EuroFinance Day 2: From the Treasury of the Future to Funding and In-House Banks

The second day at the conference kicked off by looking at the technology that is likely to define the treasury of the future. Panellists for this discussion were Gautam Jain, global head of Client Access at Standard Chartered Bank, Anthony Northam, head of FX Asia with Thomson Reuters, and Amit Sharma, head of Ecommerce & Channels at Bank of America Merrill Lynch.

Northam said the key challenge for banks is to give customers, who are used to the simplicity of an iPhone or a tablet, the same experience they get in their personal life and to make the transition from the phone to the laptop seamless. That seamless experience still needs controls or checks and balances, he said, so that treasurers don’t make errors such as executing a US$10m deal after five beers. “Mobile has the potential to change the way you do business,” said Jain. “The key is to be nimble.”

To manage risk, Northam said, the most interesting project underway is the complete global mapping of corporate entities, which means every entity is mapped into a parent or subsidiary. Once the map is in place, corporates can look at how a client’s subsidiaries may face risks.

Sharma commented that the next phase is for technology to become predictive and use pattern recognition. Northam used the example that technology needs to find the one tweet among about 1,000 tweets per second these days that may be relevant to the treasurer, develop solutions that can tell proactively when a regulation is about to change and how to react, and interpret how a weather incident may interrupt the supply chain.

        

The Bank of the Future

The technology panel were not the only people looking to the future, as a following session explored what the bank of the future may look like. Discussing this were Chye Kin Wee, head of Transaction Banking Asia Pacific at BNP Paribas, Scott Engle, the group treasurer of AIA Group, Dianne Challenor, head of Transaction Services Asia Pacific with J.P. Morgan and Victor Penna head of Treasury Solutions at Standard Chartered Bank.

Providing the corporate perspective, Engle started the discussion by saying that banks overvalue their value to a corporation: “If you think about the value chain of my business, the things the bank can do is a small part. Banks don’t understand the value chain of the client. The PayPal virtual wallet is an efficient approach and the only thing that keeps me from doing it is that it isn’t widespread enough. Banks don’t get it.”

    

Engle also suggested that banking needs to be easier: “iTunes allows easy access to a database of things, and the user has no idea how it works. You never have to learn a set of commands, it is intuitive. Clients want to pay in a way that’s as easy as iTunes. The banks that figure it out will survive.”

    

Challenor agreed, saying banks need to move away from shackles of the past to deliver services quicker, cheaper and more efficiently, and to “deliver a way for our customers to connect to their customers.” She added that banks currently have a payment guide for customers. “You should just say it’s easy.”

    

Engle agreed, saying banks systems are “so unintuitive that you have to send me a guide. The difficulty banks have is that they have a factory to produce a product, and the world has changed, but because banks own the factory they don’t change.” He expects that compliance will be disassembled and taken away from banks, migrating instead to a vendor that provides that security.

In concluding thoughts on the one key component of the ‘bank of the future’, Wee said banks would attempt to be as simple as possible in doing payments and collections. Engle commented that the bank of the future will look like Alibaba, while Challenor similarly said banking will be as easy to use as an iPhone.

    

Strategic Funding

In a session giving practical insights to corporates, Damian Glendinning, treasurer at Lenovo, focused on funding. The big question we all face, he said, is how to protect our companies against the things that go wrong. “We need to plan for what might go wrong before it does, and challenge the assumptions we all make that ‘things cannot go wrong’.”

The reason to focus on preparations, Glendinning said, is that “accidents happen.” While few expected the global financial crisis, the shuttering of banks in Argentina for 18 months or other similar events, they all did happen. These examples demonstrate why treasurers need to be prepared for the next big event. “Funding sources can dry up,” warned Glendinning. “If a market dries up, you have a problem.” To be ready for any situation, the first step is to have enough cash on hand for at least several weeks. Lenovo, for example, keeps four weeks of cash on hand.

Glendinning advised that the first source of funding is cash on hand, and that corporates should spread this among banks through a system of counterparty limits. Corporates can also use factoring, bank loans or bankers drafts “We’ve tried hard to make sure these things are negatively correlated or not correlated,” explained Glendinning. “It is also important to diversify across markets and then to build relationships to help ensure funding is always available.”

Summing up his recommendations, Glendinning said “the world is volatile. Secure funding may disappear.” For the corporate treasurer, then, a funding plan must meet the needs of the business. “A good funding plan is like an insurance policy – you pay for security.”


In-House Banks in Asia

On the afternoon of the second day, Jarno Timmerman, head of Treasury at Akzo Nobel, and Martin Schlageter, head of Treasury Operations with F. Hoffmann-La Roche, provided their insights on how they set up in-house banks (IHB).

Timmerman said treasury first made sure the IHB fit into the broader corporate strategy. They then engaged SAP to provide modules for treasury and risk management, cash and liquidity management, an in-house cash module and a bank communication management module. The result is an in-house bank structure that facilitates netting, a payment factory, uploading bank statements, cash forecasting, internal funding management, FX hedging and more.

In terms of process, in-country entities opened an account for the parent company and brought collections into the in-country bank account, which sweeps into the header. At the end of the day, all of the cash is managed by central treasury. Local entities now they send the payment to the centre, which looks for the way that is the most efficient.

The biggest advantage, Timmerman said, is full visibility of the payment footprint around the globe. Payments are centralised, so the Akzo Nobel treasury can determine routing and optimal execution. “The other big advantages are standardisation, better pricing, better control, lower foreign exchange fees and Akzo Nobel can do in-company netting. If an entity needs funding, they can borrow working capital from the in-house bank account.”

Structuring the IHB took about 12 months, Timmerman said, for blueprint, realisation, acceptance testing, and going live. Then, it took another 12-18 months for the global roll-out. Timmerman estimates the annual savings at about €10m, an amount that reflects centralisation of liquidity, fewer overdrafts, improved rates, elimination of float, fewer FTE, a reduced number of bank accounts, FX conversion, and savings on FTE.

Schlageter similarly set up an IHB at Roche, the impetus for which came from when treasury, which had been a profit centre, incurred a loss. That change led to development of a treasury roadmap and the idea of treasury as a service centre to detect and manage risk. “What you have to look at is what are the pain points, and build the structure to serve the business,” he said. The roadmap included optimisation of payments, a system to manage FX, greater efficiency in handling the 2.5 million invoices internally and harmonisation of banks. “We had 156 banks,” Schlageter said. “We now have 12 core banks.”

The result, he said, is an IHB that is more than treasury operations. “It makes other functions easier – standardisation, harmonisation and cash pooling.” Roche now invoices all the subsidiaries in their local currency, manages foreign exchange (FX) exposure centrally and guarantees 24-hour FX rates. The in-house bank also does compliance filtering on payments, cash pooling, payments on behalf and collections on behalf. Moreover, they also have a working capital initiative underway.

Conclusion


From the high-level look at where treasury is headed to practical insights into setting up an in-house bank and managing liquidity, presenters provided valuable information that will inform treasurers on managing existing functions better today and developing a better strategy for the future. gtnews will be at EuroFinance on the final day on Friday, as the focus turns to how to optimise treasury in China.

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