Perspectives 2020-2021 Public Sector

Citi Perspectives for the Public Sector 60 61 confirming adequate funds are earmarked for the transaction. This letter can be provided to potential suppliers seeking some form of guarantee or pre-payment, giving them confidence that payment will be delivered on receipt of goods. Once agreement is reached between buyer and supplier to transact, the buyer confirms goods are received and conditions met, and then instructs the bank as Agent to release funds to the supplier. Through this method, pre-payment to a unfamiliar supplier is avoided, while the supplier has confidence – through confirmation by a large global bank – that the buyer is liquid and earnest in its purchase request. Virtual Card Accounts Within the Commercial Card suite of products, Virtual Card Accounts (VCA) allow buyers to make safe, secure, and (potentially) recurring payments to suppliers (that may be either new or established relationships). VCA are a plastic- less electronic payment solution that generates a unique card number each time a transaction takes place. That makes them ideal for indirect B2B spend, including PPE (though VCA is dependent on the supplier’s ability to accept card payments). VCA seamlessly fits into existing procure-to- pay processes. It simply replaces existing bank transfers or EFT payments for a segment of payables where card acceptance is prevalent. Crucially, VCA offers transaction-level controls, with limits on the number of transactions (single- or multi- use), transaction amount limits (exact, maximum, or range) and validity periods (suppliers and merchant category codes) that provide comfort to buying organizations. VCA also delivers efficiency benefits as it offers client-specified data elements for each transaction, providing enriched analysis, reconciliation and allocation. As well as batch payments, VCA offers the option for individual payments online, providing greater flexibility. Payments are received within two to three hours and funds settled within 48 hours of authorization – significantly faster than check (which is subject to mailing time and clearing). The payer has no liability for fraudulent transactions. At Citi, we observed some risky transactions, such as pre-payment for goods without inspection; similar episodes were highlighted in the media at the time. For example, a U.S. State government delivered a paper check to a broker in a fast food restaurant parking lot. The broker then took a photograph of the check, sent the photo to the supplier in China, and goods were released. This transaction was successful. But in other cases, purchasers were not so lucky, as the headlines shown on the prior page demonstrate. While supply of PPE and other medical equipment is catching up with demand, large purchasing organizations continue to need secure, efficient, and flexible payment methods, both for PPE and other goods. The following are three of the most effective ways for public sector entities to ensure safe, transparent and reliable payments. Trade Finance solutions For clients sourcing goods from new or unfamiliar suppliers, Trade Finance solutions can add security. Many large global suppliers are familiar with commercial letters of credit (L/C). An L/C is a payment undertaking issued by the buyer’s bank in favor of the supplier, where the bank’s creditworthiness is substituted for the buyer’s: the bank promises to honor payment on presentation of documents that prove the supplier has performed its contractual obligations as specified in the L/C. Invoice review and payment is initiated by the client’s bank and facilitated through the supplier’s bank via the SWIFT network. Certain suppliers may accept a standby L/C from the buyer’s bank. This is a contingent obligation by the buyer’s bank to make payment in the event the buyer fails to fulfill an obligation, such as failing to pay the supplier after receipt of certified goods. The standby L/C only gets drawn if the buyer does not complete its payment obligation, giving confidence to the supplier, especially in an unsettled economic environment. This payment method can also give buyers a negotiating advantage when bidding on limited supplies. Both of these Trade Finance approaches eliminate the need for pre-payment, and are familiar to global suppliers. Agency and Trust solutions Early in the COVID-19 crisis, many buyers sought flexible payment solutions that would allow them to both negotiate with suppliers, and to securely make payments to unfamiliar suppliers that lacked the ability to enter into L/C arrangements. Some buyers turned to Agency and Trust solutions to enable them to negotiate with suppliers and deliver payment. Under one Agency and Trust solution, a buyer enters into a Deposit Agreement with their bank as Agent. Funds are deposited with the bank, which then provides a letter to the buyer, Secure, Efficient and Flexible Payments Are Paramount During COVID-19 and Beyond Seller (Supplier) Citi Agency & Trust Buyer Importer Exporter 4) Deliver Inventory to Buyer 3) Letter Confirming Sufficient Funds 1) Buyer Enter into Deposit Agreement 2) Funds deposited with Agent Issuing Bank Advising Bank 1 6 6 6 6 5 4 3 2 4 4 $ $ $ Goods Goods Applicant Beneficiary For clients sourcing goods from new or unfamiliar suppliers, Trade Finance solutions can add security.