seen in the past.
Clearly we are able to track cheque volumes on a daily basis, and I’d say that as we look at
October thus far we’ve seen a real moderation of that. So we haven’t seen the same base of decline,
but it’s still relatively early in the quarter, so we will be certainly monitoring that.
But based on where we sit today, we have seen periods of times in the past where those
cheque volumes have blipped. So what we’re obviously questioning is is that a blip or is that a new
run rate? At this point in time it looks like a blip, but we’ll obviously have a better view on that as we
look through Q4.
Management’s view on the cheque business is that we believe it’s probably going to be
tracking at a decline rate in the mid-single digit range from a revenue perspective, not the high-single
digits that we saw in Q3. That’s how we’re currently thinking about that business.
As it relates to your second question, are there any assets that are nonstrategic? Part of the
difficulty with that question, right, is it starts to signal to the market and we start to negotiate in the
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public around certain valuations, so I don’t think that that really is something I’m going to comment
too much on.
What I would say is that operationally some parts of the business are more intertwined than
others. Our cheque business is not intertwined with other parts of the business, but it is a great source
of free cash flow that attracts a low capital level.
So at the outset of my remarks I said that as I think about the portfolio today along a
continuum, the cheque business generates great free cash; low capital intensity. Our Canadian
lending business, as well as our US integrated core businesses are stable, mature, and highly
defensible. And I think about our US lending business and our GTBS business as having really strong
competitive differentiators and high long-term growth potential.
So that’s the raison d’être for the portfolio today. But ourselves and the Board continue to
evaluate the portfolio to look at ways to maximize shareholder value, and I think that’s about as far
as as I’ll comment at this point in time.
Would you be able to clarify, I guess, what would cause like a monthly blip in the cheque
business?
Gerrard Schmid
Sure. So our current perspective on that would be that if one took a look at the environment
in Canada in the June, July, August time frame there was quite a heightened level of dialogue that
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Canada Post was likely to strike. In response to that we saw a number of active marketing campaigns
from banks and large merchants trying to persuade consumers and businesses to shift towards
electronic alternatives. So that would be one potential driver.
And typically what we see during strikes, because the one beauty of the cheque business is
that when you’ve been in business for 140 years as many strikes have unfolded, and typically we see
some customers pull forward their order patterns; some customers push back their order patterns.
So that’s what we’re trying to assess as we look through over the next coming quarters.
We have a lot of very long-tenured employees in our cheque plants, and they would say that
during cheque strikes—sorry, during postal strikes, especially in periods when the summer is
particularly warm they’ll see a blip or a drop in cheque volume orders. We had a very, very long
summer, so we’re not going to hold our future to the weather patterns, but that could be another
driver as well.
But as I said, I think the important part is we will obviously provide a lot of transparency
going forward on a quarterly basis with regards to those cheque volumes.
Thank you.
Stephanie Price — CIBC World Markets
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When you think about the opportunities that you have with real-time payments and open
APIs, do you think that you’re seeing that demand right now? Or when do you think that demand
starts to pick up and the banks start spending there?
Chris Zingo
Sure. Right now the real-time payments, for example in the US, is they’re trying to get to a
pilot stage in 2016 which will carry through the middle part of 2017. Then the infrastructures go live,
and so you’ll start to see some progress with us and with others as well with that.
The question is what will the adoption rates be and how fast will they go? And I don’t think
there’s a consensus on that, but I think you should start to see us succeed sort of tail end of ’17 into
2018 and 2019 as it becomes more prevalent and the adoption rates grow. We are currently working
with a number of firms as pilots for those infrastructures as well, so that’s a good test for us.
We will be selling our software both on a licensed basis and on a hosted basis in our service
bureau. So for those that have large deployments, it’s another module of what they currently have,
or another payment rail, and for others it will be hosted so that they can subscribe to the service.
Gerrard Schmid
Stephanie, if I can perhaps build on that? Clearly, the big market opportunity that’s still in
front of all of us is the US market, but immediate payments has continued to evolve in growing
adoption in other markets.
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Hong Kong goes live in 2019. Europe has immediate payments or on SEPA emerging in the
next short while, too.
The other question that you made reference to were open APIs. We will likely see much
more focus around open APIs in Europe first because of the implications of PSD2 legislation, which
really banks have to be compliant with by mid-2018. Is that right, Moti?
A question for Ed. On your global deployment for payment hubs, the integration process,
the installation process, how much of that is DH? How much of that is a third party, if there is one, on
that?
Ed Ho
It varies by customer. In most cases we do work with systems integrators and we are very
focused around the implementation of our software while VSIs, for example, focus on integration into
other applications on behalf of the bank. The bank sometimes does it on their own. In some cases
they asked us to do some of the work.
So there’s no one general rule, but more often than not with the larger firms they have what
they call their house SI, if you will, who generally gets involved deeply into this because they know
the bank systems very well. So it’s usually a combination. And we work with many.
Does it matter in terms of revenue recognition whether a third party’s involved or not?
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Ed Ho
It does to the extent that we do conservatively recognize revenue on a percentage of
completion basis. And so the faster that an implementation goes the better our revenue recognition;
sometimes the slower, the worse it is. But we’re really focused around what it is that we're doing with
respect to the customer.
The chart where you showed the RFP activity, it looked like 2014 was elevated relative to
2015, and then you’ve seen it pick up this year. How should we think about the impact there on your
revenue recognition? Was the buildup in 2014 did that flow through into your 2015 revenue? Was
that part of a factor for why you're seeing lower revenue growth this year because the RFP activity in
2015 dropped off?
Karen Weaver
I'll be more technical and you can answer business. So from a revenue recognition
perspective on the hub RFPs, we will recognize revenue percentage of completion over time. It
typically can be on signing, and then it can also be under the ensuing 18 to 24 months. It really
depends on each installation and timing.
So there’s no rule. It really is also up to the customer as to how fast they're able to
implement.
Ed Ho
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So I would answer the question also by saying that RFPs are an indication of activity in the
market. But it's also our ability to win. And the win loss ratio of those RFPs that you compete in make
a big difference.
I'd also say that because of the way we recognize revenue the timing of when we actually
sign a contract makes a big difference. So we could be competing in 2015, but recognizing zero
revenues in that year, and it would carry into '16, '17, '18.
So these RFPs are a metric, but you also have to look at what's required in these deals. Some
of them are more complex than others and they extend over multiple years, which is the period in
time in which we recognize those revenues. So yes, there are probably some deals from 2014 that
we're recognizing now, there's some from 2015, and there are some from 2016. It all depends on
when it is we get these deals signed up.
Related to that, when you sign a contract what percentage of—do you start at zero on that
day? Or is it 25 percent on the date of signing? Like how does that work?
Karen Weaver
It depends because if we sign on that same day as the full contract we'll typically also sign a
statement of work. And to the degree that that statement of work has been all or partially delivered
there is some revenue recognition on the signing date. Okay.
So, Ed?
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Ed Ho
That's correct. And it depends on the situation. There are times when we do some work in
advance, and so we could recognize a little bit more revenue ahead of time. But we don't have the
great volatilities that some other software vendors have who tend to, as I think I discussed earlier,
tend to recognize licences almost 85 or 90 percent upon signing.
We recognize that ratably over in terms of percentage of completion basis over the life of
the actual implementation. So we could gain a little bit more, but it depends on the situation. It
depends on the time frame and the length of the length of the actual implementation project itself.
So we have a group that focuses specifically on that and revenue recognition.
Is there any sort of approximate number you could put around if you dollar weighted all the
contracts what a typical up-front recognition is?
Ed Ho
In the low double digits sometimes, 10, 15 percent or so; something as normal as that.
So on the win loss ratio, everybody wins some, lose some, but if you had to list the reasons
why you lose why would you lose and who do you lose to?
Ed Ho
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If we lose there could be multiple factors. I would say that if you know our competition they
have a different kind of a solution than we do. It's more tool-kit oriented where you get to build. We
try and sell our solution as more of an out of the box solution for faster deployment, which enables
the client to hopefully gain revenue sooner.
So one of the factors is which do you prefer? If you prefer much more customized solution
where you want your IT team to build, then perhaps you pick that solution. The politics within an
organization make a big difference in the outcome as well. And so if you do have a large IT team and
you want to keep them gainfully employed for many years, perhaps that’s a solution that you pick.
There are, and I call it, there are functional differences from time to time between the
solutions, so that could impact your ability to win. I’d say that over a long period of time the
functionalities tend to become equal. So you may have an advantage for some period of time, but if
you’re proficient in what you do and you have good specialists in what you do, the others will gain as
well.
So if I flip your question and say, well, why do we win if that is really the case? It also comes
down to your relationship with the vendor and your confidence level in achieving success over a long
period of time.
When we sign these licences they’re 10 years or longer. That’s a pretty long time to live with
someone, so you better be sure that you can live with them, if you will.
Gerrard Schmid
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I wonder if I can build on that. What we’ve seen broadly is banks’ levels of discretionary
spend are under pressure, and therefore their ability to sustain and build highly customized solutions
is under pressure. So we believe that there’s a long-term trend where banks will increasingly buy
products rather than customize their solutions because the implications that have shift the
technology risk to the vendor and not onto the bank itself, which is why we do well when there’s a
proof of concept.
Because in a proof of concept the bank will hit us and the competition with many use cases
very rapidly, and then ask us to prove that our software can respond to those changes. If it’s a toolkit that requires high levels of customization, that’s a problem for the competition. That is why when
Chris was talking about why we do well and when the banks are on proofs of concepts, that right up
our alley, because that’s where we can show the power of a product and why it’s a superior value
proposition over the long haul.
Ed Ho
The other element is that it’s the depth and breadth of functionality as well that comes out
of the box as compared to other competitors. And so it’s important to be able to show them that so
that they can get a faster return on investment and payback and generate revenues much quicker.
So the work that we’re doing around our products, as I’ve described earlier today, are meant
to deploy our systems much more quickly, because in light of what we see in the market today, we
see the banks looking and saying, we don’t have multi years of big tens of millions of dollars to spend.
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We need to get to market more quickly. And with our global customer base, and it’s very broad, we
believe that we have best-of-breed functionality built into our system, and that we can extend that
to all the banks and they can use it universally.
Moti Porath
I think it’s worthwhile also to mention that it’s a 2016 phenomenon where we are replacing
what used to be defined as strategic competitive win. So they went one phase with a competitor, and
then actually are coming back to us for further strategic deployment of our products, which is I think
in many ways it’s a confidence in our solution as a long-term strategic all-unified solution. And we
have quite a few cases.
And on the contrary, those customers who use older versions of our product and now are
going into transformation, all of them, without exception, came back to us.
Gerrard Schmid
And when Moti says, came back to us, he doesn’t mean that the banks went somewhere
else, but as they looked to undertake broader transformation programs they’ve stuck with us for their
journey.
Just wanted to clarify on the RFP process, is this just for net new customers? If you have an
existing customer that’s looking to roll into a new region or new area, is that an RFP process as well?
Ed Ho
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Yes. It is in most cases. So banks will always internally challenge what they currently have.
So when we look at our wins, we have new client wins and we have another category of competitive
bid wins.
And so our competitors get a shot at that new piece of business, so we may be servicing
high value or mass payments and they decide, well, let’s take a look and see if it makes sense to use
a competitor in real-time payments. That could happen. And we would hopefully be able to show the
value of consolidating everything into one system so as an incumbent you have an advantage, but
we’re challenged all the time.
Gerrard Schmid
So, Ed, maybe you can talk a little bit about the win rates for those competitive new pieces
of business versus net new customers?
Ed Ho
Yeah. I think the win rates in that category are also extremely strong. In that category we
actually haven’t lost this year. But we do go through some extended processes where they really do
investigate because it’s a material spend when they go through that.
Just thanks again. So I think when I think about your business I think what I like is that it
should have high visibility, the recurring nature of it, all those pieces that seem like they should be
there. 2016’s been a little bit of a year of surprises in a lot of ways. And so I’m wondering if you can
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kind of help us with kind of proof points that we should be looking to over the next maybe three, six
months, something like that, things just to kind of help us kind of gauge our estimation of how things
are progressing from here.
Gerrard Schmid
Sure. So let me take a crack at that. I’m sure Karen will jump in as well. So let’s break it down
segment by segment.
We spent most of today talking about GTBS, and clearly the biggest determinant to answer
your question is the bookings performance in subsequent quarters, because that’s the biggest
determinant of our future revenue growth. So that’s the, I think, the indicator that I would suggest
we all focus on as we think about Q4’s results.
As I think about our other businesses within our US lending business, we’ve said to the
market that we fully expect the LaserPro contract renewal mechanics to reverse themselves into
2017, and there’s nothing that we see in the business that would suggest we don’t feel that way. So I
think as you think about Q1 in particular, you’ll start to see that resurgence unfold within US lending,
largely driven by the LaserPro contract renewal matter.
As I think about integrated core, that’s a very stable business, so I don’t think I’d expect
much beyond what you’ve seen to date from that business going forward. As you think about our
Canadian lending business, clearly the biggest variable there is the health of the Canadian auto and
mortgage markets, and whether there’s a softening there because either of those two factors may
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soften our mortgage or our auto lending volumes that flow through our platforms, so I think those
are the indicators that I would think about around that particular business.
And then last, but not least, is the cheque volumes, which is something we’ll be reporting
out on a cost basis.
Karen Weaver
Just take a look again at our revenues by type which we’ve given you for the year-to-date
and the quarter report and we’ll give you at year-end. It shows you the breakdown of our revenues,
and you’ll see that we have a good maintenance component, we have a good SaaS component, and
of course, the transaction processing component all lead up to about 79 percent in terms of our
revenue base.
Now yes, we will have some volumes on those transaction processing which will affect, but
it does give you an idea of what our revenue looks like by type. So the reason that’s important is
because maintenance is a continuing contract, and because our products in all of our segments are
systemically important we get the maintenance all the time.
The licence component will be impacted primarily by LaserPro and by GTBS bookings in the
next several quarters, as we’ve talked. So that’ll help you put on some other colour on how to look at
our revenues.
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On the LaserPro issue, when you acquired Harland were they booking the revenues to the
extent that you are up front? Or was it ratable, and it’s been shifted over to that model over time?
Karen Weaver
So that is an accounting standard that was adopted by HFS in a 2012-ish time frame, I
believe, yes.
And then on the Canadian lending segment, the transactional piece—
Karen Weaver
I’m sorry, I didn’t hear it.
Are there minimum volume guarantees on the Canadian lending transactional piece?
Gerrard Schmid
There are not minimum volumes on the Canadian volumes—let me try that again. For our
lending volumes there are not minimums, no.
So don’t forget that the biggest piece of our Canadian business—there’s really three pieces,
so let’s just maybe decompose that. For our mortgage business there are no minimum volumes. For
student lending that’s not as much a volume-driven business because we get paid tied to the number
of students that are serviced on our platform, so that is almost effectively a minimum volume
guarantee.
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Our collateral management solutions business is variable. We’re exposed to the number of
cars that get sold, as well as the number of delinquencies. So there is some natural hedging in that
business.
Jonathan?
Sure. Just going back to your comments around the 78 million for credit—for the risk, can
you just kind of break down what is nonrecurring? Is it infrastructure? What are you investing in on
that part? And is it fair to say that the 25 million—20 million to 25 million restructuring from earlier
in the year that most of that has been reinvested in the business and we’re not going to see any
benefit for that next year?
Gerrard Schmid
So the 7 million to 8 million that we talked about, that is all nonrecurring that risk spend.
Just asking what is it? Like what—
Gerrard Schmid
Oh, what are we spending it on?
Yeah. What is—
Gerrard Schmid
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Oh, got it, got it. So as Kellie made reference to, there are third parties that we’ve worked
with evaluating our risk processes, making sure that we’ve got the right cybersecurity capabilities. So
think of them as advisory fees, Jonathan.
Your second question was the $25 million of savings from our global operating model would
we expect to see those benefitting the business going forward or are we reinvesting those back into
the Company; is that your question? We will continue to see our cost base moderate, and the global
operating model changes we made were really in support of moderating the expense growth. So the
answer is you will see some of that go into enhanced product development, and some of it will flow
into savings.
You mentioned during the call that you’re bundling the sales for LaserPro, and that over the
term of the contract will have a positive impact for the value of the contract, but over the short term
might negatively impact. Can you give us an indication of how significant that could be over the short
term as we look into 2017 and the reversal of the issue of LaserPro versus—
Gerrard Schmid
Yeah. So I think there’s a couple of ways to look at that. In Q3 of 2015, we had roughly a 6
percent bundle rate; in Q3 of ’16 there was a 29 percent bundle rate. If the bundle rate had been the
same between the two periods we would have seen roughly $2 million of additional revenue in the
quarter. So that was the impact of the deferrals on a go-forward basis.
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Clearly if we continue to increase the bundling rate we will continue to push out some
additional revenues. If the bundle rate stays at 29 percent then that phenomena takes care of itself
and it washes out.
Karen Weaver
Sorry, just to give some colour on the timing related to the bundled-product revenues. If we
just deliver a standalone LaserPro to a brand-new client it’s typically a 30-day implementation. If we
delivered a bundled solution between LaserPro and our other two products then that would normally
be a four- to five-month implementation window.
So that’s the kind of delay cycle that we’re talking about.
Gerrard Schmid
Great. Well, if there’s no other questions, we’ll call it a wrap. We’ll obviously be around to
answer any one-off questions.
Thank you, everyone, for joining us, and safe travels to wherever home might be.
Bye-bye.
*****
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