With the continued consolidation and retrenchment of certain transaction banks around the world, treasurers must find the right balance of transactional bank relationships with strong counterparties, to create safe havens for their cash. It’s worth noting that during the last crisis, corporate investors recognised the need to more closely evaluate their money market fund investments than they perhaps had in the past, resulting in some choosing to simply move money back to deposits with their core bank group. Taking all into consideration, treasurers need to plan not just for the cash they are holding now, but they should also attempt to anticipate the impact of future regulation on their overall investments.
Clearly there are significant implications for investment policies in the new and changing environment. How should treasurers be tackling this?
Treasurers with investment policies that have principal preservation at their core certainly need to address how they can continue to deposit with banks which charge negative rates on some of those deposits. In addition, MMF regulation is undergoing reform – a process that is still evolving in Europe. This too is something that treasurers should give consideration to when revising their investment policy. The new rules that we know are coming into place in the US, and may be coming into place across Europe, may test and challenge that policy notion of principal preservation.
Process digitisation is having a major influence in the new environment, especially in the field of payments. What considerations should a treasurer give to their operations with respect to the adoption of electronic solutions?
This represents an immense opportunity for both corporates and their banking partners as many more aspects of our everyday personal and corporate lives are being digitised. Treasurers need to work with their business units to understand emerging payments needs, for example. Treasurers and cash managers, with their banks, should be aware of changes to clearing systems but they may not be as familiar with all of the consumer-related digital payments initiatives currently gaining ground. There is a huge amount of activity in this space, mostly with the aim of making payments more convenient for consumers by allowing seamless and instant payments through almost any channel. As online direct shopping increases, it gives treasurers the opportunity to digitise more payment processes. This should be welcomed because it affords a potentially very positive working capital impact. Indeed, if a company can enable its customers – business or consumer – to interact and pay directly and in real-time, it can reduce its Days Sales Outstanding (DSO) quite significantly. What’s more, it also gives immediate access to key metrics for credit decisions, which can in turn drive increased sales.
Treasurers have a strong role to play in creating awareness of, and navigating a path through, these new technologies. They can then engage with the rest of the business as it starts to support those new consumer habits more readily. But speed of transaction reconciliation also needs to be taken into account. The traditional banking model expects a transaction statement on a prior-day basis, reconciling the following day. This will no longer be satisfactory; businesses need to reconcile intra-day, in a real-time environment, because online consumers now expect to see their payments have been received and that their orders have been processed. And whilst visibility into the logistics flow of purchased goods can be tracked even on a mobile device, there is not necessarily the same ability to see where the payment is in that process. This is something that the banking industry – and certainly J.P. Morgan – is working towards.
With so many processes being digitised, how should a treasurer respond to the increased flow of data?
Data management is another very exciting area of development. As the link between business and the consumer becomes more direct, and payments and other information can be connected digitally, businesses can start collecting data that not only provides treasury with real-time visibility over cash flows, but also the ability to forecast on a real-time basis.
For example, businesses can leverage data from consumer credit or debit cards to harvest considerably more information about consumer habits. By marrying this information with profile data gained through a loyalty programme, for example, they can spot trends and target its consumer base with ever-more bespoke offers, driving more revenue. At J.P. Morgan we are already working with a number of clients and their data flows, helping them to spot trends and put in place initiatives that can steer them towards new sales opportunities, and of course using data to give treasurers real-time visibility in an automated way.
As treasurers become more fluent in new payment instruments and engage further with their business units and their banking partners, it enables them to obtain useful ‘big data’ derived information and knowledge. The insights afforded by those payment instruments are far richer than was ever available through traditional methods such as wire transfers or cheque payments.
As digital systems become ever more integrated, the question of cybercrime rises further up the agenda. What can treasurers do to ensure security?
As the world becomes more digital and increasingly interconnected, the drive to interact more with consumers gains in strength. While this has advantages making it easier and more efficient to do business, it can also expose the business to an increased cyber security threat. It is something we have to live with every day but it still needs to be top of mind. The treasurer, as a manager of risk, needs to be one of the leaders within their organisation, ensuring the threats are being addressed and that prevention and detection are being invested in across the organisation, not just in treasury.
Treasurers need to have a robust platform and extremely well-trained employees to avoid fraud and protect the organisation. But equally, they must make sure they are using the new flows of data to provide ‘early warning system’ visibility into potential threats and breaches. Treasurers have not necessarily had close involvement with the business, particularly as new online initiatives have been launched within that company. In such a case, I recommend treasurers put on their ‘good risk management’ hat by ensuring that external partners – including fintech companies and banks – are not only providing convenience for consumers, but are doing so in a safe way.
As the banking environment has shifted, we have seen that banking relationships, investment policies and the approach to technology have changed too. What impact does all this have on cash-holding strategies?
Once cash flows have been accelerated, DSO has been improved through the deployment of digital solutions, and the banking structure has taken into account the ongoing regulatory impact, treasurers need to look deeper into that overall structure to be able to optimise cash holding. They need to make sure they are leveraging best practice – and technology – to make sure they can invest cash in the most efficient way.
With many companies sitting on idle cash, account rationalisation is a key consideration. As they progress through their digital strategy, from paper to electronic, we have found that it gives corporates the ability quite easily to reduce the number of bank accounts they hold. For example, as the flow of receipts changes, treasurers can review the role of certain accounts. In many cases it will have been set up for convenience – an account held perhaps just for local cheque deposits. But as the digital agenda rolls out, simplifying the account structure becomes easier and cash holding strategies can be enhanced.
And now we are seeing clients going one step further. Instead of collecting money in the subsidiaries and sweeping this up to the treasury centre, they are using ‘on-behalf of’ structures to bring that money directly from the receivables instruments to the payment factory or in-house bank. On-behalf of structures have been used for accounts payable – payments on behalf of, or POBO – for some while, particularly in the US and Europe. But we are increasingly seeing corporates move regular customers to direct payment, using a ‘receive on-behalf-of’ or ROBO approach. The main reluctance to ROBO adoption has been the potential impact to customer relationships. However, as new digital instruments appear, it actually facilitates a rethinking of how to improve those relationships. As more corporates decide they want customers to start sending funds to them in this new way, it aids adoption if, instead of providing new bank details, they also offer customers access to all the new digital payment options.
So as evolving policies and corporate business structures come on stream, what should treasurers be bearing in mind when seeking to adapt, and exploit these changes?
One of the key views that clients are already responding to is that their bank account and liquidity structures need to be flexible. They must be able to adapt to continuously evolving regulations and policies, and meet ongoing changes in their own corporate structure.
We are seeing increased activity with regard to corporate spin-offs, for example. Treasurers are starting to consider how they can put a structure in place that is flexible enough to facilitate this. If there is a need further down the line to spin off a division of the business, then that structure should make it relatively easy to separate it from, for example, the existing global liquidity management or cash management structure. With this in mind, corporate clients are now challenging the banks to provide more flexible account configurations – and certainly there is a greater adoption of virtual accounts that mean changes can be made almost at the flick of a switch.
As treasuries seek to redesign their bank account structures, they must be mindful of providing not only the capability to handle different corporate structures – arising through events such as spin-offs – but also, in response to evolving regulation, quick adaptability to fluid situations as those changes impact the business.
As the UK and Europe transitions into the Brexit environment, there are many unknowns regarding how this will evolve over the next couple of years. Once again, corporates need to think about their banking structure and partners and prepare for a number of potential scenarios. Another key consideration is European and global tax changes coming down the line. The OECD’s BEPS initiative, the European Commission’s Anti Tax Avoidance Directive, and Section 385 of the IRS tax code in the US, will all provide another level of uncertainty for affected corporates which must be met by a broad suite of options.
The ability to have a banking structure that could easily change from a multi-entity, multi-currency notional pool to a sweeping structure, or vice versa, is something treasurers need to consider as they develop a structure and select partners to support the changing environment. To make the most of the ‘new normal’ banking environment, and to ensure that the businesses are taking advantage of the digitised environment, treasurers must look at optionality in those structures, making sure they are sufficiently malleable to adapt to changing policy, corporate structure, regulation and legislation.