Corporate Treasury in North America: Investing in the Recovery

We are five years into the post-crisis era and US
companies’ prime concerns are not bank liquidity constraints, as many have
accumulated significant cash reserves since 2008’s ‘credit crunch’.  Instead,
they are now focused on how best to optimise cash to invest in the global
recovery. While cash optimisation is a perennial corporate concern, ongoing
market uncertainty, driven mainly by regulatory change, is challenging
long-standing cash management practices. The implementation of Basel III – an
initiative designed to improve the resilience, risk-mitigation and
transparency of the global banking sector – is fundamentally changing cash

Though the likely effects of Basel III, and the more
recent discussions around leverage ratios on trade finance, have been subject
to great debate, its impact on bank liquidity management – and how the changes
may serve to alter established bank-corporate dynamics – has perhaps been less
discussed. By stipulating that banks shrink their balance sheets and hold
longer-term deposits, there is a chance that Basel III may render shorter-term
balances less ‘valuable’ to some banks, which may lead corporates to explore
riskier investment options.

Overcoming this will require
innovation on the part of banks, as well as greater bank-corporate
collaboration. Working more closely to determine the optimal duration of
liquidity can allow companies and banks to reach mutually-beneficial solutions,
with corporates on the one hand standing to benefit from better rates of
return, while banks on the other being able to optimise balance sheet
management. The use of a call deposit account, whereby a set amount of cash is
invested for a defined period that rolls over until called by the corporate
client, is one example of such collaborative innovation. Further examples
include the growing use of short-term deposits as collateral for financing
solutions, such as letters of credit (L/Cs). This can result in lower funding
costs for corporates and improved balance sheet management for banks.

Optimising Working Capital

working capital management is key to cash optimisation. Such is the importance
of working capital that some corporates have even appointed members of staff
to take specific responsibility for driving days sales outstanding (DSO) and
days payables outstanding (DPO) optimisation. This is a growing trend, as is
closer internal cooperation between treasury and other departments such as
procurement and risk. There is also a growing focus on extending in-house
working capital management improvements to key supply chain participants.

The increasing emphasis on improving the flow of working capital
throughout the end-to-end value chain has sparked interest in supplier finance
and financial supply chain (FSC) solutions – a development that has gained
notable traction over the past five years. When correctly designed and
implemented, FSC solutions can lead to optimal working capital throughout the
supply chain – thereby improving buyer-supplier relations and commercial
sustainability and decreasing dependency on bank debt.

arbitrage is a key technique in this respect. It enables smaller suppliers to
leverage their larger buyers’ credit ratings in order to gain more favourable
lending conditions, while buyers in return may benefit from extended payment
terms. This is a rapidly-developing sector, and serves as proof that market
and regulatory pressures are leading treasurers to look towards broader, more
global avenues to put company cash to best use.

and Technology 

The need for such global scope, in turn,
underscores the reliance on technology. Indeed, technology and modern treasury
management go hand-in-hand; corporate demands for greater speed, efficiency,
visibility over global cash positions and access to transaction-related data
and information simply cannot be met without them. However, technology
advancement and innovation does not necessarily lie in enhancing functionality,
but rather in improving access to existing solutions. This can mean enhancing
their ease of use, as well as ensuring their global integration and

Deutsche Bank’s Autobahn App Market, for example,
illustrates how electronic products across business divisions and asset classes
can be combined into an integrated offering and adapt to clients’ individual
business profiles for an improved client experience. Each application is
customisable to allow for maximum control and efficiency, and companies are
also able to choose how applications are grouped according to their operating
models. Technology that can offer such a high degree of control and flexibility
will be vital to US corporates, as they look to replicate domestic efficiencies
in key overseas markets.

In addition, when it comes to efficient and
timely processing of payments across the globe, artificial intelligence (AI)
can be used to develop rules that allow systems to handle queries
automatically and improve processing speed, which are crucial elements of
next-generation treasury technology.

From Regional to Global

Over the coming years, we expect the treasury
focus of US companies to shift from home to abroad, as they seek to reproduce
overseas the domestic advances achieved in centralisation, automation and
standardisation. As Europe is pretty well advanced in this respect for
American companies, Asia and Latin America are becoming key focus regions, as
are the Middle East and North Africa (MENA), with companies looking to extend
their MENA treasury hubs beyond Dubai and Abu Dhabi.

treasury efficiencies across countries and continents can be a complex process
that depends not only on capability, but also on detailed local market
knowledge. The ability to replicate proven practices at home in another
location is ultimately governed by what in-country laws, regulations and
commercial norms do and do not allow. A partner bank with global reach,
capabilities and a strong on-the-ground presence should be able to support
such developments and continue to act as a crucial facilitator as regional
integration becomes global integration.

Achieving global
integration – which depends on the establishment of global best-practice –
will be both a question of innovation and also ‘reverse innovation’.  This
term, popularised by two Dartmouth University professors and Jeffrey Immelt at
General Electric, refers to “an innovation seen first or likely to be used
first in the developing world before spreading to the industrialised world.”¹

This is putting the ‘leapfrogging’ effect, from which many
emerging markets have benefitted, in reverse. Being open to making
improvements in this way – and indeed any way that market and regulatory change
may deem necessary – is vital if US companies are to remain globally

There is no question that these are changing,
challenging times and the importance of understanding and adaptating to
regulation cannot be overstated.  Keeping abreast of regulatory change – and
particularly its inconsistency across markets – is a significant challenge for
banks and corporates alike, and requires the two to work ever more closely
together to find mutually-beneficial ways of overcoming the hurdles ahead. We
believe such relationships are key and banks remain committed to supporting
the expansion plans of our clients in the US and beyond.    

¹ Vijay Govndarajan and Chris Trimble (2012). Reverse
Innovation. Harvard Business Review Press



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