Key Trends in Treasury Management

1. Key Trends in Treasury Management Matt Ribbens, CTP McKinsey & Company, Global Concepts Office September 23, 2010 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

2. The US payments landscape • Key trends in treasury management

3. Top 5 cash management banks 2 • Quick facts Commercial DDA revenue accounts for 12% of total industry revenues US payments industry revenues: 2008 1 100% = $277 billion • Consumer credit card issuing • 12% of industry revenues • 16% of industry profits • $18 billion in cash management fee-equivalent income • $10 billion in NII • Consumer DDA • Commercial DDA • 12% • $33 • Commercial credit card issuing • - Bank of America • - Bank of New York Mellon • - Citigroup • - JPMorgan Chase • - Wells Fargo/Wachovia • Money services • Merchant acquiring • Other 1 Cash management services are counted on a fee-equivalent basis; ECR expense has therefore been backed out of NII 2 2008; in alphabetical order; based upon an analysis of ACH and wire origination and lockbox volumes SOURCE: McKinsey US Payments Map, 2008-2013, release Q4-09

4. % The distribution of transactions and dollar flows are very different; most transactions are cash, but most spending is by check and ACH 1 2008 dollar flows $96,865 billion 2008 transactions 248 billion • 72% • 84% • B2B • C2B • 139 • $2,355 Cash • $1,277 Debit Card • $40,533 Check 2 • $2,116 Credit Card • $36,089 ACH • $14,496 Other3 1 Our model excludes the vast majority of wire transfer dollars in an effort to approximate customer payments activity rather than financial institution settlement transactions (e.g., broker-dealer settlement). Flows through Fedwire alone ($518.5 trillion in 2005) are more than seven times greater than all other instruments combined. 2 Reflects checks paid, not checks written. Checks converted to ACH are counted in ACH. This convention is used throughout 3 Includes wire transfer, book entry transfer, and electronic money transfer (EMT) via MoneyGram, Western Union, etc. SOURCE: McKinsey US Payments Map, 2008-2013, release Q4-09

5. Contents • The US payments landscape • Key trends in treasury management • Growth is slow (but returning) • Banks are refocusing on client experience • Security/Fraud Prevention is paramount

6. Mixed signals about the economy continues to create uncertainty for both corporates and bankers • News from the same week… • $1.84 Trillion in Cash: A Rational • Response to Challenging Economic • Circumstances • CHICAGO--(BUSINESS WIRE)--The Federal Reserve today reported corporate cash is • still hovering at record high levels of $1.84 trillion – almost identical to last quarter. • However, cash remains 29% higher than it was just 18 months ago. SOURCE: DigitalTransactions Newsletter, CNN, Sept 20, 2010.

7. As with corporates and banks, the biggest challenge continues to be topline revenue growth SOURCE: McKinsey Quarterly Economic Conditions Snapshot, September 2010, BEA, 2010.

8. Commercial customers are focused on safety of principal and the need for liquidity to fund operations • Profile of organizations’ short-term investments • Percentage of total invested in each product • Most important cash investment policy objective • Percentage of organizations prioritizing each • 37.2 • +3% • 31.8 • 30.9 • +37% • Safety of principal • 27.1 • 61% • +384% • Liquidity • 2007 2009 • 2007 2009 • 2007 2009 • Return • 2 • 0 • Money market mutual funds • Bank deposits • Treasury bills • 2007 • 2008 • 2009 • “It was all about saftey and liquidity this past year. Those investment vehicles that were perceived as safe and liquid were not as safe and liquid as we thought”- Assistant Treasurer of a manufacturing and distribution corporation • “..if you want to go for ultimate security you go for treasuries….(t)hey have virtually no return but you are not trying to get that last basis point of interest.”- VP Global Treasurer of a major retailer SOURCE: AFP Liquidity Surveys, 2007, 2008 and 2009; AFP Exchange, November 2009

9. % 4 • 8.3 ` • -7 • 3.1 Cash management has weathered the banking crisis well and is poised for several years of steady growth • ESTIMATES • Commercial card (fees) • Cash management fees • Commercial card (NII) • Commercial DDA (NII) • CAGR (’10 -’14) • Percent US cash management revenue1 $ Billions • 75 • +7% p.a. • 70 65 • 22 60 • 59 58 • 21 56 • 19 • 16 • 3 • 17 • 16 • 15 • 3 • 3 • 2 • 3 • 4 • 12.4 • 2008 2009 2010F 2011F 2012F 2013F • 2014F 1 Cash management includes all commercial payment and DDA revenues for large corporate, mid-market, SME and public sector entities. Does not include private label cards and excludes merchant services SOURCE: McKinsey US Payments Map, 2009-2014, Q2-10 Release

10. 0 Commercial use of ACH has increased steadily over the past five years, and US firms plan to continue increasing their use of ACH • US firms’ plans to adopt ACH credit use • CAGR, 2008-10 • ACH’s share of Bus/Gov payments • Percent • 45% • $ flows • 40 • Payroll • 6% • 35 • Tax Payments • 2% • 30 • transactions • 25 • B2B Payments • 12% • 0 • 2005 • 06 • 07 • 08 • 09 SOURCE: McKinsey US Payments Map, 2008-13 Scenario 2, release Q4-09; McKinsey 2008 Corporate Treasury Needs Study

11. 0 Commercial card use declined significantly during the recession, but growth will return in 2010 and beyond • Commercial card spend • Billions USD 2008-10: Commercial card trends • Commercial spending slows:Share growth in commercial card spending has been insufficient to offset broad slowdown in B2B spending; commercial card spending dropped 10% 2008-09. • T&E expenses evaporate: Easy targets for cost reductions travel budgets were slashed during the recession, dramatically reducing commercial card spend. • $1,000 • 800 • 600 • 400 • 200 • 0 • 2003 • 04 • 05 • 06 • 07 • 08 • 09 • 10 • 11 • 12 • 2013 Future outlook • Post-recession, commercial spending and access to credit will improve. Cards will continue to displace spend from other instruments. We forecast double-digit growth in commercial card spend 2010-13. SOURCE: McKinsey US Payments Map, 2008-13 Scenario 2, release Q4-09; Nilson; Team analysis

12. Straight Through Card Payments & AP Automation Commercial card solutions are moving up the AP spectrum to become more easily leveraged by companies for B2B payments Ghost Card Programs TRANSACTION SIZE SPEND PER SUPPLIER Traditional PCard Programs TRANSACTION FREQUENCY SOURCE: Global Concepts Cash Management Forum, 2010.

13. 5 In March, Global Concepts found that a majority of bankers thought that Reg Q repeal was unlikely to happen in 2010 • The reforming of a rule that does not allow banks to pay interest on commercial checking accounts does not seem to have much chance of being repealed in 2010; however, more banks see the liklihood “creeping up” in 2011. • How likely do think it will be that Reg Q will be repealed in 2010? • Responses • How likely do think it will be that Reg Q will be repealed in 2011? • Responses • 1 • 2 • 3 • 4 • 5 • 6 • 7 • 1 • 2 • 3 • 4 • 5 • 6 • 7 • Won’t • Happen • Won’t • Happen • Will • Happen • Will • Happen SOURCE: Cash Management Forum Research, March 2010.

14. % In July, the passage of the financial reform included the repeal of Reg Q which will impact corporate investment policies and commercial DDAs • The Dodd-Frank Wall Street Reform and Consumer Protection Act • Key Provisions affecting cash management: • TITLE III—TRANSFER OF POWERS TO THE COMPTROLLEROF THE CURRENCY, THE CORPORATION, AND THE BOARDOF GOVERNORS • SEC. 335. PERMANENT INCREASE IN DEPOSIT AND SHARE INSURANCE. • Permanently increases coverage on demand deposit accounts to $250K • TITLE VI—IMPROVEMENTS TO REGULATION OF BANK ANDSAVINGS ASSOCIATION HOLDING COMPANIES AND DEPOSITORY INSTITUTIONS • SEC. 627. INTEREST-BEARING TRANSACTION ACCOUNTS AUTHORIZED. • Interest can now be paid on commercial DDA accounts (fully repealing Reg Q) SOURCE: McKinsey/Global Concepts, 2010.

15. Due in part to Reg. Q, US banks have tended to derive more revenue from fee income as corporate customers sweep balances into money markets and higher yielding time deposits Due to a long-standing and now repealed prohibition on DDA interest, the US commercial DDA market has evolved differently than others • History & impact of Regulation Q • Commercial DDA revenue by source • % of total; 2008 • Unlike most other countries, the US does not allow interest payments on commercial demand deposits • The payment of interest is forbidden by the Federal Reserve’s Regulation Q, enacted in 1933 • However the Dodd act will enable banks to pay interest for commercial deposits • Due to not paying interest on demand deposits: • The opportunity cost of keeping excess cash in deposits is relatively high and corporate liquidity has been more likely to leave the US banking sector for secondary markets • US banks developed a complex suite of cash management products and account types designed reduce the funds held in DDAs (e.g., sweeps, ZBAs, Repo’s) • Fees • NII • 100% • USA • Canada • EU • Asia/ Pacific SOURCE: McKinsey US Payments Map, McKinsey Global Payments Map, Global Concepts

16. Most likely scenarios in next 24 months • More likely scenarios in 2012 and later • DDA innovation – expanding credit demand drives broader competition for DDA pool beyond small business; funding keeps pace with demand, moderating interest rates • SME shift – attacker funding demand remains moderate; incumbents willing to bleed off deposits vs. raising rates • Deposit boom – strong economic recovery; wholesale funding markets fail to rebound driving strong competition for deposit funding • Status quo – commercial banks w/ deposits stockpiles; low demand for credit and risk averse lenders The repeal of Reg Q will lead to three potential different scenarios based on the strength of the economic recovery • Industry’s relative supply / demand for funding • With moderate recovery, the large un-deployed funding base among deposit rich institutions should meet credit demand; deposit rich banks are likely to bleed off excess deposits rather than raise interest rates in response to attackers. • Strong economic recovery and growth in credit demand will increase demand for funding; if wholesale funding markets fail to rebound, strong demand for funding could push deposit interest rates up. • SMEshift is less contingent the state of capital markets and could happen with only a moderate recovery. • DDA innovation and Deposit boom scenarios are both contingent upon the external environment and speed of recovery in capital markets. • High • Demand for funds • Moderate • Low • Low • Moderate • High • Supply of funds SOURCE: McKinsey Global Concepts

17. D In July, the majority of bankers polled anticipate paying DDA interest due to the repeal of Reg Q but are uncertain of the post regulatory product mix • Do you anticipate paying interest on demand deposit accounts for business customers? • % of responses • What will be your default commercial DDA offering? • % of responses • Traditional DDA w/ ECR • Interest-only DDA • Hybrid (ECR & Interest) • Undecided • No • 4 • 0 • 4 • Undecided • 11 • 0 • 41 • 33 • Yes Existing customers New customers • How do you plan to value deposit balances on interest bearing demand deposit accounts? • % of responses • Do you plan to offer all three account types? • % of responses • No • 8 • Traditional Methods • TBD • TBD • Yes SOURCE: Cash Management Forum Research, July 2010.

18. Other regulations will also impact banks (as well as corporates) Basel III • Proposal to increase capital requirements for counterparty credit risk • Internal models to calculate counterparty credit risk (CCR) exposures do not take into account sufficiently the potential volatility and illiquidity of markets 2a-7 Money Fund Change • MMF must disclose the shadow net asset value (NAV) --basically mark-to-market value--of the fund • Potential headline risk for a fund even after 60 days when the shadow NAV is released FDIC Insurance • Unlimited insurance (TAG) on non-interest bearing transaction accounts • Permanent coverage of $250K for all accounts • Assessments of FDIC premiums will be assessed more heavily based on Assets. • Affects • Affects • Affects • Regulated banks, brokers/dealers, and insurance companies with assets of at least $25B • Value of commercial deposits much higher in terms of stability than other sources of market funding • Operational costs of banks for gathering deposits • Banks are able to pass along a portion of fees assessed by the FDIC for insurance (typically through account analysis) • MMF Funds and corporate investment policies • Releasing the shadow NAV on a 60 day lag basis willhave an impact on organizations investment decisions SOURCE: McKinsey Global Concepts

19. Contents • The US payments landscape • Key trends in treasury management • Growth is slow (but returning) • Banks are refocusing on client experience • Security/Fraud Prevention is paramount

20. Top 25% areas • Second 25% areas • Bottom 50% areas • $100-500m • $5–25m • $25–100m The most highly demanded product improvements for all market segments are related to online delivery systems • In which of the following areas would you value improvements the most? • % responding high or very high • Overall • Breakdown by revenue segments • 86 • 84 • 90 • 87 • Online access • Providers need to be aware of: • The difference between must-haves vs. nice-to-features • How this varies by targeted segment • How to prioritize investments • 86 • 82 • 88 • 89 • Reporting capabilities • 84 • 84 • 86 • 84 • Intuitive, easy to use products and services • 84 • 83 • 86 • 82 • System availability and reliability • 76 • 74 • 80 • 75 • Data integration and ability to interact with your systems • 64 • 57 • 65 • 71 • Receivables • 60 • 49 • 67 • 67 • Liquidity and Concentration • 58 • 53 • 62 • 60 • Payables • 41 • 30 • 42 • 51 • International and F/X SOURCE: McKinsey Cash Management Survey

21. Improving the onboarding/account maintenance process with self-service and more recently eBAM Today Paper Fax Tomorrow Internet Bank Portal • Security/Digital Signing • Efficient Workflows ISO Std. XML messages & Supporting documents • Automate/STP • Visibility & Control SOURCE: Cash Management Forum (Identrust & Bank of America), 2010.

22. % By the end of 2012, most banks intend to adopt new electronic products and channels • Products Banks “Plan” to Adopt by 2012 • Profiled Banks • Mobile Phone Banking • 60% • Mobile Phone Payment Initiation/Approval • 60% • Web-based Cash Forecasting • 53% • Payables Automation/Integrated Payables • 50% • Invoice Origination from online banking • 47% • Healthcare Lockbox Services/EOB administration • 38% • Positive Pay with Payee Line Detail • 33% • Remote Currency Management Solution • 32% SOURCE: McKinsey/Global Concepts, 2010 Cash Management Forum TM Study.

23. t • Top-5 products differ by size segment: • $100 - 499MM: In addition to same-day ACH debit, payables and receivables electronification products comprise the top-5 • $500MM - 1.5B: “Next generation” treasury products dominate, including web cash forecasting and a variety of mobile services Corporate treasurers are showing a great interest in same-day ACH (debit origination), with over 2x the demand growth of any other product Adoption timeline: • Top 5 growth products: All firms • % of firms adopting in next 24 months • 13-24 Months • 0-12 Months • ACH - same-day debit • 66 • 82% • 18 • Purchase to pay automation • 28 • 54 • 46 • ACH - converted checks • 24 • 53 • 47 • Mobile - Approve payments • 24 • 46 • 54 • Remote deposit • 24 • 47 • 53 • Top 5 growth products: $500MM - 1.5B • % of firms adopting in next 24 months • Top 5 growth products: $100 - 499MM • % of firms adopting in next 24 months; • ACH - same-day debit • 62 • ACH - same-day debit • 66 • 82 • 18 • 83 • 17 • Web cash forecasting • 35 • Purchase to pay automation • 28 • 52 • 48 • 57 • 43 • Mobile - View balances • 34 • ACH - converted checks • 27 • 36 • 64 • 53 • 47 • Mobile - Approve payments • 33 • Remote deposit • 26 • 54 • 46 • 51 • 49 • Mobile alerts • 29 • ACH debit filters • 25 • 45 • 55 • 55 • 45 SOURCE: Global Concepts Corporate Treasury Needs 2010

24. Contents • The US payments landscape • Key trends in treasury management • Growth is slow (but returning) • Banks are refocusing on client experience • Security/Fraud Prevention is paramount

25. A multiplicity of threats requires a comprehensive approach to risk management • Online fraud • Phishing, spear phishing and malware • Account takeover • Man in the middle attacks • Check fraud • Check alteration • Hybrid attacks • The positive pay imperative • Multi-channel risk • Remote deposit, ACH origination, wire and merchant limits • AML/OFAC screening SOURCE: Global Concepts analysis

26. Spear Phising Attack: BBB SOURCE: Global Concepts, Cash Management Forum 2010.

27. Spear Phishing and Money Mules 1. Fraudsters target and research your bank, your banking platform and your customers 2. Spear Phishing Attacks to executives (FDIC, IRS, Bank emails) Keystroke logging Infected email Customer 1 Banking Platform 6. Mules instantly wire money out Remote access Customer 2 4. Account Reconnaissance Session hijacking Customer 3 Customer Account • Look for peak balance • Evaluate account privileges • Account processes 3. Account Access – Defeat Strong Authentication Have your credentials Can use customer machine/sessions 5. ACH Batch Multiple <$10K payments to many mules across multiple financial institutions Mule banks SOURCE: Global Concepts, Cash Management Forum 2010.

28. FBI, NACHA, FS-ISAC recommendations to prevent online fraud for corporate users SOURCE: Global Concepts, Cash Management Forum 2010. • Initiate ACH and wire transfer payments under dual control • Online commercial banking customers execute all online banking activities from a dedicated, stand-alone, and completely locked down computer system from where email and web browsing are not possible. • Limiting administrative rights on users’ workstations to prevent inadvertent downloading of malware • Reconcile all banking transactions on a daily basis. • Financial institutions should also implement an awareness communications program to advise customers of current threats and fraud activities

29. FBI, NACHA, FS-ISAC recommendations to prevent online fraud for financial institutions SOURCE: Global Concepts, Cash Management Forum 2010. • FIs implement appropriate fraud detection and mitigation best practices including particularly transaction risk profiling. • FIs consider using manual or automated Out-Of-Band authentication systems in concert with fraud detection systems. • Such OOB solutions many include manual client callback or automated solutions SMS text messaging, Interactive Voice Response system callback to a known phone number with a PIN code and similar solutions.

30. Transaction Risk Monitoring SOURCE: Global Concepts, Cash Management Forum 2009. • Predictive Behavioral Analysis for Each Account • Learns unique behavior of each individual • Raises alert when something unusual for that individual occurs • Maximum detection, minimal alerts • Only get alerts when risk factors combine to create high risk score • Looking at all attributes and activities – catch account reconnaissance • Fast and Intelligent Forensics • Detailed behavioral history • Fraud matching across accounts • Low maintenance • No rules • No change to client experience • Don’t need to know fraud patterns

31. Out of Band Authentication SOURCE: Global Concepts, Cash Management Forum 2010. • An Out of Band, Multi-Factor form of authentication that allows you to use your office, home or cell phone as the second factor of authentication. • When accessing on-line banking business customers receive a phone call asking the user to enter a security code or PIN into the phone that is displayed on the computer screen. • Entering a code into the phone makes OOBA a completely out of band authentication • Provides strong two-key authentication by requiring the use of two different networks to gain access; Internet & phone • Companies don’t have to spend time coordinating the issuing, mailing, and servicing a token or device • Instant attack detection • If account is comprised access can be immediately blocked and notify banks security department

32. Questions Matt Ribbens, CTP Expert +1 (678) 221-2339 Matthew_Ribbens@McKinsey.com