Risk management has become a crucial component of the corporate treasurer’s day-to-day job. Claudia Colic, Head of Transaction Banking, UBS, delves into how treasurers are coping in the challenging environment and how their banks can assist their clients.

Describe the changing approach by corporates to risk management.

Counterparty risk remains a high priority for our corporate clients. As an example, UBS’s institutional clients today are demanding thorough reporting of their securities deposits in order to gain a better understanding of their exposures to individual custodian banks. Corporates are also displaying an enhanced awareness of operational risks, as demonstrated by treasuries who divide their operational execution between multiple providers as a way to avoid concentration risk. Due to the historically low interest rate environments, interest rates are another area of increased focus. Centralising risk management and control functions within a group of companies also remains a key topic. Indeed, the majority of projects UBS is involved in with its corporate clients start by centralising the visibility of their positions and foreign exchange (FX) management.

What changes have you seen in the way corporates approach risk mitigation? What do you see as the big issues?

Since the credit crisis began in 2007, CFOs are strongly focused on treasury control and mitigation. This has led to a desire for more detailed information on, and understanding of, their firms’ global cash positions, expected cash flows and associated risks.

Pre-crisis, the aim was to maximise return on cash within certain risk limits. Corporate clients thus tended to concentrate the majority of treasury flows through a limited number of banks in exchange for better pricing. During and after the crisis, the key requirement was to minimise risks while accepting only marginal returns, if any at all.

As a consequence, tools and reporting processes were implemented to aggregate critical data and take remedial action in case of risk excesses. In addition, corporate treasurers began to split their positions and distribute business to several banks, so as to diversify operational and counterparty risks.

The all too apparent tightening of control over the banking environment, via more regulation, has seemingly been driving corporate client centralisation and efficiency programmes. Is this your perception?

Corporate clients face a challenging competitive environment every day and are under permanent pressure to improve their cost base. If a company is forced to change its processes, this is always associated with additional costs.

As a result, corporate clients strive to leverage change to eke out margin improvements with each adjustment. On the other hand, every regulatory change compels banks to review their existing product portfolios and benchmark the expected returns under the future regulations against their capital costs.

This process often leads to alterations or even discontinuations in their offerings which oblige corporate clients to either adapt or switch banks altogether. With the widening availability of standardised data formats and channels, corporates – if forced to change their processes – will in return increasingly drive banks to standardise in order to exploit efficiencies on their side and realise centralisation programmes.

Can you give us some examples of efficiency programmes, such as working capital optimisation based on supply chain finance (SCF), cash pooling, shared service centres (SSCs) and payment factories? How banks can step in to help?

Depending on the business model and degree of centralisation within a corporate group, we have seen a wide variety of programmes. Corporate clients are very pragmatic when it comes to finding solutions that require little effort but create a big impact. Central cash visibility can unlock unused excess cash balances that can be reduced, for example, using manual intervention. Or they can centrally manage FX exposures by centralising non-functional currency management.

In Europe we see many programmes that take the mandatory Single Euro Payments Area (SEPA) migration as an opportunity to centralise payment and collection flows in one European location. Particularly in the business-to-business (B2B) environment, programmes to centralise the collection of accounts receivables (AR), for example in Switzerland via SEPA, are interesting ways to simplify operational cash collection.

Banks can help by having sales staff who understand their clients’ needs, offer feasible technical solutions and deliver what they have promised.

How have technological advances enabled treasuries to improve operational efficiency around areas such as cash flow forecasting, cash management or multi-banking?

The emergence of enterprise-wide ERP systems and global connectivity standards has opened the door for higher levels of automation in corporate treasury centres. Multi-bank capability and efficient end-to-end processing marked an important step in aggregating and processing data at group level. This technological leap allowed companies to centralise treasury functions in a single hub and empowered the treasurer with insight into the company’s cash positions, projected cash in- and out-flows and steer the group-wide liquidity in near real time.

The on-going standardisation of payment and reporting formats furthermore enabled the establishment of SSCs, thus eliminating redundancies across the firm and consolidating tasks in those business units that have the highest subject matter expertise. The consolidation of volumes in specialised units did not only decrease the internal unit cost per transaction but also enabled companies to negotiate better terms with suppliers and reduce their external cost of services.

What does corporate technology-enabled efficiency (such as multi-banking or bank agnosticism) mean for banks?

The advance in technology we’ve just discussed in combination with the prevalent standardisation trends fostered by legislative change, such as SEPA ISO 20022 XML pain/.camt messages, has not left banks unaffected. Large and mid-sized corporate clients can now interact with banks through a single channel and become independent of proprietary bank systems at a fraction of the price tag compared with just a few years ago. Banks are thus facing two major trends: firstly, large corporate clients are switching to bank-agnostic channels and diversifying banking relationships; and secondly, smaller corporate clients are consolidating relationships with a few key banks and benefiting from automated solutions, while virtually outsourcing treasury processes to the banks. To cover the needs of the first group, banks have to invest in upgrading their backbone infrastructure so that it can seamlessly accept globally adopted standards and process large transaction volumes with a high level of automation. This is the only way to remain economically competitive.

Addressing the demands of small and medium-sized enterprise (SME) clients requires banks to build integrated transaction banking product suites, ideally coupled with a sophisticated front-end, providing SMEs with the tools they need to focus on their core competencies, which lie outside of treasury management.

Please tell us about changing approaches to the treasury centre and the global versus regional question. How has this impacted banks’ service offerings?

For corporate clients operating across the globe who have a certain regional footprint, a regional treasury centre (RTC) set-up is still the most popular option. For example, there is increased focus on Asian RTCs. In addition to this, we are seeing an increased readiness by corporate clients to bank with multiple banks, instead of just one bank, within a region.

For us as a bank, this means that we need to build on our local strengths in our domestic markets, enhance our capabilities in selected core markets and build up co-operative relationships with other service providers. Our goal is to deliver solutions that fit our corporate clients’ needs, even if UBS does not directly provide all the services they require.

How is Switzerland uniquely positioned to offer international treasury centre services, thinking for example, about its political, financial and infrastructural readiness?

Switzerland is governed by a multi-party political system that fosters an environment where decisions generally have widespread support across the political spectrum. The checks and balances in this type of system prevent inconsistent swings, such as those seen in two-party systems, where it is not uncommon for decisions implemented by one government to be reversed by its successor in power.

As well as having this framework of political stability, Switzerland has weathered the financial crises of the past few years with astounding success. Against its peers in the western hemisphere, the country has one of the lowest debt levels today, and its gross domestic product (GDP) has grown at above-average rates. This combination bodes well for the country to retain its attractiveness for both employers and employees in terms of future taxation levels and a low tax wedge.

All this, plus Switzerland’s reliable infrastructure services and well-connected geographic position in the heart of Europe, make it a prime location and domicile for global and regional headquarters and their highly skilled staff.

What is the role of banks in taking on overworked and under-resourced SME treasury functions in Switzerland, for example?

Switzerland has such a small home market that most Swiss SMEs are heavily engaged in worldwide activities. Since SMEs have neither the personnel nor the systems resources to run complex and expensive projects, the key requirement is to simplify operational processes through easy solutions. This is why UBS, for example, provides a treasury management package in co-operation with an external provider, which meets most SME needs. SMEs can execute their renminbi (RMB) payments directly to the Chinese mainland through an account with UBS Switzerland. They can also reduce documentation by taking advantage of a UBS EUR Gateway Accounts, and access euro markets from an account with UBS in Frankfurt.

How are banks facing up to their own issues, including new regulations, the financial environment, and bank and non-bank competition?

Currently we are seeing two major trends in banking to address change and cope with the increased complexity of regulations, higher costs and pressure on margins: firstly, some are specialising in certain premium services (for example, best-in-class import/export trade advisory and execution services); and secondly, some are focused on highly standardised and scalable mass volume services (such as fully automated straight through processed (STP) execution for securities services).

This brings us back to the trends identified earlier regarding the different requirements of large, globally operating clients as opposed to those firms in the SME market segment. Banks need to revisit their strategies and determine which target segment or segments they intend to cover, and adapt their end-to-end business models and operational processes accordingly. In terms of infrastructure, institutions must decide whether to embrace a buy-or-build strategy, and whether to provide part of their services via a white-label offering, or maintain their own in-house service capabilities.

How are banks managing to overcome current pressures without negatively impacting upon client offerings?

This is one of the biggest challenges. Some regulatory changes affecting banks will inevitably have a knock-on impact on our clients. One major example is increased documentation. Another is Basel III, whose enhanced liquidity provision requirements for banks will impact investment solutions for short-term liquidity. Banks’ efforts towards industrialisation mean that co-operation will be key in the years to come. At UBS, we are constantly reviewing which processes and services other partners can perform more efficiently, so that we can provide even better services through these partners to our corporate clients.

Where do you see the next set of issues for treasurers coming from – and how will banks be able to assist?

Maybe we should speak about challenges rather than issues. One aspect is that corporate treasuries need to be more integrated into their firms’ business units, achieving this by implementing solutions across the entire corporate supply chain, for example through SCF or working capital optimisation. This requires persuasiveness to get internal stakeholders on board, and it is often underestimated how many internal processes need to be changed, people trained and detail level issues to be resolved in order to do this. Technology itself is not the solution, but a tool that must be embedded and managed within the company.

Another challenge will come from enhanced globalisation and movement into emerging markets, where the need to handle regulatory complexity will increase, not least because what is acceptable today may not be allowed tomorrow.

On the market side, predictions are difficult, but with the deleveraging going on in the financial world, liquidity and funding will remain challenges in the near term. Above all, all these challenges need skilled and knowledgeable people, so the fight for talent will continue.