The nature of technology is such that people are always looking to improve it. Once an idea has been formed the speed of development tends to gather pace exponentially. Evidence of the first wheeled chariots dates back to around 3200 BC. In 1769, Nicholas Cugnot created the first steam-powered vehicle, shattering the peace at just above walking pace. It took until 1886 before Karl Benz’s modern car really arrived but then the pace picked up and just 130 years later we have driverless vehicles making their tentative presence felt and the Eurofighter jet-powered Bloodhound SSC ‘car’ attempting to breach 1000mph.

Treasury may not need whatever the equivalent is of Bloodhound’s 135,000 brake horsepower to achieve results, but realising competitive advantage in a strategically important profession does necessitate advanced technologies. The first treasury management systems (TMS) arrived in the early 1980s but since then the pace of progress has increased dramatically and we now have more processing power in a mobile phone than those first forays into treasury technology could ever have imagined.

In this section we consider some of the ideas – and, more importantly, the drivers behind those ideas – that could deliver future success.

‘Innovation’ is a word much-used by the banking and vendor community when referring to its own products and services. Often what is meant is “we’ve got a new product but it’s a bit like the others in the market”. Of course, most treasurers understand the need for technology providers to put some kind of spin on such offerings, after all, costs must be recouped somehow and a bit of creative licence is one way to drive sales. But overuse of the word ‘innovation’ muddies the water for when genuine technological progress tries to emerge. Clarity of thought is needed when approaching the subject.

The organisers of this year’s annual ACT conference, cognisant of the need to assist the treasury profession’s expanding remit and strategic importance, placed technology at the heart of its programme of tracked sessions, keynote presentations and panel discussions for good reason: it (or IT) is an essential part of progress. But amidst the evident hype commonly seen at most conferences and exhibitions it saw the need to facilitate sensible discussion as a means of illuminating ‘innovation’ because not all technology is ‘innovative’ per se.

The panels of treasurers and bankers, assembled by the UK’s professional body to tackle this theme, largely spoke of specific tools for the job, which gives a flavour of what is current but does not really tackle the topic of why ideas gain momentum or falter. However, one panellist was afforded the opportunity to do justice to the notion of technological change, which we report below.

And whilst elsewhere in this Section we look at one genuine innovation of vast potential, we do so only in terms of its practical application for treasurers; we will leave the wild speculation for the futurologists.

An agenda for change

With the treasury emphasis on operational efficiency, access to effective processes and procedures is essential to avoid being trapped in fire-fighting mode. It is well-understood that making the right technology choices today sets the scene for automation of the basic functions, freeing up treasurers to handle the more intellect-intensive processes increasingly demanded by modern global trading.

Customer behaviour, regulation and technology itself are key drivers for agenda change. “By 2025, the Millennials (those born between the early 1980s and early 2000s) will constitute 75% of the global workforce,” noted John Lyons, Head of Strategy Design and Change, RBS, at the ACT conference. Tackling the drivers of change head on, he said this represents a significant shift towards the “always connected, fast-paced, tech-savvy, instant-gratification” generation – the generation “two and a half times more likely to adopt new technology” than its forebears. He goes further: treasuries with strong representations of millennials should now be giving them a voice in shaping how the organisation of the future will look.
The continual imposition of regulation is also a point of consideration in the context of technology change. In Europe, the Payment Services Directive 2 (PSD2), for example, is opening up banking services giving treasurers an unprecedented level of provider choice. New entrants, deploying open application programming interfaces (APIs) and data sharing technologies, will be able to exploit lower market entrance costs to access new niche markets and forge interesting non-bank partnerships.

If you think Google, Apple, PayPal, Amazon et al in this respect then it is the power of and familiarity with the smartphone coupled with advancements in telecoms (such as 4G and fibre broadband) that has fuelled the rise of digitisation, said Lyons.

The readiness of treasury to respond to a business environment where services are demanded and consumed electronically by users very much at home with such devices is a defining matter. The speed of adoption of these devices – and their impact on the world – must never be underestimated. The first mass market smartphone arrived in Japan in 1999. Within two years 40m subscribers were on board. In 2016, the iPhone celebrated its ninth birthday. In that period, the app economy has arrived, social media has taken off and long-existing industries have been massively disrupted by new entrants – Spotify, Uber, Airbnb and the like have changed ways of doing business for ever.

By 2020 there will be 50bn connected devices as the concept of the Internet of Things (IoT) – where everything with an IP address is potentially connected to everything else (from a fridge and car to a bank and building) – gains ground. Match this with news that over $10bn has already been invested in fintech and that 40% of this is on payments and 23% on lending, and it becomes readily apparent that these rapid advances will fall right into the world of treasury. “Understanding how these developments can help treasurers, their companies and customers is going to be very important,” said Lyons.

Indeed, these trends are already having an impact. Contactless transactions passed the one billion mark in 2015; a 300% year-on-year increase. And today 51% of all online sales are on a mobile device. Whilst Lyons noted that the optimal working capital model is “digitised receipts and carrier pigeon payments”, he can see that cheque payments, if not already vanished are declining rapidly in many parts of the world. In the UK, cheque payments are falling by 13% per year as Faster Payments grow by the same percentage. As this scheme and its equivalents elsewhere attract more usage, companies can opt for payment by bank account rather than having to pay merchant services fees on debit and card payments. These trends will accelerate. A straw poll at the ACT event revealed that almost one third had not yet considered the impact of these new technologies on their business.

In the environment of rapidly advancing technology, as the banking world opens up and starts to fragment under new rules and regulations, and as new technologies push the boundaries, the options for treasurers will expand, Lyons believes.

By enabling other service providers to enter the financial markets, it will fundamentally change how banks provide services and how customers consume them, stirring up the competitive landscape. It is therefore important that treasurers are able to respond to and leverage these changes, warned Lyons. “There is a danger that some companies will be left behind if they don’t embrace at least some of these opportunities, whether in terms of efficiency, revenue opportunity, or control and risk management.” Indeed, organisations that are both “technically capable and culturally willing” to adopt new ways of working, new ways of handling customers, and new ways of managing their businesses are the ones which will thrive in the future.

As a mark of just how fundamental a change he envisages, Lyons believes that payments and the movement of money will eventually disappear as a corporate finance function. As technology (especially open APIs) allows companies to embed payment services into core business processes – whether in an accounting or treasury platform, a purchase ledger or an e-invoicing system – a separate banking process will not be needed.

This is indeed a major restructuring and it all will be driven further forwards by the closer convergence of technology, customer behaviour and regulation. However, in another ACT straw poll, one third of companies felt they were barely prepared for the technology exploration that lay ahead.

This highlights the need to push for a cultural willingness to move forward. Fundamental changes require across the board buy-in and this is a C-level investment strategy. For it to succeed, it requires “absorption in the world around” to form a culture that embraces different business models and customer values. “It requires time, effort and commitment from the top,” said Lyons.

His vision is one that may see companies move from a profit focus to a purpose focus; from a hierarchical model to a networking approach; from being controlling to being empowering; from planning to experimenting; and from a position of privacy to one of transparency. Co-creation is the key, he notes, “harnessing the power of the organisation internally in order to rebuild itself”.

A new approach to ID

The evolution of treasury technology must have a corresponding evolution of digital identity management to ensure user security. Treasurers have long since bemoaned the fact that multi-banking requires multiple ID devices for access and as such they are seen as a necessary evil. Work is in progress to try to offer alternatives and products such as SWIFT’s 3SKey do go some way to alleviating the problem. However, perhaps something radically different is needed to properly address the problem.

“We are all nodes on the network,” stated James Marshall, Head of Treasury at Virgin Media. Speaking at the ACT event, he said with controlled storage and authentication of data, every individual could in theory sell personal details to companies, as they see fit. The value of such information is huge which is why cybercriminals make such an effort to steal it. However, the adoption of advanced identity tools and the notion of taking control of personal data is entering “uncharted territory”. Building a “retrofitted” system to exploit this world of possibilities is not feasible, argued Marshall. “This is about starting from the ground up.”

The challenge of a total overhaul is not lost on David Rennie, Head of Industrial Engagement for the Gov.UK Verify programme. With the tagline “digital by default”, he knows that digital identity is “fundamental to trust” in the online world and that the more confidence customers have, the greater the volume of business generated.

In partnership with a number of UK companies, the global Open Identity Exchange (OIX) and security technology experts such as IdenTrust, Verify aims at both decentralising the authentication and verification of personal identity documents (via banks, government agencies and other trusted businesses) and centralising access to that verification as a single source of ID. The individual’s “privacy, consent and control” is very much at the heart of it all, explained Rennie, keen to distance the programme from the much-maligned (in the UK) identity card scheme.

The USP of Verify means that personal data can be streamed from multiple sources to a single point of verification (with biometrics planned as a key sign-on aspect) but only with its owner’s consent. The bank, for example, uses the customer’s driving licence as identification but the government data base (the DVLA) verifies that the driving licence is for that individual; this spreads the risk and marks the difference between identity and entitlement. Collaboration is the key here.

Sarah Munro, Barclays’ Head of Digital Identity, posed the notion that a solution such as Verify could give individuals and companies better access to their data. As part of an ACT panel, she said businesses in particular could use such a solution to manage their own bank accounts (especially around account opening and closing, KYC and mandate management).

They could also improve their relationships with online customers by enabling them to supply required personal data immediately, rather than giving up on online transactions in sheer frustration at having to prove their identity yet again (the rate of online shopping cart abandonment is around 68%). Acceptance by the wider market will be the only test of such a solution and for Rennie this will only be achieved when Verify becomes “useable in five different contexts”, such as opening a bank account or buying online.

But maybe this is only part of the solution. For Wells Fargo, based on the doorstep of Silicon Valley, employing thought leader, Steve Ellis, as its EVP and Head of Innovation Group, is clearly an advantage in terms of tackling fraud and cybercrime. The bank claims one of the lowest attack rates in the business.

Whilst Ellis believes that putting the customer in charge of their own data is vital and that the rules of access to that data by organisations must be bound by privacy and opt-ins, identification will always be “the first step to everything you want to do with customers”. But he warns that if “a group of bad guys” is determined to get in, it will get in: to this end, all organisations “have to up their monitoring”.

In this respect, the weakest link is always human behaviour, and business processes need to be subject to rigorous checks and even real-time pattern analysis to help defeat those ‘bad guys’. With the advance of the IoT, every organisation “must now get to know all the doorways in”.

What should be clear by now is that the digital age is unstoppable. Getting ahead of the curve is essential because if companies don’t, they will have a security problem and the ‘bad guys’ will figure out these weaknesses. Ellis urges companies to recognise that the one thing “we could all do better” is working together on cybercrime, and this includes corporates, banks and vendors.

The big one: blockchain – from abstract to treasury reality

The distributed ledger or ‘blockchain’ concept gets so much coverage that anyone would think it had already been used in multiple products and scenarios. It hasn’t… yet. The idea of a decentralised, democratic, fully auditable sequence of indelible actions has phenomenal potential in just about every niche of digital life where tracking is advantageous. Although blockchain explanations of varying complexity abound, the crucial point is that users do not need to know how it works to benefit from any of the likely (or indeed unlikely) success stories that will emerge over the coming months and years.

At Treasury Today, barely a day goes by without the arrival of a press release on how another bank or vendor is investigating blockchain. Of course, their investigative efforts are laudable and will, when more ideas come to fruition, be appreciated. But at this stage, most treasurers want real-world use-cases not abstract notions. Here are some of the possibilities and early day realities.

Supply chain efficiencies

Port of Rotterdam is one of the world’s busiest and most value-adding ports. In fact, the added-value created each year is equal to around 3.5% of the entire Dutch GDP, approximately €21bn. With tank storage firms, biochemical and petrochemical operations, shipping companies and biofuels and energy producers all around, Tim de Knegt, Managing Port of Rotterdam’s Strategic Finance & Treasury team, sees ‘industry’ close at hand. And as a man with a very close eye on corporate finance and investments, he sees an opportunity that is being missed by just about every industrial player in the world: aligning the logistical, physical and financial supply chains.

Yes, every treasurer knows what supply chain finance is since it has been talked about endlessly over the past few years. But de Knegt wants businesses to think differently about their supply chain and its financial services. In the logistics space – perhaps one of the most promising areas of development in this respect – he argues that if the players in the process adopt a more “holistic” approach, the advantages could be significant. “Right now, it is very much point-to-point financing but the holistic approach could dramatically cut costs across the full supply chain.”

Here is an example of how it works. When the various chemical ingredients to make silica travel from China to Rotterdam to make a tyre, and that tyre ends up being fitted to a German car, each step of that process between sourcing, transporting and processing raw materials and manufacturing the finished product can be individually financed and sold to each subsequent partner in the chain. This is a wasted opportunity. “If the whole process could be financed at one point only – so the end customer finances the producer – then multiple individual financing stages are removed,” says de Knegt. If end-to-end supply chain visibility and concurrent financial services intervention could be achieved, he feels that it would afford “huge savings across the entire supply chain”. This could be applied to just about any manufacturing process that involves movement of multiple constituents from different suppliers towards a finished product.

Of course, there will be a host of issues to iron out, not least around the legal framework that defines ownership of goods. But the practical matter of arranging this is more advanced than may be expected and de Knegt has been engaging with industry on this topic already and is keen to open up the discussion.

There is, de Knegt notes, a slowly evolving trend for technology firms to be able to provide the kind of information needed to facilitate single-point, holistic financial solutions across the entire manufacturing process and order lifecycle (including pre-shipment, post-shipment, and post-invoice financing).

In addition to these solutions, it seems that blockchain has great potential here. The biggest challenge in the transition to a holistic model has always been data sharing – but this has been an issue for the past 30 years. “Data has continually been the major issue, no matter if we’re talking about relational databases or blockchain,” comments de Knegt. However, he explains that the benefit of blockchain is that the element of control remains with the data provider. Furthermore, blockchain could also play strongly in the transfer of legal ownership. Indeed, it may even prove to be the perfect solution for monitoring and indelibly recording the progress of the physical supply chain, the accompanying shipping documentation and the parts of the financial supply chain that confirm receipt and release payments along the way.

The difficulty with any supply chain is that there can be a multitude of participants – the tyre example above would have at least 20, says de Knegt. Outside of the initial producer and final customer, each one will benefit from lack of transparency over pricing and so the motivation for change may not be quite so obvious, initially.

But it takes just one enthusiastic newcomer – and the advent of the right technology – to start shaking up the market and make transparency essential. When booking airline tickets, it used to be the case that the travel agent would do the work and the end-customer had no idea of the costs involved; they just paid the price asked. But now consumers have complete transparency, mainly facilitated by the advent of the internet and electronic payments mechanisms. As a result, ticket prices have shrunk significantly in the face of competition (and not least because processing costs have dropped). But that change also required someone brave enough to take on the status quo and for all stakeholders in the chain to accept that change. As de Knegt says, the mechanism needs to be in place but there also needs to be “a coalition of the willing” in order for it to gain momentum. We have the technology; do we have the willing participants?

“There have been small steps in the right direction, but it’s slow,” he reports. “In an environment of negative rates and corporate cash on deposit making a loss, if you can use your cash to finance the suppliers you are going to pay in the end anyway, why not use that cash to get a lower operational cost right across your supply chain?”

From his perspective, de Knegt firmly believes that the savings could be substantial. “Where several hundreds of billion euros-worth of goods flow through the Dutch ports alone, if it is possible to cut out all the trade financing products between the initial producer and the final customer, it could save in excess of 10% of the total goods’ value,” he says. This would be a serious reduction in the cost of goods sold for any manufacturer. If at the same time it assures the supply-chain from start to finish, the holistic model seems like a no-brainer. Perhaps it is time for industry to start talking about this intriguing proposition, especially where financing and financial services players are not the only ones likely to be impacted.

Commodities tracking

Following the launch of its commodities-based consensus computing prototype, GFT, a fintech specialist, claims it is possible to individually track and manage multiple physical commodities assets using a blockchain business model. With blockchain technology also under development for trade finance offerings by the likes of Bolero and also the DBS/Standard Chartered partnership, a new era of commodities cost efficiency, process optimisation and fraud prevention may soon be upon us.

The commodities tracker application is a creation of GFT’s ‘innovation incubator’, known as create@GFT and its ongoing ‘Project Jupiter’ development scheme which is seeking to prototype solutions around blockchain technology. With a number of high profile cases of fraud within the commodities market – typically the result of a failure to tightly control physical inventories – Julian Eyre, Commodities Product Owner at GFT, says this latest prototype is intended to showcase the distributed ledger’s ability to create a full audit trail for each and every participant in the movement of physical commodities. And, says Eyre, this will be of particular interest where proof of ownership and location of the physical commodity are essential for market participants.

Warehouse receipt financing, for example, where there may be a number of duplicate and therefore confusing receipts created for a bank’s financing of a commodities deal, may well be de-risked by this type of technology. This will be done by digitally tracking an underlying physical asset by features such as origination, current location, beneficial owner, certain attributes of its quality or grading, and its provenance. Tracking is enabled by capturing data held by a unique identifier for each commodity ‘parcel’ (a consignment of iron ore or wheat, for example).

Because a barcode or QR (quick response) code can be more easily separated from the asset or even replicated, Eyre explains that GFT is planning to test with an RFID (radio-frequency identification) tag. This technology has been chosen because the tags can easily be embedded into the physical asset (perhaps a sealed container or even a single package or item). The data contained in the unique identifier is written into a blockchain record to ensure a clean audit trail. GFT is using a private blockchain, on the Ethereum platform, which Eyre says was identified as “the best option for this use case”. A digital ‘smart contract’ model embedded within this platform captures and enforces the stored data.

To date, the commodities application has been through a theoretical modelling exercise based around internal expertise, and a design and development phase based around a series of assumptions calling upon actual industry scenarios. A third-party developer – Applied Blockchain – was consulted to help steer the work. The test-bed will be a combined user group of asset class and market participants.

The prototype includes a basic permissioning model for different user-types including logistics, warehouse and end-user. “We have modelled different user characteristics, built a user interface that enables each to view and track changes in the status of the asset during its lifecycle,” he explains. The concept of this model looks to improve transparency across a very early stage component of the supply chain but this could have applications in other functions, particularly when interacting with the trade finance function. “It is quite possible that the individual asset identifiers we are able to provide to a trade finance agreement would uniquely identify those precise assets that are party to that agreement,” comments Eyre. However, the level of granularity to which the data appended to a shipment can be deconstructed is a work in progress and its resolution will depend on the use case model that attracts the most interest.

Most likely to benefit from this in the first phase of its release will be industry or asset verticals. For example, a global agri-business might seek a reduction in the paperwork required to administer but certain quality attributes (such as whether a consignment of grain is genetically modified or not, its moisture content, country of origin, or whether or not it has been sourced sustainably) must be captured and locked-down at the point of origination, then each parcel identifier can be tracked and verified at any stage in the lifecycle of that trade. “It would be possible to transfer the parcel ID through the value chain, literally to the ingredients on the packaging of the finished goods.”

The payback of this for the tracking of raw materials in terms of quality control are manifold, as indeed they are for the intervention of the finance function. For treasurers with a group risk function, the increased transparency and visibility into the supply chain is clear; such a solution also has the potential to support the associated cash flow management around the status of different parcels and their asset ownership throughout their lifecycle. A commercial settlement function is not yet included in the GFT prototype but the parallel offerings from Bolero and DBS/Standard Chartered and others that follow may well solve this part of the commodities trade lifecycle.

Although this model has potential to benefit many different functions along the supply chain, the current multiple platform/multiple system technology landscape is complex, warns Eyre. Interoperability becomes the key here, he says, adding that GFT will be looking to align with any interoperability requirements that may arise and that financial participants should do likewise. A further issue might be the regulatory constraints around the cross-border movement of data. At the moment, the consensus appears to be that blockchain will be embraced by the regulators because of the additional transparency it allows.

OTC market clearing and settlement

The uClear blockchain solution for real-time clearing and settlement in financial markets is another real-world offering. The solution, developed by the Indian based open source financial trading technology company, uTrade, is the first solution of its type to reach the market and it has been adopted by UK-based Global Markets Exchange Group (GMEX) which will integrate the solution across its over-the-counter (OTC) segments without existing central clearing infrastructures.

“On any stock exchange or outside the exchange, there is lots of trading taking place which is typically backed by legacy infrastructure that is highly inefficient,” notes uTrade’s Founder and CEO, Kunal Nandwani. “As a result, settlement of these deals typically takes two to three days.” The uClear solution removes need to use the legacy infrastructure, allowing any exchange-matching or OTC market engine to clear and settle trades almost instantaneously post-execution through a private blockchain. This works across equities and futures, with real time risk management, reporting and other financial transfer instructions. To begin with, GMEX and uTrade are working on how it can be used to clear futures products. But the potential is there to use it for any product that can be traded, including FX and bonds.

Whilst the immediate impact on corporate treasurers may be limited and not felt directly, uTrade has plans to develop the product further to assist corporates with their FX trading activities. “At present corporate treasurers typically trade FX OTC and take counterparty risk against each other. A blockchain clearing platform can assist by not only making this process more efficient, but also by creating certainty and thus mitigating some of the risk each party takes,” says Nandwani. “We are firstly testing the water with the uClear solution that we have built, and still learning as this develops,” he continues. “But the FX market is a big area that we have our eye on and we believe that we can make a difference and help corporates in what is becoming an ever more complex space.”

The vendor is too late to be first in this fame though. In early July, membership-based FXCH (the FX Clearing House) cleared the first ever institutional Spot-FX transaction on a blockchain. This means that members (or their clients) can submit trades transacted on any institutional FX platform to be cleared and settled by the new utility. All trades are necessarily bound by member-endorsed rules, a guarantee fund and tightly controlled default mechanisms.

FXCH argue that the state of clearing FX as an asset class is “archaic, expensive and ripe for disruptive innovation”. With every Spot-FX transaction being settled between two banks bilaterally, the risks involved with non-delivery have “all but barred non-bank financial institutions from operating them autonomously”. The use of a blockchain adds transparency to the settlement process, giving it what Franck Mikulecz, founder of the Ireland-based provider describes as “its strongest but most overlooked property: the trust machine”.

The issue at present for all ground-breaking technology firms is that there are so many ideas, use cases and misconceptions in the market. “There is a danger that, because of the hype, there will be failures as companies use the solution incorrectly, in areas where it has limitations,” notes Nandwani. He also believes that adoption may be slow because of regulation, compliance and an inertia that exists in the financial services industry.

But change will happen. “I like to compare the period we are in now with the internet in the mid-90s,” says Nandwani. “At that stage there were few who could predict how this would develop and what it would look like today. The same can be said for blockchain. And just like the internet, the market will mature and companies who have developed compelling use cases for it will rise to the fore. It is just a matter of time.”

And what of bitcoin?

Bitcoin should be mentioned here as the first very public incarnation of blockchain technology, but at what stage of development is it at today? It is supposed to be a virtual currency, without borders, but this looks like it may be changing, according to Australia’s Sydney Morning Herald business section. The paper reported in July this year that four Chinese companies, which have invested heavily in bitcoins and the computer technology needed to create (‘mine’) the currency, now account for more than 70% of the transactions on the bitcoin network. China, it said, has become a market for bitcoin “unlike anything in the West, fuelling huge investments in server farms [or ‘mining pools’] as well as enormous speculative trading on Chinese bitcoin exchanges”. New York Times analysis further indicated that by mid-2016 these exchanges accounted for 42% of all bitcoin transactions.

The Sydney Morning Herald quoted Bobby Lee, chief executive of Shanghai-based bitcoin company BTCC, as saying one of the reasons the Chinese took to bitcoin in such a big way is that the Chinese government “had strictly limited other potential investment avenues, giving citizens a hunger for new assets”. When speculative bitcoin activity in China in late 2013 went stratospheric, it pushed the price of a single bitcoin above $1,000. A concerned Chinese government intervened, cutting off the flow of money between Chinese banks and bitcoin exchanges.

Chart 1: Bitcoin value relative to US

Source: blockchain.info

This led to the massive interest in bitcoin mining and technology investments seen in the country today. The vast server farms used to mine the currency are powered by cheap energy sources found in the country (and less likely to be found anywhere else). The bitcoin mining machines in Lee’s facilities alone use about 38 megawatts of electricity, enough apparently to power a small city. The Australian paper concluded that the bitcoin concept may now be less decentralised than first hoped. As a currency for global trade, the power it seems may yet lie with China, just not as expected.

As an interesting addendum to the bitcoin story, a survey in June 2016 by corporate networking company Citrix, showed that out of 250 IT and security workers in UK companies with 250 or more employees, a third said they were stockpiling the currency so they can pay cybercriminals in the event ransomware – illicitly deployed to lockdown systems – strikes their network. Some 35% of large firms (those with over 2,000 employees) said they were willing to pay over £50,000 to regain access to important intellectual property (IP) or business critical data.