As the volatility following the 2008 financial crisis
recedes, the ‘new normal’ has become a pithy term to describe the key challenges
that are now a feature of the landscape and are set to remain constant in the
otherwise continually-evolving financial environment.
challenges range from credit constraints and low interest rates to the hurdles
presented by the growing importance of emerging economies – in terms of
accurately assessing risk in new, less familiar markets and managing a wider
spread of currencies. Above all, there is continued market uncertainty; the
primary cause of which is a raft of new – and changing – regulations.
With compliance measures tightening for banks and pressure increasing to
implement further measures – even as the ultimate impact of those already in
play is yet to be determined – corporates are becoming concerned about the
knock-on effects on liquidity management. Such concerns are justified,
particularly with respect to the Basel III capital adequacy regime.
While the overriding aims of Basel III are laudable, there is a danger they
may be undermined by unintended or unanticipated consequences. For example, in
stipulating that banks shrink balance sheets and hold longer-term deposits,
there is a chance that shorter-term balances and/or those that fail to be
classified as ‘operational cash’ (a category which receives more favourable
treatment under liquidity coverage ratio (LCR)), may become less attractive to
some banks. As a result, corporates – particularly those that have built up
substantial cash balances since the crisis hit – need to re-think investment
strategies and question what it means to optimally-manage cash against the
current backdrop of ongoing change and heightened risk concerns.
Such heightened complexity is, in turn, expanding the role and remit of the
treasury function. This is undoubtedly a challenge for corporate treasurers, as
it comes at a time when staff and fiscal resources are likely to be constrained.
At the same time it is also one of the positive outcomes of the present (and
ongoing) global economic uncertainty, and highlights the pivotal importance of
the treasury role in business growth and longevity.
Function: From Operations to Strategy
As cash management and
financial supply chains become increasingly intricate and involve specialist
processes, the role of corporate treasurer has matured into a strategic
function, rather than purely operational one. As a result, part of the ‘new
normal’ involves treasurers having input in decision-making both at board-level
and across multiple departments such as IT and procurement. In doing so, they
can help redevelop liquidity, working capital and risk management practices to
more effectively realise their organisations’ wider goals.
course, maximising cash and minimising risk have always been the treasurer’s
responsibility and many concerns in this respect, such as gaining global
oversight of cash positions, are perennial. These factors are, however, now
being considered in a new light. For example, efforts to improve overall cash
visibility are now as much a question of fund optimisation (to decrease
dependency on debt) as managing operational risk.
In addition, enhanced
transparency over cash flows can help reconcile the common corporate dilemma of
surplus funds earning little interest in one location while paying high
overdraft charges in another – with the eradication of such discrepancies
better-enabling companies to self-fund operations.
the use of such funds has widened. For example, Basel III-induced investment
concerns, combined with efforts to minimise risk throughout the financial and
physical supply chains – mean that surplus funds are now not only being put to
best use internally, but increasingly employed externally to secure supply chain
Concerns over the stability of key suppliers, which
is vital given current levels of trade interconnectivity and the prevalence of
just-in-time inventory management, are sparking greater interest in financial
supply chain (FSC) solutions. When correctly designed and implemented, FSC
solutions can improve automation and optimise working capital throughout the
end-to-end supply chain. A key technique in this respect is financial arbitrage
– enabling 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. FSC is a rapidly-developing sector and is
proof that treasurers are looking beyond the traditional avenues to put cash to
Treasurers must also ensure cash optimisation efforts meet
(and continue to meet) compliance requirements across all geographic areas of
operation. Though it is easy to view compliance regimes as yet another source of
cost and complexity – at least in the short-term – regulation can act as a
catalyst for lasting, wide-reaching change. This does, however, require
forward-thinking and access to the necessary guidance and operational support.
Compliance with the single euro payments area (SEPA) is a case in
point. Though the initiative applies only to the eurozone, its principles can be
applied globally with far-reaching benefits It is thinking along these lines,
rather than focusing solely on meeting compliance, that can make a real
difference to treasury operations.
Regulation and Innovation
In fact, there are several elements of SEPA that offer the potential to
improve operational efficiency globally and spark innovation. To illustrate,
SEPA requires that all transactions are conducted in extensible markup language
(XML) format. As XML can accommodate all payment transactions and not just those
that come under SEPA, its use can bring not only significant ERP benefits, but
also enable global standardisation and dematerialisation.
opportunities SEPA presents for international efficiency do not end with XML –
and again stem from what are, initially, challenges to be overcome. For example,
with the sole permissible account identifiers being International Bank Account
Numbers (IBANs) and Bank Identifier Codes (BICs), both the gathering of such
information and also the challenges associated with incorrect or incomplete data
can pose significant problems for allocation and reconciliation.
order to overcome this, Deutsche Bank has developed Accounts Receivable Manager
(ARM) for SEPA, a corporate cash management solution designed to help global
organisations streamline receivables management. The solution, developed in
conjunction with global e-commerce company PayPal, allows multinationals to use
IBANs to fully-automate payer identification without the need to match existing
client data; thereby enabling them to manage euro receivables throughout the
eurozone using a single consistent reconciliation process. This not only reduces
administrative costs but also minimises the complexities associated with
maintaining multiple bank accounts for separate lines of businesses – a further
example of how regulatory pressures (combined with close bank-corporate
collaboration) can drive solution development.
And collaboration is
key. Managing the current pace of industry evolution – which at the current rate
means the new normal could well be the ‘old normal’ in 12 months’ time – will
require banks and corporates to work ever more closely to find
mutually-beneficial ways of overcoming the challenges presented by uncertainty
and change. In an evolving environment, relationships are vital to the creation
and promotion of best-practice in cash management and trade finance and will be
fundamental to future treasury success.
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