New Treasury Realities

Expect strategic and operational roles to diverge

In the year ahead, the key developments in strategic cash and treasury management will be influenced by four ongoing global trends: standardization, centralization, virtualization and bank independence. The combination of these trends is likely to lead to dramatic changes by fostering a separation between the operational and strategic functions of treasury departments.

In the year ahead, the key developments in strategic cash and treasury management will be influenced by four ongoing global trends: standardization, centralization, virtualization and bank independence. The combination of these trends is likely to lead to dramatic changes by fostering a separation between the operational and strategic functions of treasury departments.

Standardization

Most companies still face considerable challenges with cross-border payments, reflecting the many different standards involved. The solution is further standardization, and banks, software vendors, standards bodies, regulators and, of course, the corporate community have all been trying to develop one generally accepted payment standard. Despite so many initiatives, including TWIST, Edifact, RosettaNet and the Single Euro Payments Area (SEPA), we have not succeeded in agreeing on one industry standard. However, there is still hope.

All of the European Union member states have adopted the Payments Services Directive (PSD), the legal framework for SEPA. Although we expect payments convergence within the euro zone with the introduction of SEPA, it remains to be seen how successful the initiative will be. The adoption of the standards is a slow process. Many local payment methods will be earmarked as “niche products” and, as such, will not have a specific migration deadline set for them. As long as these products are not discontinued, true standardization will not be realized. In addition, there is a growing volume of trade and commercial flows denominated in euros outside of SEPA, so standardization courtesy of SEPA is still a long way off.

Another promising initiative is the ISO 20022 financial messaging standard, an XML-based standard that originated in 2003, borne out of two other standardization initiatives, TWIST and RosettaNet. Companies that use the XML standard can avoid having to support multiple formats. Most important is the industry-wide acceptance and implementation of the ISO 20022 standard. Only when there is sufficient mass within the corporate community will this standard thrive. The corporate community needs to force banks to offer a single standard, and hopefully SWIFT will increase its role as the bank-independent driver of standardization.

The corporate community needs to force banks to offer a single standard.

Centralization

Over the last few years, companies have embarked on regional centralization of treasury operations, with a focus on providing global treasury services to internal customers 24/7. Corporations will try to achieve even greater economies of scale by further centralization of global treasury functions in order to decrease operational costs and increase visibility and control over cash flows, working capital and risks.

Cross-functional integration of the financial supply chains of corporations will contribute to that move toward centralization. Companies continue to incorporate financial supply chain management into the scope of the treasury function. For example, many companies are seeking to centralize the disbursement process by implementing a payment factory. In addition to improving the control, efficiency, security and standardization of disbursements, a payment factory can also aid in the transformation and optimization of the disbursement process as a whole. It will be interesting to see how far treasury’s control of this area will progress. For example, will the treasury department determine how early payment discounts are utilized?

Virtualization

IT systems are becoming important assets for the new, centralized treasury function. Virtualization makes it possible to execute and manage global treasury processes in one central, integrated system. Treasury staff and operating companies in different regions can all work in one system, which improves the efficiency, effectiveness and accuracy of the cash and treasury function. There are two aspects to treasury virtualization: improved functionality and integration.

Traditionally, treasury departments have used dedicated stand-alone treasury management systems for such functions as deal management, cash management, hedge accounting and financial risk management. Nowadays, with corporate treasurers looking at the supply chain, and in fact the full balance sheet, there is a need for integrated risk management, counterparty credit risk, electronic bank account management and payment factory solutions. At the same time, new solutions require new processes, and extensive process reengineering will be required to obtain the benefit of these systems.

The second development is systems integration, which can be viewed both from a technical and a functional point of view. Treasury management systems will be integrated more closely with a multitude of ERP and financial consolidation systems, which hold a lot of financial management information. The end goal is visibility of the full cash-conversion cycle in a single system. Mastering liquidity will eventually lead to the optimization of funding costs and increased independence. This leads us to the fourth trend.

Cross-functional integration of the financial sypply chains will contribute to centralization.

Independence

Bank independence will remain important in the coming year. Corporations and banks are tied to each other via the corporate cash and treasury function. Banks try to keep customers captive by developing proprietary electronic banking systems, trading portals and treasury management systems. However, the credit crisis and the default of Lehman Brothers made it very clear that corporations should not rely too much on a limited number of banks.

In addition to the continued developments in bank-independent electronic banking systems and online dealing platforms, the SWIFTNet service offering for corporations is an important driver of bank independence. SWIFT connectivity is becoming increasingly accessible to corporations. In addition to providing the ability to handle payments, reporting and confirmations, SWIFTNet is spreading into companies’ financial supply chain by offering eBAM and trade finance message support. So SWIFTNet not only enables companies to switch their transaction banks with ease and run their disbursement processes more efficiently, it also offers greater opportunities for efficiency, accuracy and control.

Another model, Wallet Distribution, devised by Zanders, can help companies review their banking relationships. With Wallet Distribution, companies take a structured approach toward rewarding bank commitment, in terms of funding, with bank revenue in the form of transaction business. Companies are looking for efficient multibank structures with fewer banks and transparent pricing, in which long-term relationships are more transparent and measurable.

Dividing line

In the near future, operational treasury functions, primarily those related to the execution of the cash-conversion cycle, will either be outsourced to the company’s shared-service center or to a third party. What remain will be the strategic, value-added functions, like the holistic management of a combined risk portfolio and the optimization of the internal and external corporate finance function.

But before corporations can really outsource treasury’s operational functions and focus on strategic treasury, many need to start working on treasury transformation projects to prepare their organizations for the new reality. With all the new possibilities—eBAM, SWIFTNet and ISO XML 20022—2011 is the ideal time to begin such initiatives.

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Basel III     care     cash management     corporate finance     corporates     credit risk     financial institutions     financing     hedge accounting     modelling and valuation     processes and systems     public sector     risk management     SAP     strategy and organization     SWIFT     treasury     treasury management     valuation desk     WACC