COVID-19 has accelerated many evolutions in treasury practice. Recent conversations have provided interesting examples of how treasurers are adapting to this new situation.

Liquidity

Liquidity is still top of mind for many treasurers. This has driven extra urgency for cash visibility and cash flow forecasting. Another aspect of liquidity is ensuring access to cash from the capital markets. Treasurers have been working hard on both fronts.

Many treasuries still rely on manual processes – in treasury itself or at subsidiaries or both – such as transcribing or copy and pasting bank statements and Excel and email for cash visibility. This manual approach is slow and error prone. The uncertainties brought by COVID-19 no longer allow treasurers the luxury of such inefficiency.

Treasurers who relied on manual processes for cash visibility have scrambled to digitise in order to increase the speed and accuracy of their cash visibility. This has the further benefit of freeing limited treasury resources to work on more value-added issues, such as forecasting and business support.

Treasurers are using the full range of solutions for cash visibility, depending on their circumstances. These include:

• SWIFT for Corporates.
• Other multi-bank platforms like TIS and Fides.
• TMS bank connectivity.
• Using a relationship bank to consolidate multiple banks.
• Some are using middleware and data warehouse technology.

With cash visibility cleaned up – which means seeing 90% of prior day closing cash balances at the start of day – treasurers have been using this as a starting point for short term cash flow forecasting – aka cash positioning.

With resources tight across treasury and subsidiaries, forward thinking treasurers are using machine learning to forecast short term future cash flows. The important caveat here is that machine learning basically relies on patterns in past data to predict future flows – the uncertainties of COVID-19 mean that for example customer payment behaviour this year is likely to deviate from 2019 behaviour. On the other hand, machine learning works with very granular data – in the case of accounts receivable, invoice level data – so it can spot changes in trends such as customers delaying payments much faster than human analysis would.

Treasurers are also using some of the resources saved by automating to deepen their longer-term cash flow forecasts over multi month and sometimes multi-year timeframes. Of course, the best forecast is only as good as the assumptions behind it, so forward thinking treasurers are using scenario analysis and min-max to explore pertinent different trajectories, such as current trajectory or second wave and so forth.

Capital markets

Because cash flow forecasts are both volatile and constrained by the multiplicity of possible scenarios, treasurers are willing to pay the high cost of maintaining extra cash. They see this as a form of insurance against some of the dire scenarios which have to be assessed as possible and maybe even likely to happen.

The simplest way to load up on cash may seem to be to draw down on revolvers and other undrawn credit. But this has not been simple for many – banks have balked and tried to trigger MACs; they have also had to manage credit from a regulatory and societal perspective at a time when there has been a lot of demand.

This has meant treasurers effectively have to negotiate with lenders to explain their approach and needs. Some have extended tenors to avoid liquidity squeezes in coming years. Covenants have been re-negotiated to allow for some of the extremes that the more negative scenarios imply.

Treasurers have also switched to what used to be exotic sources of funds outside the typical capital market and bank sources – peer to peer funding, high net worth individuals, non-bank lenders, sustainable financing, and others.

Of course, once they have the cash, they have to find a place to park it. Negative interest rates are a given in most western markets. Treasurers focus on the spread between funding cost and investment yield in any case. Some treasurers have reassessed their net investment foreign exchange exposures to find opportunities to park cash in positive interest rate markets, but for most the FX swaps required to maintain neutral FX positions obviate any benefit.

In any case, credit and liquidity risk are generally top of mind, not yield. Especially in these tumultuous times, treasurers are sticking with the cash investment mantra ‘SLY’ – security, liquidity, yield, in that order.

Communication

Dealing with debt capital markets to draw down, extend and re-negotiate finance is just one area in which treasurers have had to brush up their communication skills. Internal communication has also become critical within treasury teams to maintain cohesion, with peers to ensure effectiveness, and with senior management who are now taking a keen interest in liquidity (and hence survival).

Not all treasurers are enthusiastic about the plethora of virtual meetings and team platforms, but all emphasise the need for adapted and deeper communication to maintain team cohesion. An example is checking in regularly with team members without burdening them with micro management. Listening becomes a key skill to avoid distracting team members unnecessarily.

Technology

COVID-19 has brought treasurers’ focus squarely on technology. Whatever the use case, cloud has come into prominence as a safe and reliable way to support working from home and working from anywhere paradigms.

While cloud has been an obvious solution to virtual teamwork, security concerns over payments and other sensitive data have grown. Treasurers (and their IT colleagues) worry about the implications of accessing sensitive systems and making large value approvals from potentially insecure home networks.

One scenario that comes up is where, despite a solid VPN which most corporates have for remote working, work laptops may be compromised by weaknesses in home wiFi from IoT devices and so forth. Another concern is that the latency of home WiFi may not be fast enough for online trading.

Although one reads about American tech firms paying to upgrade employees’ home offices with hardware and security and even furniture, that does not seem to be the norm from recent reports. Rather IT departments are deploying – often confidential – packet sniffing machine learning to detect and alert unusual packets before anything too serious happens.

KYC

One area that has always been very paper based is bank account management (BAM) and know your customer (KYC). Since COVID-19 rendered face to face interaction and wet signatures with witnesses extremely difficult if not impossible, the industry has been faced with a deep quandary.

To their credit, it seems banks have started accepting most major forms of e-signature wherever possible. Of course, this is limited by local regulation, and thus dependent on regulator acceptance. Regulators have been slow to adapt to the ongoing digitisation, so wider KYC processes remained mired in paper.

Banks also struggle to digitise BAM processes in accordance with regulator mandated compliance procedures. Bankers and treasurers seem to have a shared frustration on this issue. Treasurers often cannot meet operational requirements. Bankers miss sales opportunities. With governments digitising furiously in other areas, one can only hope that financial regulators will feel pressure to wean themselves from their addiction to paper and ink.

Conclusion

COVID-19 has presented treasurers, and indeed the industry as a whole, with myriad challenges. Responses have been varied and creative, adapting to corporate circumstances and ecosystems. It has definitely been a team effort across the industry as well as across corporate departments. It is good to see the industry pulling together in the face of this crisis.