Digitisation can be seen as a natural progression inspired by the advent of technology. But, in recent years, there has been increasing focus on digitisation in the treasury community. What might a digital future look like and how can treasurers prepare?
Ever since the first treasury management systems (TMS) emerged in the early to mid-1980s, developments have made their way into the treasury department that require digital data to function. Over the years the treasury industry and those that support it have been fine-tuning these developments in order for the real benefits to fully materialise. But it takes time for developments to deliver and not be dismissed as ‘innovation for innovations sake’, particularly in the generally conservative corporate finance space.
Not so long ago, much of the technology that is now considered ‘par for the course’ was far from secure and stable enough to be used by corporates. Indeed, as a consumer, it is quite likely that you would have received a better online banking portal than as the corporate treasurer of a global MNC. However, the prevalence today of process digitisation coincides with, or is perhaps driven by, the focus on solutions that have achieved scale and sophistication, that truly address challenges for treasury whilst meeting the complex needs of corporates and delivering considerable improvements over previous processes and systems.
Treasurers are expected to be strategic business partners – constructing and co-ordinating a coherent treasury policy to make best possible use of a company’s assets and the latest treasury products, services and trends. This then must be communicated to the board. Part of this communication imperative will call upon the implementation of digital products in support of treasury.
Whilst digitisation hasn’t necessarily been the main driver in changing the role of the treasurer, it has helped treasury leaders to be more effective gatekeepers and strategic business partners. Digitisation has been the backbone to so many developments which assist treasurers in their role. One obvious example is the use of tablet and mobile devices to support those travelling. But there are other areas which have been, and continue to be, influenced by digitisation. Here is a quick resume of some of the main contenders:
FX services. Through portals, FX services have been made available in an auction format that enable corporates to easily pick and choose (often in an automated mode) from many more providers for a given transaction. Many other banking services may well we consumed in this way going forward.
FX payments. Digital cross-currency solutions offer companies the ability to make payments in different currencies, without needing an account in that currency.
Trade finance. Paper-based trade finance can take weeks to get approval from the banks – and cost both exporters and buyers more. Digital trade finance, on the other hand, can drive down the cost per unit of transacted revenue. In 2015, a SWIFT BPO+ (the ICC accredited Bank Payment Obligation) transaction involving BHP Billiton, Cargill, ANZ, Westpac and facilitated by electronic document provider essDOCS, was billed as a ‘major milestone for global trade finance and cross-border payments’ because it was the first BPO transaction to utilise straight through electronic documentation end-to-end.
Cheque imaging. Remote deposit capture offers companies the potential to replace the traditional time-consuming cheque deposit process by simply scanning and electronically transmitting the cheques. Desktop scanners offered with electronic cheque deposit products are simple and easy to operate. In the US, where cheques remain popular with businesses, the Cheque 21 digital clearing process was born out of the aftermath of the 9/11 catastrophe where physical cheques could not be transported by air across the country.
Mobile payments. Utilising the same peer-to-peer (P2P) technology that’s revolutionising the way individuals send money to one another, businesses can now credit the bank account of a customer using only a mobile phone number, changing the previously slow and expensive options when refunding.
Treasury in the cloud. The rise of cloud technology has removed hardware costs and provided a more cost-effective way for a business to obtain the technology it needs. The inexpensive, or at least less expensive, nature of most cloud solutions has helped to level the playing field in the treasury technology space. Once there used to be a huge gap between what the biggest, most sophisticated companies could achieve with their treasury technology and those at the other end of the scale. Now, thanks to the cloud, capabilities are starting to become more equal.
Virtual accounts. Rationalising the number of physical accounts held by a corporate, allowing the company increased visibility over its cash and liquidity, and, more importantly, minimising reconciliation issues because customer payments must be made using the virtual account unique identifier linked to the real account.
Bank agnostic models. The desire for bank agnostic models is driven by treasurers wanting to be able to exchange information with multiple banks using common standards, eliminating any duplication of effort and minimising counterparty risks. Single communication channels from multi-dealer platforms are only possible because of technology – SWIFT service bureaux, for example.
Instant payments. In recent years, talks have been taking place in the US, Australia, and across Asia, as well as in Europe regarding the immediate payments concept. The UK’s Faster Payments Scheme, an electronic system that enables credits to be posted, or rejected, within seconds and a confirmation of action to be sent back to the originating bank in near real-time, is often heralded as an archetype.
The rise of fintech. No discussion on digitisation is complete without mention of the rising number of fintech companies. Whilst some are looking to work with banks, and others looking to provide an alternative to traditional banking models (particularly under the market-widening auspices of the EU’s PSD 2), all are looking for ways to improve the corporate customer experience and service, whilst creating efficiencies at the back end.
These examples only represent the tip of the iceberg and new developments arrive on a near-daily basis. In the world of fast-shifting technology and rapid adoption of new digital solutions corporates operate in, simply waiting to see how it turns out is not likely to be the winning strategy. Many of the innovations are levelling the playing field so all corporates have the chance to be in sync or gain a competitive edge.
What’s more, when processes are automated and systems deliver results in quicker times, treasury has more time for “quality thinking”, says Mike Hirst, Group Treasurer, easyJet. Technology in general is something which Hirst sees as an enabler to allow the capability from a people perspective to be stepped up. “What I really want my team to be spending time on is thinking about what we are doing, the strategies that we are using to mitigate risks and the products that we are using, for example,” he says. “The execution almost becomes the press of a button – and having automated processes in place is key to supporting that.” Whilst treasury teams are responsible for the execution of day-to-day transactions and activities, the time they spend looking at the processes and systems for slicker ways to operate is valuable for the whole organisation.
There is, of course, the matter of what happens when things go wrong and cybersecurity without a doubt is something that treasurers must be keeping their eye on. Section 6 will cover this topic in depth.
In recent years, innovation in financial technology – commonly referred to as fintech – has come from new market entrants, not banks. It is important to note that fintech is not a new phenomenon, although it is often reported as such. Individuals and businesses have been able to leverage the technology offered by banks for decades – banks by their very nature are fintech. What is different about the current wave of fintech, however, is the pace of change and the sources of innovation. Banks are no longer the only innovators in town.
Take the consumer cross-border payments space, for example. This has been a particular area of focus for fintech and has received a substantial proportion of the $19bn KPMG has said was invested into fintech start-ups around the world in 2015. As a result of this focus, there are now numerous companies that have developed tools that enable individuals to transfer money across borders, instantly and for little cost. Many of these solutions also utilise a mobile wallet which has driven a more dramatic change in regard to extending the reach of financial services to those who would normally fall out of the banks purview.
That isn’t to suggest fintech is the enemy of banks, however. Banks often collaborate with fintech start-ups due to the different skills and ways of thinking such companies bring to the table.
Today, there are an estimated 23,000 start-ups working in fintech. Some of them are looking to work directly with the banks whilst others are looking to provide an alternative to traditional banking models. Bank engagement with new fintech companies is an area where programmes such as Innotribe (from SWIFT), 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.
Given 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.
For the fintechs, despite being labelled as ‘disrupters’, to date many start-ups have had the objective of either being bought by or partnering with a group, due to a lack of reputation and customers. The accelerators assist with this process, making the necessary introductions.
However, for the corporate end-user, a certain degree of scepticism around any new technology is to be expected as there is a need to see the practical value. As with many buyers of technology, treasurers do not necessarily expect to have to deal with the complexities inherent therein, nor spend an undue amount of time looking at what’s ‘under the hood’, beyond necessary due diligence.
Ultimately, corporates should be the real winners in the technology race. Whether the environment is seen as a head-to-head competition or a unique collaboration opportunity between fintech start-ups and the ‘incumbent’ banks.
What I really want my team to be spending time on is thinking about what we are doing, the strategies that we are using to mitigate risks and the products that we are using, for example. The execution almost becomes the press of a button – and having automated processes in place is key to supporting that.
Mike Hirst, Group Treasurer, easyJet
It almost goes without saying that the number of possible alternatives to banks have been on the rise in recent years. More than £4bn of investments were made in the fintech industry between July 2015 and January 2016, SWIFT reported. But bank panellists at SWIFT’s 2016 Business Forum in London were quick to assert their continued importance in the market, referring to an Accenture report which found that of all the innovation that has come to market, around 40% has come from fintech, new start-ups and challenger banks – but the existing incumbents and banks as a whole formed the remaining 60% of innovation.
Whilst the discussion was focused on payments, the comments on the fact that as a result of collaboration and competition, the corporate customers will be getting the best out of the equation are applicable elsewhere.
Indeed, the more corporates come together with a collective voice, the more they can benefit. Damian Glendinning, Corporate Treasurer at Lenovo provides the example of online banking portals – a solution which the majority of corporates use. “Retail online banking platforms are excellent, so as a corporate customer, you would expect that the corporate solution will be equally as good, if not better. But this is not the case and it is lagging far behind.” In his opinion, this is because banks don’t have the incentive to invest in corporate online banking platforms (they did in the retail space in order to save money by removing branches). “The only way to change this, in my view, is for corporates to come together with a collective voice and demand better solutions, until then we will just get what suits the banks.”
Indeed, 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 Fabian Vandenreydt, SWIFT’s Head of Markets Management, simply because they are the ones using the banking system. “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 and often that takes time,” says Vandenreydt. Large institutions can unwittingly complicate and lengthen the procurement engagement process for fintech startups. This is in part why the ‘accelerators’ exist. They know that the window of opportunity for many start-ups is narrow; when the money dries up, that’s it.
As complexity grows in the FI and corporate space, so too does the number of potential problem areas; the industry really is in constant need of new 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-related. But banks often cannot find or fund development of their own solutions. This is where the experts with new ideas come in. “No one just comes up with ideas for these areas,” says Nektarios Liolios, Co-Founder & CEO of Startupbootcamp FinTech. “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.” Many new technologies are created by former professional FI personnel who have seen a need.
Of course, there is no reason corporates cannot engage with fintechs directly, as a way of contributing to and driving change. By seeking out local fintech accelerator programmes and attending the demo days to see what is being developed and by whom, treasurers can learn about new and alternative ways of thinking, whilst networking and pushing forward relevant innovation.
It is a common mistake to associate digitalisation solely with the IT crowds. Of course, IT departments are critical enablers, but, as contrary as it sounds, digitisation is much more than technology; it is about people. For any team considering embracing new technology, it is pertinent to think about the following questions:
Is it user-friendly? If not, employees may try to avoid using the technology and rely on old methods. Considering the substantial investment typically directed at projects, this could be a disaster.
Will training be required to master the new solution? If so, who will provide the training, for how long and at what cost?
What type of maintenance will be required? No corporate wants a system that will be outdated almost instantly, nor is it likely that any corporate will want excessive and/or expensive updates to hinder the day-to-day activities.
How will it affect departments outside of treasury? Any changes to processes that will be felt elsewhere should be communicated well in advance of implementation.
If it saves time and/or money, what will be done with those resources? Any termination of employee contracts will have to be managed carefully too.
Does it help treasury achieve its strategic goals? Changes should meet real business needs, and not be deployed for innovations sake.
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