Treasury Today Country Profiles in association with Citi

Looking back on a dynamic year

Hiker looking out over the moutains

From Brexit to the Bangladesh Bank heist, 2016 has seen some significant world events which have repercussions for companies around the world. At the same time, the evolving challenges faced by corporate treasurers have been accompanied by some significant technological innovations.

The past 12 months have been nothing if not eventful. Against a challenging macroeconomic backdrop, treasurers have faced numerous challenges, from cybercrime to continuing low interest rates. Meanwhile, technological developments including blockchain-related milestones and the rise of outsourced applications are providing new opportunities for treasurers to operate more efficiently. This article reviews some of the most significant milestones, innovations and challenges of the last year.

Cybercrime and fraud

Concerns about cybercrime have been mounting in the last couple of years. In February, the scale of potential breaches became apparent with the theft of $81m from Bangladesh Bank – an event which has made corporate treasurers far more conscious of the risks.

Andrew Bateman, President of Treasury Software Solutions at FIS, notes that cyber security is increasingly becoming a greater concern for corporate treasurers. “We are seeing more and more focus on this topic, following several breaches in the marketplace this year,” he comments. “It is interesting to see how people are beginning to understand where the risks are in more detail. Making your environment secure is one thing, but making your application secure – both externally facing and also within your firewall – is becoming increasingly important.”

Meanwhile, other types of cyber threat are also becoming more sophisticated – such as Business Email Compromise (BEC) scams, whereby fraudsters send emails to finance staff, attempting to convince them to make urgent payments to overseas accounts. Fraudsters may go to great lengths to make their emails sound authentic and many such attacks are successful. In June, the FBI reported that BEC scams had cumulatively resulted in losses of over $3bn since 2013.

The rising threat of fraud was also highlighted by Kyriba’s 2016 Treasury Survey, which found that the number of companies which had been the target of attempted fraud had increased by 20% since the previous year. The largest reported loss was $2.5m from a single incident.

Tackling the risk of fraud

George Dessing, SVP, Treasury and Risk at Wolters Kluwer, notes that the company has intensified its focus on cyber risks and incident management as the company’s business model has evolved into digital.

“Our company is becoming more and more digital – 86% of total revenues are digital and services – so you can imagine that the issue of cyber fraud is a relevant risk for us to manage,” he explains. “In the old days, our main risks related to the warehouses which contained all of our print books. Our global risk management and insurance programmes have necessarily evolved to meet traditional and emerging risks, including cyber.”

Where reacting to incidents is concerned, Dessing notes that this may include external as well as internal incidents. “We have locations in New York, so when the bombing took place recently we needed to react and inform our employees as this happened relatively close to our office – the more you inform them, the more you engage them. As the world becomes more interconnected, treasurers, who have long been closely linked to market risks, are now getting more involved in operational risks as well.”

Brexit and beyond

The outcome of the UK’s Brexit referendum on 23rd June sent shockwaves around the world, but with the terms of the exit yet to be decided, the impact for corporations remains unclear.

Nevertheless, there is certainly concern about the impact of Brexit. Research published by Greenwich Associates in August found that over a quarter of European companies intend to move away from UK banks once Britain leaves the EU.

These concerns relate to the possibility that banks’ passporting rights will be withdrawn following Brexit. Currently, British banks can use passporting rights to offer financial services across the EU and European Economic Area (EEA) without requiring authorisation in individual countries. Concerns have been raised that if these passporting rights are withdrawn as part of the Brexit negotiations, some financial institutions would move their headquarters to another country within the EEA.

Aside from this issue, Brexit has had wide ranging implications for treasurers. “The implications of Brexit haven’t yet fully unfolded in a legal sense, but there has been quite a profound effect to the capital markets from a UK perspective,” says Chris King, Group Treasurer at Vita Group. “The currency, gilts and swaps movements have certainly tested and validated downside sensitivities in business and covenant scenario modelling. UK defined pension schemes have had a large impact, and the investment approach has been strongly challenged.”

King adds, “whilst the uncertainty will need to be considered in more detail and managed accordingly, particularly in light of ongoing liquidity in ever more febrile markets, it does offer scope for some lateral thinking and reassessment of how best to manage the risks.” He notes that the opportunities are just as significant as the risks, given that most of the downside market impact has – seemingly – now been felt.

Beyond Brexit, other geopolitical events have featured prominently in 2016. “Political instability in the Middle East and Africa has led to the largest involuntary migration since the Second World War,” says Mitko Iankov, Head of Market Development – GTM Europe, Thomson Reuters. “This has unwittingly fuelled the populist politics within developed Europe, further exacerbating the protectionist attitude and popularity of extreme politics. This is not isolated to Europe, but indeed contributed to an anti-globalisation, anti-free trade business environment in which most MNCs thrive.”

Making the most of cash

Aside from these challenges, treasurers have continued to grapple with perennial concerns such as effective cash management and good forecasting. This is particularly pressing in the continuing low interest rate environment. Despite the Fed’s decision to increase interest rates at the end of 2015, other monetary authorities have not moved from the low rates introduced following the financial crisis. Interest rates remain at 0.25% in the UK, while Europe’s deposit rate was cut further to a record low of -0.4% in March.

Meanwhile, many companies continue to hold high cash balances. In May, Moody’s reported that non-financial companies in the US were holding $1.7trn on their balance sheets. With interest rates on bank deposits still low, companies with significant excess balances are looking for other uses for their cash.

“We have a lot of surplus cash,” explains George Dessing, SVP, Treasury and Risk at Wolters Kluwer. “Capital allocation has been a high priority for us in 2016. We recently announced our intention to do an acquisition as we are continuously looking for opportunities to support our organic growth strategy, so we are keeping active on this front. In February, we also announced a three-year plan to buy back up to €600m of shares.”

In other cases, the focus is on extracting as much excess cash as possible by optimising working capital management processes. “Companies are not getting the returns on their deposits that they used to, so there’s a real need to try to squeeze cash out anywhere you can,” comments Jennifer Boussuge, Managing Director, Head of Global Transaction Services EMEA at Bank of America Merrill Lynch. “This has been accompanied by advances in technology which are allowing companies to unlock previously inaccessible working  capital. This can have very real benefits: I know one treasurer who has been able to finance some smaller acquisitions by putting in place more efficient working capital management practices.”

Boussuge says that interest in managing working capital more effectively is on the rise, noting that some companies have appointed working capital management executives who report to the CFO and are at the same level as the treasurer. “These executives will look at all of the supply chains across the company, with the goal of squeezing cash out of the balance sheet,” she explains.

Politicial pressures

Marianna Polykrati, Group Treasurer of Greek food company Chipita, explains that the company has not been significantly affected by the political and macroeconomic pressures which have characterised 2016.

“Our headquarters is based in Greece, so we are conscious that the crisis is continuing to affect the Greek market,” says Polykrati. “But due to the global presence of the Group we haven’t seen any decrease in terms of sales. On the contrary, we have double digit increases in both sales and profitability, being mainly generated by the CEFTA/CEE region. The truth is that our core products – confectionary and croissants – are considered also as an “antidepressant” and even in the crisis it is a product that people always buy even when they are short of money, so we’ve actually seen a slight increase in our sales in the Greek market.”

Meanwhile, Polykrati has been paying close attention to developments further afield, such as the Brexit referendum and the upcoming elections in the United States. In the past, the company has only had a minor presence in the UK market, which has accounted for only a small percentage of total sales. More recently, however, Chipita opted to open a commercial company in the UK.

“We opened the new company just before the Brexit referendum took place,” Polykrati explains. “We haven’t seen any difference following the referendum – we sell our products from a market that is very competitive in terms of price, so even with the slight devaluation in GBP, the cost was internally absorbed, thus still being well positioned in the UK market.”

Where the US elections are concerned, Polykrati says she expects the outcome to be significant – but at this stage it is difficult to predict what the consequences will be. “We have a co-operation with a commercial company in the United States and we don’t really know what to expect,” she comments, “but we do continue with business as usual.”

Innovation

While treasurers have been facing considerable challenges this year, from the increased threat of fraud to choppy political waters, the technology available to meet their needs continues to develop and present new opportunities.

Some treasurers have been watching the arrival of enhanced solutions and improved functionalities with interest. “At the beginning of the year, we were planning to adopt a new treasury management system, but we haven’t yet managed to get all the necessary approvals internally,” says Marianna Polykrati, Group Treasurer of Chipita. “The delay has turned out to be a good thing though – I’ve noticed that there are new systems coming out offering better solutions and lower costs, so I have been reviewing all the systems that are now available.”

Where specific developments are concerned, FIS’ Bateman says that the last couple of years have seen a move to outsourcing the operation of applications. “The software as a service (SaaS) model has become very prevalent at the mid to low end of the market,” he explains. “Customers just want to consume functionality – they don’t want to have to worry about installing it and running it. That works well where you have a more standardised workflow and processes. Meanwhile, larger corporates are saying they want vendors not only to host applications, but also provide application management and managed upgrade services.”

Another topic which has developed over the last year relates to the rise of fintechs and the impact on banks. In the past, the focus of this topic has tended to be on the prospect of competition between banks and fintechs. However, there is some evidence that this has begun to shift, with the focus moving to collaboration.

“I think the discussion has moved on from disruption to how we partner,” comments Boussuge. “Fintechs are not regulated financial institutions and many of them don’t want to be. They realise that if we’re going after the same client sets, the banks already have the clients; they already have the rails, if you will, and they have complied with the regulatory environment. What these guys bring is the innovation. So we’re now figuring out how we come together, and that will increasingly be done through banks investing in this area and acquiring these digital capabilities.”

Virtual account management

Another area of development is virtual account management (VAM). “VAM tools enable the reconciliation of multiple accounts,” explains Boussuge. “Companies have a header account, which is the ‘actual’ bank account, with multiple layers of virtual accounts underneath. Different banks approach this in different ways – in our case we use IBANs as unique identifiers, so people can make payments into and out of their accounts.”

The benefit of this approach is that each vendor can pay into a separate virtual account, making reconciliation much easier. Boussuge notes, “this was a new concept three years ago, but it’s really taken off – now every RFP that we see includes VAM.”

Blockchain

Meanwhile, talk around the possibilities of blockchain has begun to translate into action. While most of the possible applications of blockchain remain unrealised at this point, some progress is starting to happen. Microsoft and Bank of America Merrill Lynch announced in September that they are collaborating on a trade finance blockchain initiative designed to standardise processes relating to standby letters of credit. The same month, Barclays and technology start-up Wave also announced that they had become the first organisations to execute a global trade transaction using blockchain technology.

Conclusion

The last year has certainly had its share of difficulties: choppy political waters continue to make for an uncertain environment, while treasurers are increasingly focused on managing risks relating to cybercrime. In addition to these challenges, the pressure of complying with new and existing regulations continues to be a major focus for treasurers around the world. The scope of this issue is explored in more detail in The Corporate View article.

Alongside these issues, innovation and development continue across a range of treasury activities, providing new ways for treasurers to manage cash more efficiently. As we move into 2017, treasurers will be keeping a close eye on these opportunities – as well as remaining cognisant of the challenges.

Managing plastic money

For Italian tourism company Alpitour, 2016 has seen a major focus on reviewing the technology used for the company’s receivables. With hotel bookings, plane tickets and vacation packages increasingly being sold on the internet, the company has been working to develop a new selling channel which can be used by all of the group’s divisions – namely a tour operating company, an airline charter company and a hotels division.

“Each business unit has its own selling target (B2C/B2B) and different ticket prices,” explains Enrico Rao, Alpitour’s Group Treasurer. “The payment instruments available on the site, the credit card acquirers and the infrastructure have been decided by the central treasury. Because we have different business units and different internet sites, we did not want to use different banking solutions – so the main idea is to manage plastic money in the same manner we manage the central treasury.”

Alpitour Group has therefore adopted an independent Payment Gateway to be used by all the relevant business units, linking group websites to the Payment Gateway for payments. Each company is able to view its real time transactions, upload data for accounting purposes and manage refunds.

“On the other side of the Payment Gateway, we can connect different credit card acquirers chosen by pricing conditions or alternative payment methods, such as MyBank or PayPal,” Rao adds.

Advantages of the solution include having a unique database of all group transactions, as well as a real-time view of the situation for each company. “We can also set a fraud prevention strategy customised by the needs of each entity – for example, specifying how many attempts for each card is fine for our risk standards,” says Rao.

“Finally, for managing plastic money we have sourced from concepts and instruments typically taken from treasury management – such as cash pooling, central payment factory and central treasury systems – in order to get the same advantages and centralisation we have already achieved in treasury.”

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