He might not have a crystal ball, but Erik Zingmark, Deputy Head of Transaction Products, Nordea is extremely well placed to discuss both current and future trends impacting the treasury profession. In this interview, Zingmark outlines the new strategic imperatives for treasurers, reveals key insights from Nordea’s Treasury 2017 report and addresses the opportunities treasuries have in becoming strategic drivers in digitisation.
Deputy Head of Transaction Products
We’re now several years on from the global financial crisis. In what ways are treasurers still being impacted?
As we all know, the global financial crisis of 2008 resulted in an increased focus on cash management, balance sheet monitoring and liquidity. The role of corporate treasury therefore grew to be even more significant in this respect, with senior executives taking a very keen interest in cash positions, buffers and exposures, and expecting frequent updates. Today, cash is certainly still king.
Since the crisis, a wave of new financial regulation has also been introduced, impacting the treasury function both directly and indirectly. Aside from gaining responsibility for specific regulatory-driven projects, treasury has also become even more influential in the compliance sphere. The treasurer now has increased responsibility for all risks – ranging from market risk to sovereign risk, with counterparty risk at the heart of everything. Indeed, the desire to spread risk among reliable counterparties is certainly something we are still seeing today.
At the height of the financial crisis, it became obvious to corporates that not all banking partners had the same creditworthiness. The strategy of having as few banks as possible turned out to be too risky – and this led directly to a change in strategy, whereby the treasury now plays a key role in choosing the right banking partners, in finding alternative sources of funding and in improving the use of excess cash. What many corporates found, once this new strategy was in place, was they could actually create a more efficient cash management and banking set-up by engaging with strong regional banks, instead of implementing a set-up with one global bank. Finally, I would say that treasury departments are coming under increasing pressure to put more efficient systems in place in order to cope with growing complexity and transaction intensity in the post-crisis environment.
How can treasurers look to embrace the crisis-driven change that is still happening?
Change presents an opportunity and the steady elevation and expansion of the treasury team’s role within the organisation paves the way for treasury to become an even more important partner with, and strategic advisor to, business units. This means supporting globalisation, promoting efficiency, improving integration with trading partners and the supply chain, as well as greater sophistication in risk/return optimisation.
As I alluded to earlier, treasury also has the opportunity to become the source that senior executives and key stakeholders throughout the organisation turn to for instant reports on liquidity and risk positions and to assess the financial impact of major events whether economic, political or environmental. This should allow the treasurer to gain an even greater trust and respect from the C-suite, whilst raising the profile and value of the treasury function internally.
What new solutions or techniques are being devised to help treasurers achieve their cash and liquidity aims?
It is an old truth that the key to efficient liquidity management is greater control of intra-company cash balances through centralised cash flow management. What we see now is that new technology is making it possible for treasurers to continue to optimise the use of group liquidity by taking a wider responsibility for the subsidiaries’ working capital processes.Furthermore, new ways of distributing technology – such as cloud delivery – are making it easier for a treasury function to start using, or upgrade to, tools that are more sophisticated.
Another established way of improving efficiency is through the centralisation of payables management. What SEPA has done is to enable treasurers to take this to the next level, by centralising receivables management as well. The rationale for this is clear: by building a collections factory and applying the receivables on-behalf-of model, the organisation can benefit from economies of scale, better credit and risk management, rationalisation of bank accounts, faster use of incoming payments, and reconciliation cost savings.
In terms of pooling, which is of course a traditional cash and liquidity tool, I would say the attractiveness of notional pooling is likely to decline since Basel III imposes stricter requirements on offsetting balances, but instant access to group liquidity can be made possible through physical real-time cash concentration across borders. This technique, provided by only a handful of banks today, is probably the most efficient means to minimise cash traps and idle cash, as well as to enable better visibility and control over liquidity.
What else can cash management banks do to help treasurers in this respect?
Today’s treasurers require more data and more analysis around cash and liquidity than ever before. They need this to monitor and feed business demand in a timely manner. With that in mind, banks must be in a position to deliver what their customers require. This means providing presentational tools, such as dashboards, to help treasurers consume and interpret this data – and also in a mobile environment.
Whilst this is an obvious area for investment by banks going forward, some banks have struggled thus far to aggregate and coordinate data supply since many of them are using aged core systems that cannot cope. And although certain banks are managing with old technology at the moment, there will come a time that these legacy systems will have to be changed in order to enable banks and customers to embrace the benefits of new technology and move forward to the next stage of development. It may be a painful experience for many banks to make such a big change, but it will absolutely be necessary.
Is centralisation still the best way to solve cash and liquidity visibility challenges? How is innovation enabling more treasury departments to achieve a greater degree of centralisation?
In most cases, full optimisation in the use of group liquidity requires the centralisation of payables and receivables. But even though centralisation is a key enabler for efficient liquidity management, it has often been difficult for treasury functions to obtain, largely due to a lack of standardisation among banks and the need to invest in expensive technology.
Again, the introduction of SEPA has changed the rules here, making it possible to master euro payments and collections to and from counterparties in many countries through accounts (and in some instances a single account) held in one country. Whilst this may have seemed like a daunting step when SEPA was relatively new, the success stories from the first movers are now rapidly spreading across the corporate community. This is creating an incentive for more companies to establish payment and collection factories and to implement payables and receivables on-behalf-of structures.
Cloud technology and Software-as-a-Service (SaaS) models are also playing a role in the drive towards centralisation. For example, they are making it less expensive for treasuries and shared service centres (SSCs) to employ technology solutions that are more sophisticated – and up-to-date. In turn, cherry-picking the relevant modules from the right technology vendors and outsourcing the hosting of data, as well as the support to the business units, will enable smaller treasuries to reach the next level of centralisation.
Looking ahead, what do you see as the key themes for treasurers to concentrate on over the next 12-24 months?
In Q4 2014, we conducted the Nordea Treasury 2017 report with the precise aim of taking the pulse of the industry. We surveyed 82 large corporate treasuries and interviewed more than 60 CFOs and treasurers, building a clear picture of where the treasury stands today, and how treasurers see their role evolving in the future.
The key findings reinforce much of what we’ve spoken about already, such as banking relationships being absolutely key, and the fact many treasurers are finding that a smaller number of core banks gives greater oversight of liquidity and exposure, without the counterparty risk of a single global bank model. Elsewhere, the survey found visibility and control over cash and liquidity remain significant priorities, with access to funding and optimising existing funding arrangements also high on the agenda. In addition, centralisation is widely recognised as ‘the future’: giving treasurers a better overview of their cash and liquidity positions, whilst also helping to deliver the efficiencies needed as treasuries take on an expanding workload and become strategic advisors to the business.
Perhaps the biggest change the survey results highlighted was the decline in trading activity undertaken by the treasury department over the last decade. Only a third of treasuries still have a trading mandate and, for them, the objective is usually to sustain market knowledge rather than to generate a profit.
Whilst trading may be declining, hedging is on the up. The survey results revealed large corporates are now hedging more risks than they were two to three years ago, and most expect they will be hedging even more by 2017. In particular, corporates are hedging to protect themselves against fluctuations in FX and interest rates, typically using futures. In summary, the Treasury 2017 report underlines that treasury has moved into a strategic role, but that is not to say the transactional element of the treasury’s role is going away – this remains just as important as ever.
Looking at the transactional space for a moment then, how is innovation in the world of payments set to impact corporate treasurers and their payment providers?
In its current form, ‘the payment’ is a standalone product for the transfer of funds to settle a transaction. And over the last decade, it has gradually turned into a low-priced commodity of little strategic interest. Due to the impact of new technology and regulatory changes, however, we can foresee a huge transformation in the role of a payment. In the future, the humble payment will become a value-adding solution that is integrated into broader commercial transactions. A key factor that will affect all stakeholders is the advent of the Payment Service Directive 2 (PSD2) as it will allow new non-bank players to enter the space. Of course, this could be seen as a threat by the banks, but the smart operators will use it as an opportunity; they can set themselves up (perhaps via subsidiary) as a non-bank and offer the same services to customers. So, this change should not be seen by banks as a threat but as a way of liberating them from some of the regulatory constraints they were subject to before.
And since banks already have the infrastructure, the compliance teams, and the knowledge of the industry, they are in a perfect place to better serve payments customers. Conversely, some of the new entrants will find that, as they expand, they encounter all the same regulations that banks now do – and they will struggle without the right resources and expertise. So, for smart banks, this could be the start of a new life. The PSD2 will focus the attention of the banks and they will have to build an appropriate response or, ultimately, face a bleak future.
Another trend we are hearing a great deal about is digitisation. Why do treasurers need to be thinking about this?
Digitisation is very much a hot topic. We foresee many innovative digital offerings entering the market with the potential to support the treasury function more efficiently than traditional bank services. For example, just as FX services have been made available in an auction format through portals that enable corporates to pick and choose who they want to deal with for a given transaction, in the future it may be possible for many other banking services to be consumed in this way, making the marketplace far more competitive.
Naturally, the banks will not sit idly by and watch while new entrants eat their proverbial lunch though, so we can expect greater innovation coming from the banks too. As discussed, the traditional payment offering will be redefined – it will also be further integrated with more comprehensive product propositions covering the customer´s process end-to-end. Treasurers should also expect to see banks making use of new technology to create multi-channel functionality based on real-time exchange of transactions and balances.
For the treasurer, the key messages around digitisation are to stay up-to-date and to be ready to exploit the new offerings. In a world of fast-shifting technology and rapid adoption of new digital solutions, it is important to be part of the flow. Simply waiting and seeing how it turns out is not likely to be a winning strategy, since you need to be in sync with your counterparties to stay efficient.
Finally, how is Nordea embracing digital opportunities?
In order to become very easy to deal with, whilst remaining relevant and reliable, Nordea is one of few banks in the world so far to embark on a simplification journey whereby the complete core banking and payment platforms are being replaced. This will enable Nordea to become highly efficient and agile, and at the same time to further embrace the digital opportunities ahead.
Nordea is also utilising new technologies to create innovative services and to establish omnichannel solutions which are more efficient in reaching and supporting our customers. We are increasing our spending on innovation and people working in a lab environment. We were one of the first banks to provide banking content for the Apple Watch and have many other interesting solutions cooking. The golden rule, and our ultimate goal, is to be available whenever, from wherever, and through whichever channel our customer chooses.
Beyond our own horizons, we believe digitisation is a key enabler for transforming the whole banking industry. Going forward, we will see traditional bank propriety solutions being replaced by more comprehensive offerings, whereby any given financial service will be closely integrated into broader commercial product propositions. XML will be the bedrock of much progress in this space, as long as it remains standardised, and Common Global Implementation will play a big role in keeping it as a true standard. And then we have blockchain technology which could transform banking fundamentally.
To be part of this digital evolution, banks will have to utilise the best of new technology and be willing to partner with other players when building and delivering new services. Another major component of this ongoing development is engagement with the customers; to ensure what the banks are working towards really taps in to their long-term ambitions. Digitisation is a primary strategic initiative and growing need on the customer side and banks must respond by facilitating discussions with their customers around the innovative use of digitisation. The payment execution is a central part of the commercial process but digitisation stretches far beyond that. Collaboration, for instance, could focus on potential cost reductions, efficiency enhancement, risk, reallocation of treasury staff from back office to more high-value front execution or even positioning treasury as a strategic business partner in the internal digital ambition.
We are increasingly assuming this role as a knowledge centre and strategic advisor where we facilitate the sharing of best practices, digital strategies and smarter ways of working between and together with our customers. This helps prepare treasurers for the next opportunities that digitisation will bring and arms them with relevant knowledge and viewpoints to carry into the C-suite. It is a new step in the customer-bank relationship and I would certainly encourage treasurers to proactively engage with their banking partners around digitisation and help shape the future of financial services and, indeed, drive the innovation agenda within their own organisations.