The Next Generation of Treasury

Globalisation increases the corporate need for cross-border solutions. This trend has been accompanied by the streamlining of treasury departments over recent years. Technology has been an enabler, supporting the new requirements of the financial nerve centre and environment in which treasuries now operate.

The factors that are shaping change are numerous and diverse; the most evident of them include:

  • Continued globalisation.
  • Centralisation of treasury and related working capital activities.
  • On-going economic uncertainty and increased risk.
  • The treasurer’s increasing responsibility for, and focus on, risk and liquidity.
  • Recent regulation and forthcoming regimes, such as the final introduction of the single euro payments area (SEPA) in February 2014 which will accelerate changes in behaviours – in account structures, processes and technology.
  • Corporates’ focus on cost and efficiency, which often means that treasury is required to accomplish more without any increase in – or even a reduction in – resources.

The financial crisis in 2007-08 diverted attention somewhat from these developments toward coping with the fallout, but more recently there has been a resumption of growth initiatives and a more forward-looking agenda.

Each of the above factors has been accompanied by the steady elevation and expansion of treasury’s role within the organisation. This has been most evidenced by increased responsibility for, and expected rigour around management of all risks, with counterparty risk at the centre. At the same time treasury is being seen as an increasingly important partner with and advisor to business units, and as the source that senior executives and key stakeholders throughout the organisation turn to for instant reports on liquidity and risk positions and to assess the financial impact of major events whether economic, political or environmental. This trend was already underway before 2007-08, but the crisis propelled the treasurer even more centre stage.

Treasury Moves Centre Stage

So today’s treasury department is a strategic adviser, more closely integrated with the organisations’ other business units and supporting globalisation, efficiency, trading partners/supply chain integration and greater sophistication in risk/return optimisation.

The treasurer has become a disseminator of intelligence rather than just information and has greatly increased influence with both internal and external stakeholders. The new demands on treasury require faster, better, more integrated access to data and the tools and techniques to make sense of this data. It also means that treasurers are much more reliant on technology than before the crisis.

Corporate treasuries have an array of technologies available to assist them in the execution of their roles, both bank (web channel, host-to-host file transfer, etc.) and third party solutions (e.g. treasury management systems, risk systems, AP/AR workflow tools, etc.). These solutions are evolving with corporate treasury needs, with the evolution of web and cloud technologies and with greater adoption of SWIFT connectivity and standards initiatives (e.g. ISO 20022). How a corporate imbeds technology into their treasury processes and which technologies depends on a host of factors including size of company, industry, geographic footprint, nature of trading partners (e.g. corporates, consumers, public sector), degree of centralisation, complexity of debt and investment portfolios.

There was a brief period when it was thought that the evolution of third party treasury technology solutions and the introduction of SWIFT connectivity would eliminate the need for bank web channel solutions for the largest corporates; that they would be largely mid-market and small business solutions. However, the treasurer’s evolving role and responsibilities, increasingly complex and risky environment he/she is operating in, dramatically increased need for accurate and timely data from banks and the technology and tools to make sense of that data.

Until relatively recently, when corporates selected their banks, they were focused on functionality and would tour each bank to test that functionality and the efficiency of the bank’s operations – to “kick the proverbial tyres”. . Today, functionality is considered more of a given. Now corporates want an in-depth demo of the web channel; in-depth understanding of all channels for the exchange of data/information and the interoperability among the channels. The focus has shifted to end-to-end customers’ service and communication with the bank – how they will be implemented and how they can expect to be serviced post-implementation. Banks such as Nordea are keenly aware that the role of communication channels is central to their client relationships.

Further change is in the offing. With smartphone ownership rapidly increasing treasurers want to be able to deal with their bank system in the same way they do with their own private system. They want web channels to be user-friendly, provide real-time visibility and access to data and for that data to be fully transparent. Will it give them the necessary flexibility and immediacy of data to carry out analytics and make decisions? And with the need to ensure that excess cash is utilised as deftly as possible, does it offer the tooling structures that give visibility to their liquidity, so they know how best to utilise it? These demands have motivated treasurers to look carefully at their technology, be it a treasury management system (TMS) or a bank web channel.

As treasury becomes more established as the financial nerve centre of the organisation, it not only requires accurate data, but technology that enables timely access to and integration of that data into the company’s systems in order to achieve straight-through-processing (STP) and perform analytics. That means looking to banking partners for a web channel that provides host-to-host file transfers, straight-through-processing and immediacy of data. At the same time the company itself is looking for means to further streamline operations through centralisation and optimisation, in order to further reduce costs.

Technology Continues to Evolve

In the past, both companies and their banking partners were able to secure efficiencies when web technology originally replaced PC-based solutions. As the second generation of web technology is introduced, however, more solutions (bank and other) are rapidly becoming out-dated. Updating means not only providing the required functionality but as importantly or sometimes more importantly, providing the ease of use, tools and value-added capabilities that help simplify treasury’s increasingly complex role. These updates can mean enhancing how intuitive and easy the system is to use/navigate, adding self-service functionality, adding bank account management capabilities, providing online tools for the management of payments files, adding tools that facilitate forecasting, ensuring seamless integration with third party systems and clients’ systems. 

Smaller companies are transitioning from manual to more streamlined processes, while larger companies are now recognising that moving from in-house solutions to external solutions offers efficiencies. The latter might talk of becoming bank independent, but in reality they need web solutions from their primary banks that provide visibility and real-time access to data as they deal with more complex account structures and account set-ups. Both multinationals and small to medium-sized enterprises (SMEs) alike want to be in control of interfaces, so that they can complete more processes electronically rather than manually.

Increasing globalisation and more cross-border solutions are emerging at the same time as companies are seeking to centralise operations within treasury or a finance department. Globalisation means new requirements on a company’s banking partners to support their corporate clients, enabling them to go online to monitor and update their files, manage receivables, authenticate or delete payment orders, all through efficient interfaces.

Although the trend towards STP has been on-going for many years – indeed cost efficiency, centralisation and optimisation have long been high on Nordic corporates’ agendas and their level of STP is among the world’s highest – the focus on it continues to increase. It now extends to cover each and every interaction with the bank, even down to the lodging of a complaint. Treasurers and other financial professionals do not want to have to pick up the phone and call; instead they require an interactive electronic dialogue so that any problem, such as not receiving a payment file, can promptly be addressed and rectified. Saving time is of the essence, so the bank’s interfaces must be well constructed, look good and be user-friendly.

Collaboration is helping these demands to be met. A good example is Common Global Implementation (CGI) which is comprised of banks, third party providers and corporates interested in coming together to agree on common formats to facilitate the implementation of ISO 20022. Areas such as payments handling is increasingly regarded by companies as a commodity, and therefore not one that they wish banks to compete in. Rather, they prefer a commonly-agreed streamlined process.  Current initiatives such as SEPA are strong drivers for standardisation, which are shaping the thinking and attitudes of treasury departments.

Even the more traditional bank services are becoming commoditised in the process, so that although differentiation between individual banks partly reflects their global presence it increasingly rests on the strength of their web and electronic banking channels. This is where the company is controlling and managing its liquidity and its accounts.

Nordea’s initiative in this area, the Global Cash Pool, is a cross-border real time solution that was launched last year in the Nordic region. It is a service that is proving so popular that Nordea is already extending its geographical footprint, to follow its customers into the new markets in which they now operate.

Instead of sweeping at the end of each day, which always carried with it a degree of insecurity, the new system provides full visibility and full control of the cash balance. When everything moves in real-time, treasury departments can be assured that the money is always there under their control, in one account at any given moment. It’s a service that is proving so popular that it effectively sells itself and Nordea intends to extend it further to Germany and the UK.

Bank as Counterparty

The financial crises of recent years have fuelled discussions on managing risks, including counterparty risk. Being a stable partner for its customers is extremely important to a bank such as Nordea. To meet regulatory challenges and maintain its strong position, the group has initiated one of the most ambitions strategies of any bank in the world, enabling it to focus on customers and their needs, as well as shielding them from the direct impact of the new regulations.

There has been growing concerns that a further financial crisis is becoming a real prospect. This has seen counterparty and settlement risk move to the top of the treasury agenda. As a result we are seeing a reversal of a trend established for some 15 to 20 years, in which treasury departments sought to limit or reduce the number of relationship and correspondent banks they dealt with in each country. That attitude changed in 2007-08, when events proved that having more than a single credit provider was a good insurance policy for companies. Nordea itself gained more cash management relationships as many decided to ‘share their wallet’ with more banks.

Conclusion

The crisis has been the catalyst for treasury departments to focus on what is required to help them execute their elevated role, including the very latest technology, in which full visibility and STP are essential elements. The onus on the banks is to provide treasurers with accurate data and the technology and tools to flexibly access that data, integrate it into their systems and analyse it in order optimally manage risk and liquidity and respond to executive management inquiries. The strength of banks’ service offerings will be a differentiator as treasury increasingly takes centre stage within the organisation.

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