Treasury Today Country Profiles in association with Citi

The FinTech revolution

Air hockey table

Technology refuses to stand still. And so it should. Even in the relatively glacial world of treasury, technologists are moving forward with new ideas that are primarily aimed at reducing risk and raising levels of efficiency.

When considering new offerings from the vendors, banks and third parties that are progressively re-shaping the treasury landscape, it is important to understand how innovations such as virtual accounts, mobile platforms, real-time information exchanges and the concept of documentation digitisation fit into a treasurer’s operating model. As such, rather than list what is new and exciting (and risk adding to the hype of solutions that may never see the light of day) it is perhaps more interesting to consider how ideas come to fruition, especially in an environment that is constantly changing.

Given the generally cautious nature of treasury, technology for the sake of it is unlikely to fare well in this space but new ideas with a purpose are usually welcome. Indeed, as Paul Taylor, Head of GTS EMEA Sales at Bank of America Merrill Lynch (BofAML) says, sometimes “necessity is the mother of invention.” It would be fair to say that the financial world has seen some evidence of necessity over the past few years. “There is no innovation that is not driven by the needs of our time,” adds Taylor. But he notes too that most of these innovations rely on the banking system to underpin their very existence.

Despite the progressive switch from traditional to online commerce, the availability of electronic platforms launched on mobile devices, and the current trend for instant gratification and realisation, treasurers still want to know that their financial transactions are secure, Taylor states. “It is easier today for small FinTech companies to innovate precisely because so much of that innovation rests on the plumbing provided by banks and the knowledge that what they are doing is effectively providing a new means for those transactions to take place in the sure and certain comfort that the banking infrastructure exists.”

Looking at the macroeconomic picture, it’s clear that corporates operating internationally have to contend with numerous external forces, each impacting the supply and delivery of goods, in addition to the money-flows associated with them. Regulation, for example, is in a state of rapid flux and treasurers are affected directly and indirectly (the latter especially where their banks are concerned, notably around Basel III). Geopolitical developments are another such force, with tensions in Eastern Europe and the Middle East making corporates all the more aware of country, counterparty and currency risk. Certain geographies are becoming increasingly difficult or undesirable to move funds into or out of, and banks have been retrenching from non-core countries, all of which leaves some treasurers with significant hurdles to overcome.

Technology can be used not only to improve efficiency but also to open up new markets. An innovation might leverage existing systems and platforms or could try to create a new niche and spread out from there; either way, innovative technologies can change a treasurer’s experience both in the way they interact with their banks and how they operate internally.

FI creativity

Pre-2008, transaction banking was not the prime concern of treasurers; when the crisis hit corporates suddenly realised the importance of cash management and liquidity, says Eric Bayle, Head of Payments & Cash Management at Société Générale UK. Many corporates sought to reduce the number of bank accounts they held, streamlining the electronic banking processes used. Some looked to shared service centre structures to reduce risk and cost, speeding up collections and concentrating and optimising their cash.

In this context, if technology can help treasurers find alternatives to previously clunky, risk-laden or over-complex operating models then it has a definite role to play. Forty or 50 years ago, it took weeks to get money from A to B. Over the years, the time delay became days, and then within a day. From this perspective, Mark Buitenhek, Global Head, Transaction Services, ING, says ensuring that all payments are instant “could therefore be the final step that can ever be taken in this area, and we are keen to drive progress towards that real-time goal.”

Banks often say that their clients usually drive product development, and to an extent this is true. Wouter De Ploey, a Director in the Business Technology Office of the consultancy firm, McKinsey, points out that banks are facing a challenging time, being at the mercy of low growth, low interest rates and tough regulations. With consumer and corporate client behaviour changing in terms of expectations (driven in part by their own difficulties but also by smart new innovations), he notes that banks are keen to “right size themselves” to get their cost bases under control. As they do so, they are hunting for the best clients to provide the necessary volumes of liquidity and fee income.

This, argues De Ploey, means banks are rethinking the breadth and depth of their services – a position facilitated in part by the FinTech providers and their smart new ideas. “Banks have rediscovered customer-centricity; customers were lost somewhere in the crisis and the regulatory agenda, but banks have now figured out that to outperform their competitors in terms of value creation potential there are only a few strategies that work; customer-centricity is one and so they are all going after re-designing the client experience.” De Ploey sees “a massive investment” on the bank side to remove old technologies, architectures and unsustainable process bottlenecks. Herein lies an opportunity for corporate treasurers. But, he notes, treasurers are “not demanding enough” when it comes to getting their banks to help re-engineer better processes.

Of course, not all progress is client-driven, says Bayle. SEPA, for example was imposed by regulators as a replacement for local legacy payments formats, forcing corporates to change processes and systems in order to comply. However, when it was realised that the XML messaging format of SEPA could be used for all payments, he says banks were being instructed by forward-looking clients to accept the ISO 20022 messaging model on a wider scope of delivery. Because slight variations of XML exist across the banking community, in terms of what data fields are required, the Common Global Implementation (CGI) initiative was established as a forum for banks and corporates and is now bringing about a single message exchange format that is easier for all to work with.

Some technology projects take a long time to come to fruition (SEPA is a classic example) but Bayle argues that progress can depend on the geography and culture. For example, Europe tends to be populated by advanced corporate technology users where the differentiation between companies tends to be in the detail (such as the degree of straight through processing). Conversely, parts of Africa are lacking in some of the more complex structural systems where even SWIFT payments must be processed manually – but Africa is also one of the most advanced regions for consumer mobile payments. In all cases, he suggests there is an element of cultural expectation that will see large corporates typically anticipate and then conform to different regional experiences; this accords with De Ploey’s belief that corporates are not pushy enough with their banks when it comes to the delivery of new technologies. However, Bayle adds that if the need is sufficiently strong, or the benefits worthwhile, corporates will pressure their banks to deliver – as happened with the wider adoption of XML.

As new technologies have been brought to bear on treasury, the core elements of efficiency and risk management have improved, facilitating a whole new raft of responsibilities for the modern practitioner, each presenting new challenges. Expand this notion out to the wider financial community and it becomes clear that where there are challenges, technologists will already be on the case. Indeed today, there are an estimated 23,000 start-ups working in FinTech. Some of them are looking to work directly with banks, others are looking to provide an alternative to traditional banking models. However, Bayle is not convinced that the technologies currently on offer fulfil the tag of ‘disruptive’ that is so often applied to them. “There is evolution, but certainly not revolution,” he states.

Of course, however innovation is perceived, it will only work if the right solution finds the right user. So, whilst competition in the sector should be encouraged, ING’s Buitenhek believes collaboration is the way forward. “That’s why we are working with a select group of smaller players across the globe and why we have set up an innovation centre to work towards digitising our complete offering.” By allowing innovators to work with real-world problems, challenges become an opportunity, not a threat.

There is an argument that banks are not best placed to become development houses. Taylor says he is not sure the world necessarily wants the banking community “to be taking bets” on the consumer channels of the future. “It absolutely wants us to respond and stay relevant but there would be a lot of scepticism if we had some kind of innovations lab pumping out new platforms every year just for marketing gain.” To this end, Alex Young, Head of Sales for UK & Ireland (Corporates), GTS at BofAML, says that to create the best solution for its clients, the bank collaborates with best-in-class technology providers – the bank’s co-operation with the new ‘Apple Pay’ mobile payment and digital wallet service is a case in point.

However, should a bank want to engage with a FinTech start-up it has to move quite quickly; a new business lifespan tends to be quite short if it does not receive the backing. In this respect there are mechanisms to aid the process.

Accelerating ideas

Bank engagement with new FinTech companies is an area where programmes such as Innotribe and Startupbootcamp FinTech, and conference-led projects such as PayExpo’s Payments Dragons’ Den, have been operating for a number of years. They are known as ‘accelerators’, helping to develop and bring new ideas to the attention of potential users in the FI sector.

Startupbootcamp FinTech fields global applicants (2014 had 436 from 59 countries), selecting around ten to work intensively with over a three-month period, mentoring, educating and sourcing whatever each needs to go to market. The programme is funded by industry partners typically with FinTech interests (including so-called ‘Angel’ investors) and is augmented by a pool of 200-plus mentors drawn from multiple sectors and geographies. Nektarios Liolios, Co-founder and Global MD of Startupbootcamp FinTech also sits on the panel of the PayExpo Dragons’ Den event referred to above. He says applicants either come with a piece of technology that needs a business model built around it, or they have a business idea and basic IT concept but need to understand more about the complexity of the technology required. All concern delivery to the broadest sweep of the financial industry and its customers and include sector-agnostic tools for areas such as cyber-security. “We sit down with them, try to identify the gaps and work with them to fill those gaps.”

SWIFT is a name that most treasury personnel will know well, but Innotribe is a more esoteric offshoot that may be new to some. Started at the end of the last decade, its continuing mission is to help financial institutions scout for the best ideas from the most promising start-ups and early growth-stage technology firms. Innotribe runs a programme of events and competitions across various geographic regions each year and works with its banking partners to try to develop and bring ideas to market for itself, for the banks and ultimately for their clients. This year it had over 370 applicants (increasing roughly 100 per year for the past two years).

Innotribe is led by Fabian Vandenreydt, SWIFT’s Head of Markets Management. Although it is charged with driving innovation in the core of what SWIFT does, he observes many more FIs are now appointing a Head of Innovation to try to capitalise on creative thinking. Indeed, Vandenreydt sees it as a “sign of the times” that because banks are increasingly constrained on their discretionary investment under the burden of regulatory compliance, they are looking for other ways to grow and innovate and that working with technology startups is one of those ways. “The fact that Innotribe is run by a global utility that serves the full banking community is interesting to the start-ups because it gives them exposure to many institutions, but banks are much more open to startup innovation than they used to be,” he comments.

If banks are driven by the need to be more efficient (in terms of managing process, cost and risk) then corporates are the ones that should be driving the changes in terms of product offerings, says Vandenreydt, simply because the clients are the ones using the banking system and infrastructures and want easier, cheaper and more secure and transparent solutions. “If you look at the innovation domains in Innotribe this year, everything that relates to how corporates are being served by banks in supply-chain integration, treasury and cash management are big areas. Anything to do with digitisation of payments is also big,” he notes. “This is all being driven by client demand but it is also being driven by the start-ups themselves who see a potential niche where they can offer functionality that banks currently do not offer.”

Getting the two sides to meet is not always easy. “I don’t think banks put their heads in the sand and refuse to see these ideas – they get that quite quickly – but they do need to be able to put in place a mechanism to make the most of an idea but often that takes time,” says Vandenreydt. He explains that the integration of new technologies into a legacy banking environment can require a change of business model to extract the most benefit from it. But it is true also that large institutions can unwittingly complicate and lengthen the procurement engagement process for FinTech start-ups. A procurement fast-track that sidesteps a bank’s normal lengthy vendor approval process is therefore required to allow the process of experimentation, and if necessary development, to get underway quickly. This is in part why the ‘accelerators’ exist.

It is true that some banks are necessarily wary of diving in too quickly with new technology, not least because of the compliance and integration imperative. They are very much driven by the need to see a fully worked-up proof of concept. In this respect, the FinTech companies often struggle to fully comprehend the real world experience of the banks and their clients, particularly around regulation. Thus guidance from accelerator organisations, working with their bank clients, can prove invaluable when building up a working solution and an effective business model. “An idea in isolation that doesn’t take into account legacy systems, regulations, customer expectations and the reality of budgeting for development will not go very far,” says Vandenreydt.

As complexity grows in the FI and corporate space, so too does the number of potential problem areas; the industry is in constant need of more solutions, especially where it comes to the more esoteric aspects of the business that tend not to be visible to the outside world such as the capital markets or back office. “No one just comes up with ideas for these areas,” says Liolios. “There is a need for someone not only to know about and understand the problem but also have the confidence and entrepreneurial drive to do something about it themselves.”

Banks get involved with the accelerators because they want to see at an early stage what the trends are. If they see something that appeals they can opt to run a pilot programme. “But there is also an element of being aware of what could potentially threaten their business,” says Liolios. Over the past few years there has been much talk of FinTech firms trying to ‘disrupt’ the norm. In some cases this is taken as an attempt to disintermediate the banking sector. But the degree of success here is minimal; as BofAML’s Taylor pointed out previously, most of these ideas are founded on the existence of a secure and reliable banking infrastructure. Even if (as has been suggested) the banks in this context become nothing much more than a pipe delivery system, the value of that service cannot be denied.

Liolios too is unsure that ‘disruptor’ is a valid term, not least because many appear only to focus on commoditised bank services such as payments processing. These types of products, he feels, are “creating new value” for customers but are not disrupting the status quo per se.

“I see disruption as a positive,” states Vandenreydt. He too believes that many FinTech companies are just trying to work with the banks and as such their ideas are starting to gain traction across a broader section of the financial community. Many innovations in the financial sector start in the retail space, driven by a need to keep customer contact alive (via mobile devices for example) but it is only a matter of time before they feed through into other areas, including those populated by treasury. A younger generation of tech-savvy individuals is keen to bring their personal understanding and adoption of consumer technologies into the workplace and banks are keen to provide it. “Customer intimacy is not only about the transaction, it is also about giving advice and information,” says Vandenreydt. “Banks need to work hard to build a full proposition to meet that need.”

The problem for many large organisations is that it can be difficult for new technologies to gain acceptance which is why it often ends up aiming for the “lowest common denominator” just to get everybody to buy into it. Banks talk a lot about ‘mobile’ as if it was something cutting edge but its prevalence outside the working environment makes it a fairly safe bet. “Often the vision is lacking,” states Liolios. If an organisation wants to be a leader and change the way things are done, he believes that projects must be “driven” forwards bravely, not put on autopilot. The difficulty for banks in doing this lies not only in getting the right people to work on a project but also in tackling lethargy, he notes.

A recent poll of the 5,000 plus Startupbootcamp community members (including banks, corporates, professional services providers, investors and startups) asked why banks are so poor at innovating. It offered a selection of possibilities including regulation, funding, lack of knowledge and inertia. The most selected answer (polling more than 35%) was ‘inertia’. Liolios explains that the lack of incentive, the organisational structure, the culture and the awareness of client needs all contribute to innovation becoming “not much more than a box-ticking exercise”, but the recognition that unless there is a fundamental change in the business to make it a genuine digital business, there will be little progress.

Rather than “being paralysed and just watching the world change around you,” he states “you have to start somewhere”. He cites a small group of highly active banks in this space, a number that are trying to progress, and then “a whole bunch of banks” that are rarely if ever heard from in the context of innovation. “It makes you wonder what they do to reflect the changing landscape!”

It is a slow and sometimes very difficult process to change an entrenched way of thinking and this is why some banks will be more successful than others, says Liolios. The accelerators can use all their experience and know-how to demonstrate how new FinTech can benefit these organisations. “Instilling this mentality of experimentation is vital; of course the banks’ core systems have to be solid and stable so people can rely on them, but at the same time they need to be able to move forward and figure out what works and what doesn’t.”

Indeed, if an organisation’s mantra is ‘failure is not an option’, Liolios asks how executives can possibly support a team whose purpose is to be adventurous. He has observed a number of institutions that have set aside funds for development but other than organising the occasional innovation workshop failed to produce anything of note; innovation is an active process that must engage with as many ideas as possible to test what works and what doesn’t – the organisation must never be afraid to fail.

A collective response

From when it was first created, right up to the 1970s, treasury as a function barely changed at all in terms of technology. The introduction of computing and basic electronic data capture heralded “a new epoch,” says BofAML’s Taylor. The pace of development has gathered dramatically since then, with the arrival of the TMS and then the internet age and cloud computing taking it to a new level of sophistication. “But only now, just a short time into the latest epoch, are we developing the collective imagination as an industry,” he notes. “We are starting to figure out what we can do and what our clients need us to do. It is this that will drive what happens next.”

Whether we are in the midst of technology evolution or revolution is open to debate, but the ever-changing needs of corporate treasurers ensure the progressive application of financial technology. This naturally brings us back to the statement at the start of this piece that “there is no innovation that is not driven by the needs of our time.”

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