2010 in Review: Mounting Challenges for Treasurers

Publication: gtnews.com

This year has seen treasurers face challenges on several fronts. This review of 2010 examines industry trends and reveals the top 10 most read topics on gtnews this year. 

Looking back at 2010, it is fair to say that, thankfully, it has been less tumultuous than the couple of preceding years. This was the year that many economies around the world emerged from recession and, while not exactly sprinting into growth, the widely predicted doubledip recession has failed to materialise. So far, so good? 

Perhaps not - looking beneath the surface, there are clearly still many structural cracks in the global economy that could derail future stability. In Europe, the sovereign debt crisis threatens to catch up with many more countries in 2011, while the euro itself is under the most intense pressure of its short history. How long will German taxpayers be content to lead the bailout of other nations? 

In the US, the Dodd-Frank Act became law, creating huge changes for both banks and corporates in their accounting and reporting processes, while ‘QE2’ showed a marked difference in approach to deficit management compared with most European countries. Even China, seen by many in the west as the saviour of the global economy, has been struggling with a number of economic issues of its own. Under fire from the US and Asian neighbours for manipulating the value of the renminbi (RMB), the spectre of inflation also looms large in China. 

With considerations such as these, the role of the treasurer is not getting any easier. The rise in profile of the treasury department over the course of the credit crisis has been well documented, but in many cases this has not been matched by a similar rise in resources. So in a situation of having to do more with less, what have been the topics that gtnews subscribers have been reading the most this year?

Cash Management Concerns to the Fore 

Perhaps unsurprisingly, cash management issues dominate the ‘most read’ list for 2010. But within this broad umbrella description, a number of issues emerge, including cashflow forecasting, cash management systems and the centralisation of cash management processes. 

Forecasting 

Looking at cashflow forecasting, the gtnews Treasury Insider’s blog on the topic had the rather provocative title “Cash Forecasting: Is It Really Worth It?” In the post, the gtnews Treasury Insider explains that, while they don’t need convincing of the importance of cashflow forecasting, there are a couple of major challenges they face in their organisation: 

1. I need to encourage the subsidiaries to get into the habit of forecasting regularly, by which I mean once per week, with updates when necessary. 
2. I need to improve the accuracy of these forecasts. I am keenly aware that the nature of our business dictates the frequency required for forecasting. 

The Treasury Insider sees the issue for their company as being an internal personnel issue rather than a system issue. And the blog post gained a large response from the gtnews readers. Selected reader comments include: 

• “I can only support the absolute MUST of cashflow forecasting and also the need to have a at least three months outlook especially when you have to plan out your short-term financing needs, like we are having to do in my company.” 
• “We went from a loose two-week forecast model in 2008 to a very rigidly enforced 13 week model in early 2009 in response to the economic crisis. The outcome played a large part in ensuring that our company avoided any breach of financial limits or covenants - its simply that important.” 
• “Regarding your issue no 1, the best way to solve this is from the top down. Your CFO [chief financial officer] needs to be behind you. Anything less than that will get short-term attention.” 
• “Better cash forecasting will not occur until the link between profitability and liquidity is measured more precisely, and those involved are rewarded for meeting their goals.” 
• “... treasury needs to take the lead not only by owning the cashflow forecast process, but by clearly articulating the benefits across the organisation.” 
• “Technology also helps complete the information loop by quickly communicating back forecasting effectiveness at a level of detail that is actually useful to the remote user.” 

Clearly the optimum forecasting rate - daily, weekly or monthly - varies from company to company, and there were different views on this from the readers who commented. Common themes surrounded the importance of getting senior management onboard with the forecasting process, and also educating business units as to the importance of accurate and timely cashflow reports. To get a successful cashflow forecasting project off the ground, treasurers need to be adept at communicating the benefits to all invested parties. 

A centralised approach to cash management 

In their article that looks at centralising the cash management function, Diejana van der Wal and Heijmert Rijken from Rabobank acknowledge the role that cashflow forecasting can play as part of a centralisation programme. Integrated with cash pooling, it can be an important tool for improving cash management as it lets the treasurer have visibility of their company’s cash, no matter which country or currency the account is held in. 

In terms of pooling, one example of this helping to centralise liquidity management that is given is this article is the end-of-day sweep. This process makes it possible to transfer balances from local accounts to one central account or to centrally maintained accounts in the name of the local subsidiaries. It is also possible to automatically move the balances back to local subsidiaries, while profiting from the advantages of a central interest pool. 

Van der Wal and Rijken explain that this allows the treasurer to have better control over their cash, while they can also view it as a corporate asset within the organisation. 

System choices 

The most read piece of content on gtnews in 2010 was an article from Joergen Jensen at Nasarius, who provided a guide to cash management systems in Europe. In the article, Jensen examines a variety of areas related to cash management systems, such as the type of vendors (banks, enterprise resource planning (ERP) providers and specialist vendors), what you should look for in a system to suit your organisation, and how to approach the selection process. Jensen also takes a look at some of the specific offerings from the different types of vendors that are available, and offers some advice as to which types of systems may better suit which types of organisations. 

This year, gtnews also published a buyers guide to treasury management systems (TMS), providing a comprehensive report on the various issues that treasurers face when selecting and operating a TMS, featuring interviews and case studies from a variety of treasury professionals and a TMS matrix comparing the functionality of a large range of systems. You can download the TMS buyer's guide free of charge. 

SWIFT Success? 

Articles related to SWIFT take up two of the top four places in the most read chart on gtnews this year, demonstrating the demand for information that exists when it comes to the role that SWIFT can play in making corporate bank communication more efficient and secure. The content with most relevance to corporates in this list is Debunking the SWIFT Myth, written by Joy Macknight and published in July this year. In this feature, Macknight asked the question why, despite the benefits that SWIFTNet offered corporates by providing a single, standardised and secure channel, had not a greater number signed up to use the service? It certainly seems that preconceptions about the accessibility of the SWIFT network had played a role in the slow take-up, with many corporates questioning whether they have the volume of payment information necessary to justify the cost of gaining SWIFT connectivity. 

To combat this perception, SWIFT has launched a variety of different connection methods for corporates - from plugging in a USB stick to gain off-the-shelf connectivity through Alliance Lite, through to outsourcing connectivity to a SWIFT service bureau (SSB). The additional services that SWIFT is now looking to offer as part of an overall package is also helping to gain traction, through innovations such as: 

• Exceptions and investigations. 
• Trade finance. 
• Secure e-mail. 
• SWIFT Secure Signature Key (3SKey). 
• Electronic bank account management (eBAM). 
• Electronic invoicing (e-invoicing). 

As Marilyn Spearing, global head of trade finance and cash management corporates, Deutsche Bank, and chair of SWIFT’s Corporate Access Group, says in the feature: “Everybody is talking about electronic bank account management and e-invoicing - in other words really expanding what can be done through the same channel.” While SWIFT connectivity is still not going to be high on the agenda for some corporates, these value-added offerings look likely to give a welcome boost to SWIFT’s corporate numbers. 

To compare and contrast a selection of the SSBs available for corporates, download the buyer’s guide to SWIFT service bureaus that gtnews published this year. 

Evolution of corporate payments 

But there was a lot more going on in the world of corporate payments during 2010 than just debate over SWIFT. An article from Nigel McCook of Edgar Dunn & Company discusses the possibilities for future trends in payment systems. Analysing survey results, the article focusses on understanding the importance, both today and in the future, of individual payment products, as well as the key industry events that are expected to shape the payments markets over the coming five years. Some of the key findings discussed include: 

• Credit cards were the payment product given the highest rating in terms of current importance, followed by domestic debit cards. 
• Respondents from Asia gave comparatively higher ratings of importance to cash, mobile SMS, remote payments and remittance. 
• The top four payment products, in terms of their expected growth in importance over the next five years, are: 

1. Contactless cards. 
2. Mobile SMS/remote payments. 
3. Prepaid cards. 
4. Mobile NFC. 

These were among the payment topics under discussion at this year’s Sibos conference in Amsterdam. Following the past couple of years of battering this conference has taken - both from the Lehman Brothers’ collapse in 2008 and typhoon Koppu in 2009 - this year saw delegates and exhibitors alike emerge from their emergency shelters and hit the conference ready to do business and network. You can find full gtnews coverage of the conference here, including both the Corporate Blog and Banking Blog and a wealth of video interviews with perspectives from a number of industry experts. 

Risk Management Issues Rise 

One of the more blatant legacies of the credit crisis has been the rise of risk management and mitigation that treasurers are responsible for. A glaring example of this is the fact that corporates now actively need to carry out counterparty risk analysis of their banking partners - something completely at odds with the ‘one global bank’ policy that many corporates were actively pursuing when credit was both plentiful and affordable. 

A key area of risk management this year has been foreign exchange (FX) - from currency volatility in Europe and South America to concerns over ‘currency wars’ in Asia, corporate treasurers have had to be increasingly mindful of their FX exposures. As such, it is no surprise to find the article from SunGard’s Ryan Heaslip in the top 10 content list. Entitled Cost-effective Foreign Exchange Risk Management, the article looks at steps corporates can take to ensure they have an efficient FX risk management strategy in place. Some questions Heaslip suggests treasurers start by asking include: 

• Are you currently able to gather a complete dataset of exposures?
• Is exposure information provided in a timely, detailed and accurate manner? 
• Is there an operational focus on reducing exposure? 
• Are risk factors used to rank exposures? 
• Is there a strategy that prioritises the types of risk to hedge (e.g. balance sheet, short-term forecast, long-term forecast)? 
• What type of derivative strategies will be used to hedge, after operational considerations? 

The topic of FX risk management was also high on the agenda at the inaugural Global Corporate Treasurers Forum Europe that gtnews hosted at the Grosvenor House Hotel in London in June. The event is an annual independent forum bringing together European corporate treasurers to meet face-to-face, listen to leading speakers and network with industry peers in a high level and exclusive environment. 

Discussion at one session of the forum turned specifically to the transaction risk element of FX risk - where the risk of value changes depending on where the transaction is. Some transaction exposure is not shown in the profit and loss (P&L) because it has not yet been recognised, or the contract is anticipated rather than committed to. A couple of the questions raised at the forum referred to a) whether transaction exposure should be hedged; and b) if it was hedged, whose responsibility within the organisational structure was this? 

One group treasurer explained that their company had decided not to hedge its transaction exposure as they would have had to involve all of its investors, which would have added complexity. It has an impact on reporting - the company would have had to have shown like-forlike figures, and they wanted to protect this information. The factors involved in weighing up whether or not to hedge this risk requires a full evaluation by corporates. 

If you are a treasurer or group treasurer, and would like to find out more about the Global Corporate Treasurers Forum Europe and register your interest in attending the 2011 forum at the Ritz Hotel in Paris, click here. 

Growth in Supply Chain Finance 

Another area of interest to corporates that received a ‘boost’ from the credit crisis is supply chain finance (SCF). The contraction of available credit in the market led to an increased need for bank financing. With a dearth of liquidity solutions available, SCF solutions gained a much greater global popularity. Picking up this trend, Alexander Mutter from Deutsche Bank examined what the future may hold for SCF offerings in his article that rounds out our top 10 for 2010. 

Mutter sees the growth of SCF leading to more diversified and bespoke solutions emerging, driven by banks. He uses the example of a supplier portfolio where there are large, mid-sized and smaller enterprises involved. “Today, a similar supply chain finance solution will be offered to all of them. In the future, the offering to the individual supplier will be customised according to their balance sheet objective, based on the need analysis of this portfolio and risk policies, as well as financial needs,” suggests Mutter. By taking this approach, the SCF offering will be more flexible and tailored to suit the individual customer profile. 

Responding to the growth in popularity of SCF as a topic among corporate treasurers, this year gtnews has worked with Enrico Camerinelli, a senior analyst at Aite Group and SCF expert, to publish a monthly blog on key SCF issues. Topics covered in 2010 include the return on investment in SCF, the importance of sustainable supply chains and the need for an industry standard taxonomy in SCF. You can find every blog post on the topic here. 

Looking Ahead 

2010 proved that, while the role of the treasurer has grown in stature, the demands this places on the treasurer are fierce and come in many forms. The economic world can still be paranoid and reactionary in the aftermath of the credit crisis and, as many corporates stockpile cash, perhaps some treasurers could be accused of fuelling the fire in this regard. It seems that this year has answered a number of questions - regarding global recession and the credit crisis - but thrown up several more challenges. 

Despite this, there are excellent examples of corporate treasury departments and individual treasurers demonstrating best practice across the myriad different disciplines mentioned above. We were lucky enough to witness this first-hand at gtnews in 2010 through the quality and quantity of entries we received for our first annual Global Corporate Treasury Awards, which was this year held in Amsterdam alongside the Sibos Corporate Forum. As you can see from the winning projects, teams and treasurers, innovation is alive and well in treasury departments around the world. 

Coming up on 4 January in our first upload of 2011, we’ll be publishing a series of articles offering perspectives and predictions for the year ahead and mulling over the challenges that are likely to come the way of the treasurer. Until then, best wishes for the holidays from everyone here at gtnews.

2010 AFP Annual Conference: Blog

Publication: gtnews.com

Post 1: Multichannel Bank Account Management (9 November 2010)
Electronic bank account management (eBAM) was in the spotlight at a session during the first day of the AFP Annual Conference 2010, with a panel discussion providing corporate, bank, and standards association perspectives.

One of the most compelling sessions on the first day of the AFP Annual Conference 2010 in San Antonio looked at the topic of electronic bank account management (eBAM). A buzzword of the past 18 months, eBAM can be a confusing topic due to the large number of players in the market and the fact that the concept itself is evolving. This session provided a corporate perspective from Barbara Quiroga, director, cash operations, lead, Delta Airlines; a bank view courtesy of Hilary Ward, certified cash manager (CCM) global product manager, global transaction services, Citi; and the thoughts of an international standards organisation thanks to Stacy Rosenthal, head of corporate and payments strategy, SWIFT. 

The session set out to demonstrate how the use of eBAM can help corporates be more efficient in their global banking relationships, particularly in areas where paper and manually intensive processes exist. 

Corporate Approach 

Quiroga began the session by illustrating the challenge that Delta faces in managing over 100 banks, operating in 80 countries and dealing with around 20 legal entities. Managing this number of relationships can be time consuming and challenging, and so the prospect of simplifying processes through eBAM was appealing to the Delta, particularly as their treasury structure is heavily centralised. To start the process, Quiroga explained the eight-point checklist that Delta drew up, listing what the company wanted out of any eBAM process that it entered into. These were: 

1. To eliminate paper. 
2. Control bank accounts in a centralised way. 
3. Track the progress of bank account requests internally and across the company’s banks. 
4. Search for and request changes to a single signatory across all applicable bank accounts. 
5. Use search capabilities to generate reports. 
6. Update the corporate address, contact data, legal structure and any other data and/or information associated with a bank account. 
7. Create a virtual signature card for each signatory that is legally binding and regulatory compliant. 
8. Provide authoritative reporting for corporate compliance needs. 

Quiroga reported that Delta had started implementing their eBAM programme in February of this year, and that it is ahead of schedule. The Delta case study is a great example of how corporates should approach eBAM - by having a clear idea of what they want to achieve with the implementation of eBAM and using these points as a way of measuring progress and the success of an implementation. However, it is worth noting that an eBAM project will only truly be successful - and indeed worthwhile - if the corporate implementing it already has a firm grip on their existing bank account management programme. This was a point emphasised by Citi’s Ward in her presentation. 

Bank Perspective 

Ward described how traditional bank account management was limited by issues such as: 

• A reliance on paper. 
• Manual processes. 
• Long cycle times. 
• Unreconciled records. 
• Embedded risk, such as numerous hand-offs and resolutions subject to interpretation. 
• Country- and bank-specific processes. 

The positive news surrounding eBAM is that the electronic processes involved have the potential to yield a number of benefits to bank account management, including visibility and control, security - with identity automatically built in to processes - and efficiency. However, Ward continued, “if you don’t know where the ‘BAM’ is, how are you going to get to the ‘e’?” In other words, eBAM isn’t going to fix a mismanaged bank account management programme. 

Standards are Needed 

SWIFT’s Rosenthal also agreed with the point that corporates need a solid foundation from their existing bank account management structure before embarking on an eBAM project. But looking at wider trends in eBAM, she argued that it is necessary for all stakeholders in the eBAM project to collaborate and define ‘common’ market practices. Rosenthal pointed out that standards in this area are evolving and will continue to evolve based on market adoption and feedback. 

The need for common standards is seen in the amount of banks and vendors offering solutions that are being marketed as eBAM. This was picked up by a delegate attending the session, who asked the panel who the ‘real’ vendors for eBAM are. 

In response, Delta’s Quiroga suggested that it depends on the process that the individual company operates internally, and that those tasked with selecting eBAM partners should find the best fit for their company. She also pointed out that there are lots of things that corporates can be doing while waiting for their bank to offer the desired level of eBAM support - the primary of which would be focusing on their current bank account management practice. 

Answering the same question, Rosenthal advised the delegates present to speak with the banks and vendors that they currently work with today, in order to help develop and shape the eBAM offerings of the future. There are around 12-15 vendors in the eBAM landscape at various stages of development, she advised. Looking to the future, it will be interesting to see how this market plays out, in terms of competitors falling away or partnering up.

Post 2: Closing the Gap Between Bank Cash Management Offerings and Corporate Needs (10 November 2010)
A session on the second day of the AFP Annual Conference 2010 examined how to close the gap between corporate expectations and bank solutions in the area of cash management. 

A theme of the AFP Annual Conference 2010 that came up in a session yesterday was the idea that corporates and banks need to work much closer together when developing appropriate treasury offerings and tools. This theme was reiterated in a session featuring representatives from Citi and AT&T, as well as Aite Group who announced findings from a recent corporate survey. 

According to the Aite Group survey, over 50% of the large corporates they polled had business with more than 20 banks. So it would be fair to say that corporate banking relationships are complex, overlapping and also fluid. Within these myriad relations, corporates are hungry for information on issues such as cash and liquidity visibility, risk factors and working capital automation. For the latter topic, many treasurers I’ve spoken to at the conference are particularly keen on learning how to move to straight-through processing (STP) and to eliminate both paper and silos from their organisational processes. 

Returning to the Aite Group research, but this time on the financial institution side, the survey found that one-third of banks described the credit crisis as being a ‘near disaster’ for them. However, as Christine Barry, research director at Aite Group, explained, those banks that had survived the credit crisis in better shape are now finding opportunities in the market through a variety of value-added tools they can offer their corporate clients. These include areas such as fraud prevention tools, more advanced liquidity and cash management tools, account receivables and payables management - an area where corporates are keen for more automation. All of these areas are being driven by new technology, and Barry made the point that technology is critical to future bank success. Technology helps to measure risk, promote accessible data and allow financial institutions to provide strong product offerings. 

Another interesting area of the research looked at the customer service experience corporates had when dealing with their banks. Asked whether they had ever switched banks because of poor customer service, 76% of corporates said they would, which backs up the idea of corporate banking relationships being fluid, as mentioned earlier. Numbers like these mean that banks are placing an ever-increasing emphasis on the client experience, and new technology is allowing banks to respond in, for example, some of the following ways: 

• Customer-driven dashboards. 
• Multibank reporting. 
• Strategic tools for better liquidity management. 
• More granular entitlements. 
• Real-time information. 

And corporates are ready and willing to invest in these new products if they are a good fit for their company. Sherri Bazan, corporate manager, domestic cash management, AT&T, explained that they have been developing a number of different treasury initiatives in the quest for greater automation and efficiencies. Some of the AT&T projects include: 

• Simple IBAN redirection solution. 
• Move from cheque to electronic payments. 
• Counterparty risk project. 
• Future improvements - electronic bank account management (eBAM) and automated clearing house (ACH). 

The overall feeling from this panel, and from the mood of the conference overall, is that corporates are keen to embrace technologies and systems that create financial and time-management efficiencies, but they have to be solutions that are created with the corporate in mind. Corporates are looking for end-to-end visibility and reachability in their treasury management processes, and solutions providers that understand how they can fit into this world will surely be successful in the years to come. However, that understanding can only come through detailed dialogue with their corporate clients.

Risk, Regulation and the Rise of Asia: Corporate and Bank Perspectives

Publication: gtnews.com

This year's EuroFinance Cash and Treasury Management conference was held in Geneva, Switzerland. The three key topics under discussion were risk, new regulation and growth in Asia. This commentary looks at the challenges and opportunities in the year ahead. 

This year the EuroFinance International Cash and Treasury Management conference was held in Geneva between 6-8 October. The economic situation is Switzerland is comparatively healthy when viewed alongside some other European countries, but what of the global economic outlook for the next year? This was the theme of the opening session of the conference, with Daniel Franklin, executive editor at The Economist, interviewed by Anne Boden, head of Europe, Middle East and Africa (EMEA), Global Transaction Services, RBS, on ‘The World in 2011’. 

Boden described how she had found paranoia about emerging markets on recent visits to the US. Franklin pointed to the fact that this is a permanent shift, which was accelerated by the credit crisis. He encouraged delegates to look beyond the BRIC countries of Brazil, Russia, India and China, and also be more discerning with opinions towards emerging market countries. I think this comes from a certain desire in the west to rush to acronyms and paint largely diverse emerging economies as the same. 

Turning to risks for the year ahead, and Franklin’s main concern is protectionism. He used to the US as an example for his fear - unemployment is stubbornly high and some in congress are calling for harsh trade measures in order to protect jobs in the US. The main focus of this ire is China, with the perception that it is manipulating the price of the renminbi in order to have a trade advantage. Franklin stated that China doesn’t respond well to threats, but at the same time would not want a trade war with the US. 

Looking at Europe, and Franklin dismissed the chances of the euro breaking up as no more than a 10% likelihood - believing the political will to hold the euro together will overcome any current disgruntlement in various of the member states. However, the mechanisms within the eurozone for coping with economic crisis need to be much more robust, with the various sovereign debt woes and the value of the euro standing testament to the fact that safeguards were not strong enough in the past. 

Many of the economic themes that Franklin discussed have been subject to direct political influence during and in the wake of the credit crisis. Franklin named political risk as the biggest risk faced over the next 12 months, stating that he believes this gives a 30% chance of the much-touted ‘double-dip’ recession. For example, some tax cuts introduced by former-US president George W Bush are coming up to their expiry date. Looking at the political polarisation in the US, and the possibility of next month’s midterm elections delivering a split Congress, these cuts may be unable to be reinstated, which in turn could strike a blow against consumer spending levels. 

Turning to business, Franklin named three key trends: 

1. Competition from the emerging markets is increasing - even in the corporate world. 
2. The global nature of business is only intensifying, be it in the talent pool, or where business operations are based. 
3. There’s a focus on having both of the key factors that create enduring success for business - scale and agility combined. Many companies are good at achieving one or other of these, but the two together offer a much greater challenge. 

Asian perspectives 

Picking up on a theme common in this first session, a panel discussion on the second day added some extra detail to the Asian analysis. Damian Glendinning from Lenovo, based in Singapore, made the point that many of the delegates in the conference hall might find themselves working for a Chinese or Indian company in the near future. This is one example of the rapid corporate growth taking place in Asia. And it’s not only in the talent pool where this growth and competition is being found. 

Glendinning pointed out that a large number of western corporate are viewing Asia, and China in particular, as a ‘honeypot’ and there is a scramble to become involved and create a presence in these markets. Faced with this competition in their home market, an increasing number of Asian corporates, led by those from China, are rising to the challenge and taking the fight to the west by competing aggressively in these traditional western home markets. Glendinning used this example to illustrate the point that delegates need to understand the fact that perspectives in Beijing on the global economy and corporate world can differ from the perspectives held by those in London or Paris, for example, and that entities in the western world would benefit from trying to gain an insight into these alternative perspectives. 

David Blair from Huawei, based in China, described some of the challenges of being a western group treasurer of a Chinese corporation. “They call us the ‘grey hairs’," he joked, referring to the young and ambitious domestic workforce that are driving innovation in Chinese corporations and their thoughts on working for somewhat older western treasurers. Blair explained how Huawei has to have a very tight set of financial controls in place in the company, with most cash being centralised and not ‘in the field’, something he described as being very necessary when the workforce is young and eager. And, as Franklin mentioned in the opening session, this competitive nature is something that those in the west are just going to have to get used to. 

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Regulatory Thoughts 

Paul Simpson, Citi - The regulatory framework is unpredictable at the very least - Dodd-Frank, anti-money laundering (AML), emerging payments. A lack of liquidity is enhancing the focus on supply chain finance. Also, global cash flows are changing, which can be attributed to the growth of the BICs. 

Marilyn Spearing, Deutsche Bank - We’re wading through regulations, like it’s a new religion. And this is not just in the US with Dodd-Frank, but in Europe with things such as SEPA [single euro payments area] too. 

Tony Richter, HSBC - There’s a need for European governments vocally to support SEPA migration. The recent example of France switching the vast majority of its public finance payments to SEPA instruments is a lead that others around Europe should be looking to follow in order to boost the scheme. 

Anne Boden, RBS - The impact of regulations on the banks and the knock-on effect on their corporate clients is key. With Basel III, are we regulating the crisis we just had instead of focussing on current issues? Also, many regulations don’t look at the interlinked nature of banks. 

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Risk, Technology and the Role of Banks 

gtnews has published a number of articles about the growth of risks that treasurers are tasked with managing since the credit crisis, particularly areas such as counterparty risk and sovereign risk. It is here that treasury technology can be a key facilitator for treasurers, and this was a topic that I discussed with Vanessa Manning, corporate director, market manager, EMEA, international cash management at RBS. 

Corporates are seeking end-to-end visibility over their value chain, in a way that is synchronised and visible, rather than in the silos that bank offerings can tend to come in. Manning made the point that the technology available today allows this to be possible. And while budgets are tight, the opportunity to outsource these capabilities exist. "Software-as-a-service [SaaS] has never been cheaper, and it is globally available," said Manning. With the options available multiplying in number and versatility, corporates are looking to multibank channels, as opposed to proprietary banking technology. 

Turning to 2011, Manning described how there will be a continued focus on both standardisation and modularisation, with agility and mobility of systems being key to corporates during this time. Corporates want to track areas such as processing flows and connectivity, and are comparing and contrasting the performances of their different relationship banks thanks to the multi-bank portals that exist today. The user-friendliness of the new technologies will also play a large part in corporate adoption in the coming year, according to Manning. "This has to cover the complete online account," she explained, and pointed to the trial of the SWIFT 3SKey (PDI) in France as an example of the interest in developing user-friendly interfaces. 

User friendliness is a key reason that electronic bank account management (eBAM) is such a hot topic for both corporates and banks right now. Speaking to Paul Wheeler, managing director of Wall Street Systems, he explained how for corporates, eBAM will become a 'must have' utility over the next couple of years and it will be seen as part of the standard treasury kit. On the bank side, the advantage of eBAM is the efficiency it brings - compare having to change the signatory on 300 accounts of one of their corporate customers manually via paper authentification, to the ability to do this online. With pressure coming from both sides of the corporate banking relationship to get this technology evolving, progress will be swift. 

The next development for eBAM revolves around the developing SWIFT standards in this area. Wheeler explained how Wall Street Systems is playing a part in the next trial, which is aimed at getting multiple corporates sending information into a bank, and then the bank responding back to the corporates. In terms of the developing market in eBAM vendors, Wheeler described how this is adding momentum in the move to establishing eBAM. At the same time, he was bullish about his own company's chances of maintaining a strong presence in the market: "At the moment there's lots of noise, but when corporates and banks become more educated about the types of offerings that are describing themselves as 'eBAM', some vendors will fall away." 

A main challenge that Wheeler sees facing eBAM is the difficulty in making it multibank. This is something that Wall Street Systems are counselling the banks about, but the move towards multibank could slow the adoption process. Wheeler commented that SWIFT needs to be strong on this issue to ensure the process doesn't become bogged down.

Making the Business Case for a New TMS

Publication: gtnews Buyer's Guide to Treasury Management Systems 2010

‘Expense management’ and ‘corporate streamlining’ are two phrases that have stalked the corridors of treasury departments around the world since the credit crisis hit. Against this backdrop, Ben Poole examines how treasurers can make the business case for a new TMS. 

While the recent financial crisis did much to elevate the role of the treasurer, it also resulted in widespread cost cutting and expense control in the corporate world. The new financial environment has seen treasurers taking on greater responsibility and a larger work portfolio, while finding that their resources – in terms of budget and staff - have been frozen or reduced. Against this environment, all spending will be thoroughly scrutinized and treasurers may find themselves in for a challenging time when trying to justify new purchases, particularly for something as comprehensive and expensive as a treasury management system (TMS). How can treasurers address this challenge, and what are the main business points that can support a treasurer when pitching to senior management and IT purchasing managers?

Where is the Cash?

Cash flow is the main cause of financial risk within a business, so it is vital that treasury has an accurate, timely and transparent view of the company’s cash position. This needs to cover areas such as accounts payable (A/P) and accounts receivable (A/R), between treasury centres in different countries and the various foreign exchange (FX) exposures that these generate, as well as across banking relationships, covering account fees, interest rates, etc. As TMS can seamlessly integrate a variety of areas of treasury activity, from electronic dealing (e-dealing) to reporting, confirmation matching to cash forecasting, they can provide an accurate view of enterprise-wide cash flows to help effectively manage the liquidity and improve investment returns. In addition, the transparency allows treasurers to compare lending rates between different banks and move away from expensive borrowing.

But getting control over cash visibility is not simply a case of plugging in a TMS and finding that all your treasury worries are over. Quite often, the implementation of a new TMS goes hand-in-hand with a restructuring of the treasury function along more centralised lines as treasurers follow an ongoing quest for efficiency. If you want to streamline the way that you process your A/P and A/R, the chances are that a centralised approach to treasury management is the best way to achieve this and then gain the benefits of cash visibility already mentioned. A centralised approach, together with a TMS, helps strip out the ‘dead wood’ from many processes, and instead puts the focus on a treasury management structure that receives automated updates from the various business units and banking relationships, rather than trying to collect disparate data on myriad spreadsheets. In turn, the enhanced quality of data will benefit overall cash and liquidity management, while merger and acquisition (M&A)-related integration will be simplified against this backdrop.

Senior management, including those as high as board level, have been particularly keen on timely and accurate cash and liquidity information since the credit crisis first struck. These parts of the business have since been educating themselves on every nuance of liquidity management, corporate financial compliance issues and banking relationships, and require real-time information on these topics at a moment’s notice. Companies that were operating largely decentralised organisational structures, especially if the majority of treasury work was being conducted manually on spreadsheets, will have been particularly hardpressed to provide the relevant information quickly and accurately. By contrast, a centrally-managed treasury with a TMS is ideally positioned to provide this information.

Rise of Risk Management 

The variety and depth of risks that treasurers have to manage today is far in excess of that which existed before the credit crisis. Large corporates can find that they don’t have an overall view of risk, which can lead to risks being missed or mismanaged. A good TMS will provide a wide range of functionality to help treasures measure and manage financial risk. In addition to providing monitoring capabilities for limits, TMS can also provide scenarios analysis and modelling capabilities to model the effects of cash flows and guide risk management decisions. A treasury that relies on spreadsheets will have no way of finding out its real-time cash positions, and indeed this is also not always an option with enterprise resource planning (ERP) systems.

Take counterparty risk as an example. Before the credit crisis, it is fair to say that, for many companies, the scope of their counterparty risk measurement began and ended with the ups and downs of their derivative portfolio against counterparties. Today, corporates are looking to add their balance position, credit facilities and bank exposure to this mix, highlighting how just one risk has escalated postcredit crisis. In this area, a TMS can assist the treasurer by allowing them easily to set the risk parameters in line with their counterparty risk policy, as well as producing customised reports to that effect.

As is clear from the first two topics in this article, visibility over a corporate’s cash position and the management of financial risk are intrinsically linked. The constantly shifting sands of a corporate’s cash position across the organisation need to tracked accurately and in real time in order for a treasury department to maximise the company’s liquidity and ensure best practice in risk mitigation. Today, TMS offer enhanced functionality in areas such as bank account administration and treasury reporting, in addition to corporate connectivity to SWIFT, as a way successfully managing these two large challenges. This is not something that a treasury operating largely on spreadsheets will be able to get a handle on. While spreadsheets can be a cheap and available short-term solution, these corporates will be potentially missing crucial risk exposures and losing money through poor cash management. The business case for a TMS here is clear.

Maximising Banking Relationships

TMS can help corporates to integrate with financial services providers’ systems, enabling them to have realtime access to data from banks. For example, banks have invested in up-to-the-minute balance reporting capabilities that a TMS can give you access to. In the payment hub space, payments and cash movements can be tracked through the TMS, just as you’d track a package on a courier’s website. It can also help in better managing the fees and aggressively managing compensation.

The possibility of integrating electronic bank account management (eBAM) with a TMS is intriguing at this point. This is surely the next logical step for both of these two products, enabling a treasurer to centrally manage cash flows and risk across the organisation, while simultaneously having the ability to open, move and close bank accounts, for example. TMS vendors will have to keep up to speed with the standardised message types that SWIFT are developing in their eBAM programme, but this is a concern that they should be able to address easily, leaving corporates with a powerful bank relationship tool as part of their integrated TMS.

Information Reporting 

When it comes to information reporting, TMS can offer a number of advantages for corporates. One of the main challenges that treasurers face when using spreadsheets or ERP systems for this function is the lack of real time information available in areas such as payables and receivables. A welldeployed TMS can provide right data to the right people at the right time to improve control, decision making and reducing expenses. Banks have portals that are capable of directly sending the reporting information that corporates need directly to their system in a seamless manner. ERP systems can do this integration, but TMS tend to be more versatile and flexible because of their specific focus on treasury processes.

The benefit of having this real-time view is that the treasurer has greater freedom to make key decisions over whether they should look at investing or borrowing, safe in the knowledge that they have up-to-date and accurate information. In addition, as this process is automated, it reduces the workload on an already-stressed treasury department.

Enhanced Efficiency

As with any system, the automation that a TMS brings can improve efficiency and productivity by removing manual processes and improving accuracy. In a situation where you have multiple users in multiple areas of the company, a TMS can define workflows, meaning that the right people have the right access to the right information. This identity and access management (IAM) role lets the system do the work for the treasurer once the entitlements have been set up and the workflow established.

This also adds a very important level of security to treasury operations. Spreadsheets by their very nature are insecure and open to abuse. With a TMS, access to all data can be set by treasury and access privileges managed depending on whether staff move departments or leave the company. This should drastically reduce the prospect of data theft or manipulation. In addition, the TMS can provide a ‘paper trail’, detailing which user has accessed or input which data at which time, which can be vital for internal auditing purposes.

An end-to-end TMS can replace multiple spreadsheets that rely on the manual keying in of data, and therefore removes the prospect of human error that exists here. In addition, this frees up treasury staff from having to deal with timeconsuming and repetitive data entry, and they can instead focus on the role of treasury analyst and become more productive this way.

Conclusion 

TMS offer clear business benefits over the use of spreadsheets and some ERP modules in a number of areas. They allow visibility over a company’s cash position, leading to more accurate cash forecasting and the liquidity and working capital advantages this permits. In addition, the variety and depth of financial risks that corporates face in the postcredit crisis world are far easier to make sense of and manage through the use of a TMS than other options. When it comes to interacting with banking partners, a TMS can enable corporates to get real-time account information at the click of a button. They are also able to provide a wide array of reporting information when called upon.

And last, but not least, the efficiency that a TMS can bring to a treasury department cuts across several areas - by removing manual input, the system reduces the potential for human error, allows a small treasury team to achieve an exponentially large amount of accurate work, and provides for a security of data that can help treasurers sleep at night. In terms of making the business case to senior management or IT purchasers, these points should help to make a positive impact.

In addition to these points, the treasurer has additional resources available that they can draw on when putting together the business case for a TMS. Get close to the business, understand why business units operate in the way they do, and have a two-way, open conversation about how a TMS can improve financial management across the organisation. Not only will this help build the business case, but it will also be invaluable when it comes to choosing the best fit TMS for your company.

Advice on how to put together the business case can also be sought from your main relationship banks. After all many of the main banks have TMS offerings of their own in some shape or form. By speaking to your main bank, you can hopefully get valuable advice to help in building a solid business case.

Evolution in Corporate Transaction Banking

Publication: Global Treasury Briefing, Volume 3 Issue 2

The world of corporate transaction banking is changing. Why are corporates striving to gain greater visibility over their cash and how are pressures on banks post-credit crisis affecting corporate bank relationships? 

The globalisation of the economy has had an immense impact on the way large corporations are managing their cash and liquidity. Many corporations have reacted by taking steps to standardise and harmonise their finance processes across entities and regions by establishing regional shared service centres and implementing centralised back office systems. 

What were once payment factories simply offering a hub for processing payments, are now evolving into holistic corporate transaction banking systems that can offer corporates a holistic means of managing all transactions that flow to and from their banks. What has precipitated this change, and what are the wider trends in the corporate transaction banking area? 

The credit crisis has sparked a major rethink within corporates of how and where they put credit facilities in place. Corporates are looking to use internal cash more efficiently and get more visibility over their cash. One area that treasuries can find challenging is when it comes to gaining access to their cash once it has been identified. The situation is exacerbated in 'difficult countries' that have prohibitive tax regimes preventing the easy movement of liquidity outside of the country. An opportunity exists here for the large cash management banks with presence across countries such as this to advise their clients and leverage their network to provide value-added services in this regard. 

In addition, with the global economy in a fragile state post-crisis, corporate treasurers are placing a greater emphasis on having an overall visibility over their cash position. Achieving this visibility, together with the ability to access this cash, directly affects an organisation’s bottom line. Investing in this process can allow corporates to reduce their short-term borrowings by up to 30% - a figure that is bound to be attractive in the current climate. 

“Access to external capital still cannot be taken for granted,” explains Mario Tombazzi, senior vice president, regional liquidity product management, HSBC Asia-Pacific. “The importance of a company's working capital is especially important: liquidity risk can force large corporations into bankruptcy, and counterparty risk is also increasingly on the agenda. As a result, the opportunity cost of the internal sources of funds has increased. It's not only important to have enough funds, but also to manage them in a way that keeps them accessible and visible.” 

Corporates Hedging Bank Counterparty Risk 

While there is this good interest among corporates for setting up payment factories, shared service centres and the like, the attitude seems to be that if they’re going to go down this route, they will also split their business between a number of banks in an effort to reduce exposure and hedge counterparty risk. 

Corporate treasurers that embark on discovering how many banks and accounts their organisation uses can find themselves facing quite a painfully slow task, especially if this includes many overseas entities. Some business units may appear to be unwilling or unable to supply the information in the first place. This could be because these units either do not keep an up-to-date list of their various banking relationships or they see the exercise of listing them as one of group treasury interfering on their patch. Once the most accurate list has been compiled, treasury then needs to understand the reason for the amount of bank relationships and accounts and then see if there is a chance to reduce them. 

The first step in this process is to establish what an account costs to set up and manage. This can be a difficult exercise to complete due to the number of variables involved in the cost structure. These include: 

• Bank charges - set up, maintenance, etc. 
• Internal administration - reconciliation, etc. 
• Costs of linking to account structures - pooling, etc. 
• Reporting of account transactions. 

Once the cost has been established, it is then possible for the treasurer to set a realistic saving goal for bank charges. 

The question can arise as to whether group treasury should be responsible for managing cash management bank relationships within an organisation. This is usually the norm, but can find disagreement from other areas of the organisation. Treasury can make considerable savings through bank consolidation and the continuous review of accounts, but it also needs to be aware of the effect this can have on other business units within the organisation in terms of the change in relationships that these units have with their existing banks. Any change driven by treasury has to be handled sensitively. 

Figure 1: Changes in the Transaction Banking Landscape 

While corporates are reassessing their bank relationships, banks are also looking at how they leverage their corporate contacts. From a bank perspective, they want to ensure they are getting a slice of the profitable transactional business. One way to achieve this is by including part of the corporate cash management business in the terms of any credit agreement offered. Corporates understand this ‘linkage’ that banks are focussing on, but any forcefulness in the bank’s approach, particularly with the linking of the credit relationship to the cash management business, is another driving factor in making treasurers question how they share their business across their credit banks. Amol Gupte, head of treasury and trade, North America at Citi, says: 

“The market practice of rewarding credit with transaction business is not a new concept. However, in the wake of the recent financial crisis, banks are under immense pressure to optimise their credit extension with cross-sell business - to generate fee income and attract liquidity. As a result, non-bank providers are experiencing higher attrition rates, driven predominantly by clients moving transaction business to their primary credit bank(s).” 

Despite this, Gupte points out that the banks have to be innovative and offer competitive advantage in order to attract and retain corporate clients. “With that said, it is important to note that the key drivers for decisioning for our corporate clients continue to be product quality, pricing, etc. As such, there is no significant “free lunch” business that is simply gifted to banks due their extensions of credit. To be successful, banks must continue to invest in innovation and technology,” Gupte advises. 

Payment Regulations Squeezing Banks 

New regulations, particularly in Europe, are forcing banks to review their payment offerings and decide if they still want to, or can afford to, remain in the business. For banks, cash - their most liquid asset - is now more valuable. Regulatory requirements now require banks to not only prove that they have enough cash and liquidity to continue trading, but they must also be able to prove that they have enough to meet their ongoing obligations. While regulators around the world are still putting the finishing touches to the new areas of compliance, it seems clear that at least some financial institutions will need to provide the regulators with sufficient data to allow for various stress and scenario tests. On top of this, the credit crisis has led to a return to ‘back to basics’ transaction banking as a main source of profit for banks. This, in turn, is likely to continue to drive increases in transaction volumes. This means that banks need to ensure that they are putting their cash to good use, leading to a greater focus on counterparty and nostro account management. 

Large banks can have millions of transactions from myriad sources moving through their nostro accounts. The balances of these can change hundreds of times a second at peak times. Cash flow volumes have also risen, a trend set to continue with greater increases in electronic and algorithmic trading. These increases add pressure to the process of hitting target balances and regulatory demands, and squeezes nostro balance netting, reconciliation and forecasting processes. However, if financial institutions can successfully manage these processes, they can increase their opportunity to maximise the efficient use of cash in the money markets and foreign exchange (FX) markets, both regionally and globally. 

While this opportunity exists in nostro account management, this is also an area where banks can lose money. If an institution does not have sufficient funds in its nostro account at the time of closing, it will incur penalty interest and charges. As this is short-term and unexpected, the interest rates - which are based on the current Libor rate - are high. It is a common occurrence that nostro account balances fall so short that banks are severely penalised, possibly losing them hundreds of thousands of dollars on individual trades. This can also impact their liquidity buffers, which will soon be specified by the regulators. For example, if banks in the UK fall below their threshold, they will have to submit daily liquidity reports to the Financial Services Authority (FSA) and may also be issued heavy fines. 

The methods that financial institutions use to manage their nostro accounts look compromised when you compare them to the planned new regulatory requirements. For example, many banks hold complex hierarchies and nostro accounts structures, while using a multitude of manual processes and systems to maintain target balances, sweep funds, make cash flow projections, execute trades and manage risk. For global banks, these challenges are multiplied by trading a broad mix of asset classes across different time zones. Liquidity risk and operational risk increase exponentially, which leads to huge challenges in determining what the institution’s cash requirements are for its day-to-day counterparty obligations. However, with the impending liquidity regime and the return to transaction banking, banks are now recognising that this is a challenge they need to overcome. 

It’s estimated that the single euro payments area (SEPA) alone which will eliminate cross-border fees and float income will result in direct revenue loss of €20bn for banks. So does it only spell bad news for financial institutions? Not according to Citi’s Gupte, who told gtnews that, “While SEPA should reasonably precipitate the exit of thin-margin players who are not able to absorb the overall revenue decrease, it will also increase trade flows within the eurozone. Well-positioned banks will intermediate in these higher flows to offset the loss of float and cross-border fees.” 

One criticism of SEPA implementation is that it is happening far too slowly, as it is a regulatory-driven, not market-driven, change. Most payments within the SEPA framework are domestic with existing systems that are inexpensive and already proven - so why would an institution want to alter this process and spend money on a new infrastructure when the volumes of cross-border payments are so low? Currently most banks and corporates, and even agencies of the governments that ratified the PSD, are doing the bare minimum to meet SEPA requirements for cross-border transactions. In addition, domestic transactions are left largely unchanged. There are a number of reasons given for this – countries say that their systems are already SEPA compliant and therefore no action is required, banks say the SEPA Direct Debit (SDD) or SEPA Credit Transfer (SCT) volumes will be so small that they can process them without actually implementing any major changes, just the minimum to comply. Does a bank with six million mandates in one country want to modify each and every one of these for domestic SDDs? The answer, and common sense, would suggest not. As SEPA is a regulatory-driven change, the only way to make this happen is to increase the regulatory pressure to force financial institutions to comply. 

The prevalence of bank legacy systems is another issue that needs to be addressed before SEPA can be properly implemented. Most banks aren’t keen at building a new model as again this is not a cheap proposition. SEPA was dreamt up long before the credit crisis, and banks now have different priorities. Post-crisis, many have slashed their investment budgets in order to conserve funds for their operational budget. The received wisdom is that a bank can stop investment in infrastructure and systems for a period of six months to one year and won't lose anything in the meantime. In reality this is negative short-termism - at some point the bank will need to start investing again, and will find itself at a disadvantage to its competitors at this time. The ‘wait and see’ approach is another reason for the slow implementation of SEPA, as too many banks are waiting to see what the viable market model is before they invest in the process themselves. 

With few banks providing SEPA payment methods or cash management activities due to the large investments required to keep up with regulations - and some banks will not bother at all - there will be an increase in banks ‘white labelling’ their products to smaller banks. Deutsche Bank are a good example of a provider in this situation. 

As part of a major research project of SEPA and the Payments Services Directive (PSD) carried out by the Financial Services Club last year, Werner Steinmuller, head of global transaction services of Deutsche Bank, provided the following assessment of his bank’s position: 

“Deutsche Bank is in a comfortable situation. We spent quite a sizable amount on SEPA infrastructure and have a brand new system that is extremely capable of doing this that is also highly scalable. Others have not made this investment so this gives us a price advantage. We have built some conversion solutions for handling old volumes and now can run both old instruments and the new SEPA instruments so, if SEPA is coming, we are extremely well positioned. If SEPA fails, I can write off the investments and still win.” 

SEPA has required banks to build new infrastructure and systems, as well as new efficiencies in transaction processing. These systems and efficiencies can be leveraged across the bank’s network – just because SEPA, or even the euro currency, could possibly disappear, it doesn’t mean that these advances in transaction processing will. There is still an issue for corporates to consider here though – with white-labelling on the increase, corporates need to know who is providing their services. 

Turning to the US, and Citi’s Gupte shared some thoughts with gtnews about the regulatory impact there: “The major US regulations that will have an impact on the cash management business are the American Recovery and Reinvestment Act (ARRA) and the emerging financial services industry regulation focused on increased transparency, accountability, and government oversight.” The ARRA, in particular, provides an opportunity for the financial services industry in the US to move towards greater automation. 

And when it comes to white labelling, Gupte is quick to point out that it is not just regulatory pressure that is a key driver here. “Intense price competition for plug and play, plain vanilla services automatically grants advantages to the larger banks with sufficient scale to recover the substantial fixed costs. If this size-based advantage were not sufficient by itself to justify market entrance, white labeling also allows banks to expand their distribution network via indirect channels to areas where their local relationships may not be as strong,” explains Gupte. 

Use of Paper Increasingly Unfashionable 

European corporates are reducing their use of paper from within cash management and payments processes - cheques being a good example of this. SEPA is leading to a natural reduction of the use of paper, and feeds into the general movement to standardise, centralise and automate. All three of these are very difficult for corporates to achieve with paper, as processing paper is comparatively expensive. 

Cheques have traditionally been more popular in the US, but even here the use of cheques is going through an unprecedented period of change. Figures from a recent Aite Group report forecast that cheque payments in the US will comprise merely 68% of all non-cash payments in 2010, compared to 80% in 2006. With stagnating top lines in light of current economic conditions, cost reductions and quests for absolute efficiency are pervasive in corporate goals. As Citi’s Gupte explained to gtnews, organisations are re-evaluating their operational processes and implementing previously disregarded tools - including electronic integration with suppliers - to enable more judicious use of internal resources, reduce cycle times, monitor vendors, capture early payment discounts, enjoy increased transparency and control, and enhance bottom line performance. 

“One of the industries most aversely affected by the inefficiencies and drawbacks of paper based payments is healthcare,” explained Gupte. “The claim submission, processing (including reconciliation and verification), and ensuing payment processes dramatically extend the time between the service being rendered and the provider being able to completely reconcile its receivables. While paper cheques are still the preferred payment method of choice, more secure electronic channels will emerge on the back of new regulations.” 

Asia is also experiencing a growth in the use of electronic payment systems, according to Nolan Adarve, senior vice president, regional payments and receivables product management at HSBC, Asia Pacific. Adarve pointed out to gtnews that the alternatives, such as writing cheques, are not only more expensive to process, but also more time consuming. “However, this doesn't mean that cheques are on their way out. In Asia, thousands of cheques will still be issued and cleared every single day, Adarve explained. “For example, in Vietnam, cheques are still the preferred method of payments given the country's culture and infrastructure. HSBC will continue to invest in the most advanced payments solutions for our customers, be it paper or electronic as cheques will continue to be a significant form of payment for the foreseeable future.” 

Working Capital Key For Corporates 

A trend triggered by the liquidity crunch has been a greater interest from corporates across the world in working capital. The goal is to improve visibility and usage of internal funds. One example of this is that corporates are working on getting their payments as quickly as possible, while finding ways to delay making payments themselves. To improve the organisation’s working capital, treasurers must increase their cash visibility through processes such as cash forecasting, sweeping and netting. By using these standard cash management processes, corporates can gain an understanding of how much cash they have, where it is, what denomination it is held in, etc. With a full view of cash across the organisation, the treasury can effectively act as an in-house bank, providing funding to business units where necessary. 

Amol Gupte says that, over the last year, Citi has seen a fundamental paradigm shift in the priorities of our corporate clients. “Prior to the crisis, corporate strategies were focused on yield. Now, liquidity and risk are paramount, although yield is still an extremely high priority. Organisations are increasingly focused on opportunities to optimise working capital and extract liquidity otherwise trapped internally within the cash conversion cycle.” 

Pooling, either notional or actual, and interest optimisation across one or many currencies are seen as the ‘low hanging fruit’ in this area, given the speed with which improvements can be implemented. Pursuant to local regulations, some enterprise resource planning (ERP) systems are now available with pooling functionality. Previously, this service was predominantly provided by banks. 

“In looking at higher-complexity working capital management practices, corporates are now less draconian in their payment terms for suppliers,” explains Gupte. “At the height of the crisis, the general practice was to impose lengthy terms to generate liquidity. Today, corporates are keenly focused on injecting liquidity into their supply chains through supplier or receivables finance without diluting (or potentially even improving) their days payable outstanding (DPO) or days sales outstanding (DSO). In the present environment of early economic recovery, corporates are again viewing suppliers more as strategic partners with which win-win payment scenarios such as the previously mentioned can be developed.” 

This development within the financial supply chain of large corporates trying to protect their suppliers from the credit squeeze by paying early is particularly interesting, as the corporates are stepping into the role that bank’s usually have. To all intents and purposes, they are becoming the credit manager for SMEs, taking this power from banks. Is this a permanent change, or just a temporary one? Most likely it is not a permanent position for these large corporates to be in, although it is certainly sustainable until the banks get their act together and make credit available at more favourable terms. 

Another credit-related issue to watch over the next 18 months is a rather sensitive topic to some. After the various government bank bailouts around the world, many banks are now state-owned. Is subtle pressure being applied by governments for these banks to only supply credit to indigenous companies, or at least give them more favourable rates of credit? While this doesn’t appear to be an official policy of any government, it is something that some corporates suspect or are at least wary of. If governments were to lean on banks in this way, there’s a real danger of isolationism in credit management. 

Conclusion 

The fall-out from the credit crisis has caused a fundamental shift in how corporates interact with banks and manage their cash. As bank credit has become scarcer and more costly, treasurers have had to look to their own working capital management as a way of providing liquidity throughout the organisation. 

In order to successfully operate a payments factory, treasury needs to have full visibility of cash throughout the business units of the organisation. This starts with accurate and timely cash forecasting, which then informs the treasury of the optimal time to implement cash management strategies such as netting and pooling. To gain this visibility, treasury technology offers many options, but it is also relies on the treasury department educating the business units that they deal with as to the benefits of providing accurate information in good time. 

While corporates are hard at work trying to gain greater visibility over their cash, banks are facing equally complicated challenges. Regulatory changes from even before the credit crisis are removing access to banks from some areas that were previously profitable. Banks are now finding that they have to re-invest in their payment infrastructure in order to stand out in an increasingly competitive market for corporate business. Meanwhile, additional regulations that are being drawn up as a result of the credit crisis look set to have an even greater effect on the way that banks interact with their corporate clients. Transaction banking is evolving, and it hasn’t reached the end of this process yet.