The staple of treasury is, arguably, transaction banking. From payments and cash management, to trade finance and custody via a host of ancillary securities services, the function is a key part of the treasurer’s life. It is a core aspect which, over the past few years, has seen change at the hands of digital technology and in particular the advent and now ubiquitous adoption of internet-based activity. We look at some of these changes and question their impact.
Few treasurers could favour the now old-fashioned manual approach to their profession. Trading executed on the telephone and managed on spreadsheets is less likely these days because most will find that digitisation is simply more effective and efficient both in terms of time and cost. Indeed, the shift in the digital landscape towards internet-based tools, if properly exploited, can facilitate the treasurer’s increasingly strategic role simply by freeing up time to allow for deeper involvement in the business.
Of course, the shift towards the digital model is about more than trading. All major banking partners will offer their corporate clients digital portals as the main access point for bank products and services across the transaction banking spectrum, these covering everything from cash management to money funds.
But evolution is at work. Disruptive start-ups continue to pitch technologies – and banks and other key organisations continue to encourage their work, not least through tech accelerators such as SWIFT’s Innotribe and Startupbootcamp FinTech. Solutions under development now may well make the way in which transaction banking services are delivered look very different in a few years’ time. It would be fair to say that in transaction banking, the digital revolution is very much underway and those who do not seek to embrace it risk being left behind.
The rise of the portal
We know payments and collections have been subject to a digital revolution but greater improvements are being realised with respect to how that money is managed once it has been received. Indeed, in the past few years, we’ve seen web portals for treasury management at some major banks take a giant leap forward. Once, they were simply a gateway to a bundle of separate applications, albeit with a single sign-on. Now, banking portals offer suites of integrated services that enable the kind of single platform a treasurer could previously only get with a host-to-host (and thus far more involved) terminal set-up.
There are two main categories of portal, multi-bank – or bank agnostic – and proprietary portals. Multi-bank portals have become the favoured option of more and more corporates in recent years.
The single-bank option was first to appear. In the early days, a request for quote (RFQ) model was used. The treasurer would log in to the bank’s website, state how much was needed of a required currency, and receive within 30 seconds or so an automated quote. Once that offer was accepted all the downstream processes, such as clearing and settlement, had to be executed offline, and often manually. Continual investment by banks in their technology has today created greater levels of automation and facilitated ever-lower latency of price streaming, more akin to professional traders’ requirements, to the point where users can instantly see the depth of liquidity in the market.
The sophistication and capability of a system’s functionality today tends to be driven from the top downwards by the needs of the financial institution (FI) and pro-trader market, but the way in which users wish to work and interface with these systems tends to be driven from the bottom upwards by the needs of the retail market and the tech-savvy individual. In other words, users want the simple, intuitive interface they will find in their everyday interaction with technology but with all the clever behind-the-scenes ‘trickery’ garnered from the top end of the market.
With the high levels of FX trade-flow a system is required to handle, many pre- and post-trade services have also been integrated with platforms to try to create as much of a straight through processing (STP) environment as possible. For corporates, trades are usually integrated up front into an order management or trade planning system and then uploaded into the FX platform before execution, with automated booking of these trades back into the treasury management system (TMS) or spreadsheet.
For a treasurer, the choice between single or multi-bank platform seems obvious at face value. Why wouldn’t you sign up for a multi-bank FX portal and get the best price at the click of a button? Certainly the multi-bank portal’s arrival was seen by some observers as the death-knell for single-bank platforms. But it has not been the case. Why?
In some cases, it may be that the treasurer does not execute a sufficient number of trades to warrant subscribing to a multi-bank portal. But there may be another factor at play too. Just as retail supermarkets don’t always come out on top for customers when factors such as service, product knowledge, advice and even customer loyalty are factored in with price, so multi-bank portals may not always deliver best execution for a corporate treasurer, especially for those with large or exotic needs (notably emerging market currencies).
Another factor often considered when trading is the need to spread the share of the corporate wallet. Quid pro quo, a treasury may wish to ensure that its relationship banks are getting a fair share of its business – even if that means a particular FX trade is executed on a non-competitive basis. The reason is simple: they may not want a certain bank – especially one with which they have a valuable line of credit – to pull the plug on the relationship because it was deemed unprofitable. In these days of bank consolidation and regulatory pressure from, in particular, Basel III, this is a realistic threat to be managed.
If one thing is certain, it is that the treasurer is yet to be presented with a one-size-fits-all FX solution and that until such a tool is made available, it is essential to understand the pros and cons of each model in order to make the most appropriate choice in each situation.
The rise of the multi-bank FX portal
In the late 1990s, encouraged by the rapid uptake of the internet for business purposes (driven in part by rising consumer confidence in web-based transactional tools), players in the banking and technology communities saw a niche in the FX market. Corporate treasurers were typically engaging in multiple bilateral relationships with liquidity providers. The new connectivity technologies would enable treasurers to request and receive FX prices from multiple banks, and place orders, all in ultra-fast time, through one central platform. A number of multi-bank platforms hit the market around mid-2001.
For the corporate, these portals promised more than just a convenient price discovery tool. They could also deliver workflow, enabling treasurers to see all their accounts, trades and the scope of their portfolios in one place. With further integration into SWIFT (via the automated MT101 request for transfer message) and the Continuous Linked Settlement (CLS) system, such a combination would eventually deliver post-trade services, right through to clearing and settlement. Connectivity between the front-end of a TMS and corporate back office functions became a reality in October 2012 for 360T’s multi-bank FX trading platform, when it announced that Kyriba was to integrate it into its own software-as-a-service (SaaS) delivered TMS.
But the early rush to join the multi-bank platform race ended almost as soon as it began for some, with SunGard’s system, part of its STN Treasury unit, and Citigroup, Deutsche Bank and J.P. Morgan Chase’s Atriax failing to make the grade within a year or two of hitting the market. The (short) list of those that survived includes FXAlliance (aka FXall, a business originally owned by a consortium of 16 banks, but since July 2012 a part of Thomson Reuters), the aforementioned independent German-based global provider, 360T, as well as the State Street-owned Currenex.
However, the breadth of products, currencies and liquidity providers available on each of these – and later arrivals such as Bloomberg’s FXGO and, most recently EBS Treasury – has flourished. Platforms now typically cover electronic trading across the range of instruments including spot, forward outrights, swaps, non-direct forwards (NDFs), options and deposits. All seek to add value in as much as users can access functions such as market surveillance, statistical and comparative analysis and portfolio and risk management. The number of banks available to trade with will vary by platform, but most major institutions will make themselves available in this way to their corporate clients.
At the technological heart of all multi-bank FX portals is the electronic communication network (ECN). For web-based FX trading, this has been around since 1999, being first offered by New York-based Matchbook FX. Multi-bank platform providers today, such as Currenex, Bloomberg, 360T, FXall and Knight Capital’s Hotspot FX, use it to stream quotes from the world’s major banks. Because ECN is a live exchange-type order book driven by spreads on all quotes, buy-side users (often FIs, but sometimes the pro-traders of MNCs) can actually move prices. Using an ECN-enabled platform means traders generally enjoy improved price transparency and faster processing than single-bank portals, whilst the highly automated process enables banks to lower their costs and widen margins.
Single- or multi-dealer?
Since 2009, US software company Streambase has conducted a yearly survey of technology trends in the foreign exchange market. In its full 2015 survey, which polled 147 professionals involved in trading FX on both the buy and sell sides, multi-bank platforms were found to be the most popular.
The rationale for this preference is reasonably straightforward. Most companies have multiple accounts with multiple banking partners and the ability to connect to these counterparties through a single channel supports efforts to standardise processes and reduce costs (two things never far from the treasurer’s mind). Using multi-bank portals is also perceived to be the best way for treasurers of ensuring that they have received best price.
Not that these portals have fully taken over – anecdotal evidence suggests that treasurers will still hop on a single-dealer platform from time to time. If treasury needs to deal something significant a single-dealer portal will still be used and it will talk to the bank directly. There is good reason: showing everybody on a portal that you have a large deal on the cards can start to affect the price you receive.
The sentiment that the best price is only achieved through competition on a multi-bank platform is understandably still shared by a large number of treasurers, particularly those at companies that do not tend to find themselves making frequent large trades. Whilst some banks prefer to promote their own electronic platforms by providing better quotes there than on the multi-bank platforms, at least when a multi-dealer platform is being used banks are being pushed to compete with one another.
But multi-bank has its limits. There are, for instance, certain instruments for which single-dealer platforms are better suited. Take options, for example. Most of the banks do not yet price options in a multi-dealer platform automatically so a request has to be put in manually. However, it is still possible to achieve competitive pricing outside the platform just by shopping around.
First of all, it is important to acknowledge that MMF trading is now subject to major regulatory change. This is at an advanced stage in the US and is a work in progress in Europe. The main alteration – likely to be imposed on both sides of the Atlantic – concerns how funds are valued, which, from a regulators perspective, is designed to minimise the chance of a run on a fund if another crisis looms. This is a topic that is under regular scrutiny in Treasury Today. Here, the state of technology is the primary interest and the impact of changes on the tools of trade will be minimal as far as treasurers are concerned even if in the run-up to change both investors and funds could be seen engaging in short-term tactical behaviour (or long-term too if you count some of the EUR funds that actually hard closed in response).
Regardless of the outcome of regulatory reform, all portal providers must be able to provide up to date information on changing investment guidelines for each fund, as well as ensuring that investors do not inadvertently breach these, or attempt to do so, through use of their portal. It also requires portal providers to introduce new fund types to match investor need whether they be based on variable net asset value (VNAV) or, more creatively, on the ‘flexible distributing’ share class, for example. There is a need of course to be able to provide timely reporting on these. But all of this is more about development work for the provider and, as stated, less of an issue for the treasurer per se.
Generally, in the MMF industry we see trends similar to those taking place in the FX portal market. The pace of adoption of platforms offered by independent multi-bank providers like MyTreasury (now known as EBS Treasury and now also offering FX), ICD, and SunGard’s SGN Short-Term Cash Management (STCM) portal, is increasing, replacing single-bank platforms as the venue of choice. Of those that now use portals, the number of treasurers working with independent providers over proprietary bank offerings has been rising.
According to a SunGard Corporate Cash Investment Report from 2014, independent, multi-bank portals had reached tipping point and were now more commonly used than proprietary systems, with 23% of respondents using a multi-bank channel for 80-100% of their FX activities. Of course, independent providers will always argue that they are cheaper for investors to use but banks will often bundle together their offering with other services such as custody, cash sweeping or asset management, which can create certain operational efficiencies. The ‘share of wallet’ factor should always be borne in mind too.
The range of fund participation in a bank portal may be limited, compared to an independent portal. This may influence a treasurer’s decision where there is a need for portfolio diversification, although a portfolio of around five to ten is typically used. Banks often have distribution agreements with their fund participants which may be seen as encouraging partiality where advice is offered. Of the independents, ICD and SunGard are permitted to offer investment advice, and are thus regulated, whereas EBS Treasury is concerned mainly with (and therefore earns its keep through) transaction processing and execution.
Banks typically offer ‘omnibus’ trading portals, which means the provider will set up and manage accounts on behalf of its users allowing trading and settlement (through a central clearing agent) to take place en masse and anonymously. As independent portal providers, both SunGard and EBS Treasury offer ‘fully-disclosed’ direct trading platforms, which allow treasurers to trade directly with each fund on the platform – their independent competitor, ICD, provides a mix of direct, clearing bank facilitated and omnibus trading which clients can use in combination.
With direct trading systems the fund provider knows who its client is. For treasurers, maintaining visibility of ‘share of the wallet’ may be important. For other traders, particularly hedge funds, anonymity may be preferred. If using a bank portal, it may be perceived by other institutions on the treasury’s bank panel as giving that bank preferential treatment; conversely it may be the intention to overtly give that bank the business.
Broadly, the omnibus model offers simplicity and ease of use but trading authority is given away with an omnibus account. Direct trading is more transparent and controllable. The investor opens one account with the portal provider and the portal provider opens an undisclosed account with all of the funds, doing all the admin such as account opening and settlement on the investor’s behalf. Fund providers do not have access to their investors.
A disclosed nominee account may be opened in the investor’s name, but this account is still owned by the portal provider. If something happens to the portal provider or an intermediary, such as a clearer, if the client is an undisclosed nominee its anonymity means it will not be able to approach the fund providers; as a disclosed nominee the issue remains that the trading account actually belongs to the portal provider and unless the client is a signatory on that account, return of funds is unlikely until the problem has been resolved. Most omnibus portal users do not have delegated trading authority on their own accounts.
What are the benefits of MMF portals?
They save time and provide a one-stop-shop with access to multiple investment options with fully automated sweep options available.
Portals improve portfolio management and allow the investor to diversify their investment portfolio, manage limits and analyse holdings.
They also improve transparency and provide timely information and analytic data.
MMF portals provide streamlined options, transparency reporting and analytic tools.
They show the entire MMF market place in one application, giving a holistic overview of the short-term investment market.
They also consolidate the need for multiple applications to trade the funds and automate the process downstream.
In addition to analytical capabilities, vendors have also developed methods of controlling and managing risk, as well as creating the opportunity to set credit limits with the various funds and providing in-depth information on each fund’s performance and portfolio.
Cost and integration
Portals are usually free to investors and this often includes the cost of integration into the corporate’s treasury system. The portal providers are remunerated by the funds themselves by way of a commission (usually a few basis points) on each deal. Since the commission is small, investors should not be losing out on any return; but it is worth noting that some portals will take larger commissions, thus restricting the choice of funds if you choose not to pay these higher rates, and in order to balance out the overall cost, returns could be lower.
With the near-zero cost of using a portal (it still requires basic resources, such as person hours), some treasurers are adapting their approach to fund investment. Traditionally, a trading desk would have carried out ten to 15 trades a day, typically early in the morning to account for the time it takes to get confirmation that the trade has taken place. However, since the introduction of real-time processing and automated trades via the portals, providers have seen far more trades taking place later in the day, very close to the funds’ cut-off times. The implementation of new MMF rules could impact the cut-off period, making it earlier, if a market price is required.
Digitising cash management
It is in the area of cash management that independent providers are perhaps most established, with treasury management systems (TMS) vendors building ever more intricate cash management modules and dashboards into their web-portal offerings. And the advent of cloud has helped significantly here.
Half a decade or so ago and, in the absence of a broad range of cloud-based treasury solutions, the TMS was struggling to find much traction beyond the largest multinationals, particularly in less developed regions. It was not that the treasurers of companies without a TMS were ignorant of the benefits such technologies would bring to their operations. The issue was that companies would issue an RFP and look at all the different systems on the market, only to walk away after being told the budget requirement. After all, half a million dollars upfront (not to mention the ongoing cost of repairs and updates) represents a fairly hefty initial outlay for a platform that is not even profit generating.
However, this is not the case today when treasurers talk to any of the software-as-a-service (SaaS) cloud-based, web-portal TMS providers in the market. Many companies that needed a system but didn’t acquire one perhaps just needed a more comfortable entry point to get on board. Now, the ability to move to a full TMS for a few thousand dollars a month – and little or no maintenance – is more appetising.
Cash management is also where the banks continue to innovate and invest in their digital offerings. Corporate treasury departments naturally require a plethora of financial data from their banking partners in order to execute their cash management duties. But automating and integrating all the data the department requires on such matters as cash positions, payables and receivables and interest rates is rarely straightforward.
How a corporate connects to its banks is, therefore, of crucial importance. There are a number of different channels through which corporates can access data and, within those, various connectivity options, including:
Single bank proprietary connectivity.
Multi-bank connectivity via a portal or SWIFT.
Since the last financial crisis, spreading holding cash with a number of different banks has been a common tactic used by treasurers to minimise their counterparty risk exposures. What is more, with banking regulation producing unintended consequences such as banking de-globalisation or ‘balkanisation’ even those who manage their counterparty risk exposures using other methods are finding they need more banking partners to obtain global coverage. Implementing multiple proprietary electronic banking is inefficient, however, and hardly helpful when it comes to delivering the visibility over funds that the treasurer demands.
Instead there has been increasing interest from the corporate market in the type of enterprise-wide, multi-currency, multi-bank cash management portals. These solutions (which can be integrated with a company’s existing technology) tend to cover a range of different functionalities to assist at each stage of the cash management cycle – payables and receivables, cash forecasting, and supply chain finance products – to name but a few.
While third-party vendors have used the increasing demand for multi-bank cash management portals to establish rivals to the banks’ own proprietary portals, the proprietary portal has not gone away. In fact, banks continue to see portals as the optimal delivery vehicle for most treasury management services and many are ramping up their investments in such technology. Indeed, certain proprietary portals now give visibility over account balances and pooling arrangements with third-party banks too. The advice is to speak to your relationship bank(s) to see what they can (or are planning to) offer in this respect.
SWIFT gets a broader outlook
A more efficient way for corporates (of a certain scale) who wish to connect to multiple service providers through a single channel is by joining and directly connecting to a bank co-operative network such as SWIFT. Connecting to SWIFT, so the theory goes, can eliminate almost all a corporates’ bank connectivity problems. It replaces multiple bank channels with a single, secure and standardised window to the 8,500 bank and financial institution members on the SWIFT network.
Connecting directly to SWIFT has traditionally been viewed as an expensive option for companies and, as such the SWIFT service bureau route is the current connectivity model of choice, with over 100 providers worldwide. SWIFT service bureaux were created originally to provide secure connectivity to SWIFT but now the best bureaux offer much more than just connectivity: cloud-based applications for payment factories, reconciliation, data transformation, compliance, cash forecasting, sweeping and pooling, are just some of the additional functionalities commonly bundled into offerings.
However, despite the enduring popularity of SWIFT service bureaux, new initiatives in recent years such as Alliance Lite and the latest edition Alliance Lite2 have, through the utilisation of cloud-technology, attempted to tailor direct connectivity to treasuries with smaller technology budgets. Whether the current set of offerings can ignite the interest of smaller corporates still remains to be seen – and they have been pushing this for a few years now – but SWIFT clearly has them in its sights. Indeed, the SWIFT proposition was at one point all about connectivity; it is offering a broader portfolio in the corporate space, including sign-on security (such as 3SKey), a KYC registry, its Payments Data Quality reporting and data analytics service and partnerships with the likes of TMS provider Reval. Much of its new approach is driven by its intent on appealing to mid-tier companies.
One final connectivity innovation worth noting is the ongoing development of additional bank-agnostic messaging systems, such as SAP’s financial services system (FSN). This is an on-demand solution that connects banks and other financial institutes with their corporate customers on SAP’s secure network. Whilst the common consensus is that FSN does not pose a serious threat to SWIFT, it at least signals the intention of the industry to find alternatives for both corporates and banks alike.