Technology

Question Answered: The treasurer’s conundrum – bank or fintech?

Published: Sep 2019

Person using laptop to look at currencies

This issue’s question

“As technology continues to evolve, corporate treasurers face a problem – when it comes choosing a service provider, should I stick with a traditional banking partner or take a risk with a fintech?”

Anton Abraham, Head of International Advisory, Global Transaction Services, Bank of America Merrill Lynch

Anton Abraham

Head of International Advisory, Global Transaction Services
Bank of America Merrill Lynch

The evolution of technology continues to dramatically change the world. With robots advising on investment decisions and automated trading enabling the execution of transactions faster than humanly possible, we are going through an unprecedented upheaval in the way we live and work.

Emerging technology like distributed ledger technology (DLT) and artificial intelligence (AI), coupled with the exponential use of mobile and so-called ‘smart’ technologies, has created a truly digital world. These developments in technology are driving the next generation of financial services infrastructure and solutions.

The combination of these factors has influenced the role of the treasurer and the importance of technology, which has never been more critical to effective treasury management. As the global marketplace changes, business models and operations have to adapt to remain competitive.

This is even more profound in Asia, where the growing middle class, multiple markets, languages and regulatory regimes create a unique set of challenges. The right technology can make navigating these challenges easier. It is vital that corporates have an understanding of the technological solutions available to them and how they can be deployed to assist them to operate, scale and succeed across borders and time zones.

The most important questions you need to answer are what problem are you trying to solve, and what is the right technology solution for your problem? More often than not, treasurers understand the areas requiring improvement across their treasury, but they don’t have the right technology for optimum performance.

Therefore, it’s critical to have a clear strategy so that everyone in the organisation is aligned around what you are trying to achieve. Banks, technology partners and advisors are also important stakeholders in this process and should be engaged.

Never before has so much technology been available to treasury and finance professionals to tackle their challenges. There are so many solutions and options available that treasurers need to consider their needs carefully and find the right mix of solutions that gives them optimum results.

Deploying an enterprise resource planning (ERP) system or treasury management system (TMS) is no longer enough to implement a best-of-breed solution. Treasurers now need to leverage a mix of fintech, bank and third-party applications to create a bespoke treasury solution. This presents a unique set of challenges as treasurers try to determine the best mix of technology for the organisation and how best to integrate it.

Solutions that integrate cash forecasting tools, TMS, SWIFT and fintech solutions are becoming increasingly common. The key for success is to ensure the focus is on people, process, and technology across the organisation. It’s critical that treasury is clear on what the technology must do. In order to define this, treasury will need to:

  • Get granular.

  • Address treasury and organisational challenges.

  • Consider timing and output – does it need to manage liquidity or risk in real-time?

  • Identify the ‘must-haves’ versus the ‘nice-to-haves.’

  • Limit the need for customisation.

  • Make certain that the solution can scale.

  • Integrate infrastructure into bank and other fintech solutions.

Building an intelligent treasury function takes planning, foresight, and a keen understanding of existing and emerging technologies. As the pace of technological development accelerates, not being in tune with the latest developments can negatively impact a treasurer’s ability to effectively manage risk.

Under this quick win approach, the corporate instructs its banks to send statements to the SWIFT address or BIC of the fintech, which is a SWIFT member as a Supervised Financial Institution. This has the advantage of a rapid return on investment, which leads smoothly to other phases: treasury payments, then bulk payments and cash concentration. This rapid deployment model delivers fast results, while keeping the option for the corporate to join SWIFT at a later date.

Thomas Stahr, Owner, Stahr GmbH

Thomas Stahr

Owner
Stahr GmbH

Selecting a business partner can often be a question of perceived information about the reputation for the new partner in focus. This kind of information can come from several sources, such as credit ratings and the creditworthiness of the potential new partner itself, to existing customers, influencers, and more. However, despite the wealth of information available there is hardly any direct references to the needs of the business.

In essence, it means that selecting any new business partner, like a fintech or a bank, requires the same diligent process from a treasurer such as when hedging an FX or interest rate exposure. Primarily, the needs and requirements of the business in question always needs to be determined. In selecting a partner, the process can be partitioned into four main categories, and each segment should be weighted accordingly:

  • General criteria. This can be the domicile of the banks head office, subsidiary network of the bank, and the fidelity of the management, for example to measure a partner’s loyalty in case of a hostile take-over, or takeover threats.

  • Risk. Factors can include credit ratings, risk disclosures, loss of turnover and impact in case of bankruptcy are also key considerations when evaluating risk.

  • Abilities and potential. Can a bank play a major role in granting loans or support bond issues? Does it have a professional FX and MM desk and provide SWIFT reporting? Physical cash pooling is also essential.

  • The costs involved. But, crucial to an effective operation of any organisation are the direct costs involved, such as the charge for domestic payments, foreign payments, flat fees and charges for e-banking and software.

These factors are especially important when it comes to Asia, because cash management techniques like pooling or virtual accounts are very common. Asia, compared to Europe and North America is quite underdeveloped regarding best global banking practice. For example, in China cash pooling is somewhat exotic. To get funds in and out of the country, organisations will either have to comply with very strict bureaucratic terms, or not at all.

However, what is clear is that the operational market in Asia has indeed opened itself up to more and more cross-border transactions in recent years. It will get more competitive, mainly for smaller and mid-sized companies. For treasury in Asia, a more comprehensive qualifying view should be taken when choosing a partner, such as direct costs and other economical topics. A few examples include costs for domestic and foreign payments, commitment fees and bond issue costs.

However, regardless of the metrics used and regardless of the country a treasurer operates in, choosing between a bank or a fintech as a partner will always come down to a cost/benefit analysis, free of any external influencing.

Marcus Hughes, Head of Strategic Business Development, Bottomline

Marcus Hughes

Head of Strategic Business Development
Bottomline

Although some suggest the balance has tilted in favour of a fintech over a bank as a service provider, in reality this should be a ‘dream team’ partnership for banks and fintech, working together to jointly deliver enhanced multi-bank payment and cash management services to corporate customers.

Recently there has been a marked reduction in the scale, ambitions and branch network of many cash management banks, to the point that few banks today would claim to have global reach. Some offer overlay banking services and act as a gateway for corporate customers to access a number of partner banks, to extend to their geographical and product reach. But these have had mixed results, dependent on the level of integration and standardisation achieved.

In contrast to this trend of banking de-globalisation, corporates have continued to globalise their operations.

Asia has long been key to supply chains and is gaining importance as a major sales outlet. Corporate globalisation means almost all large corporates have hundreds, even thousands, of bank accounts and numerous bank relationships – from London to Singapore and beyond. So, managing payments and cash across multiple banks is complex and time-consuming, with each e-banking platform requiring disparate security tokens and approval processes, different formats, and reporting features.

The global financial crisis crystallised demand for improved cash visibility, which remains a priority of treasury. The crisis also reinforced a trend for treasurers to prefer technology solutions which are independent of banks, allowing treasurers to continue executing payments and cash management efficiently, even if one or more banks experience difficulties.

This has resulted in the emergence of fintechs offering cloud-based multi-bank payment and cash management (PCM) platforms. But, banks should not view them as a threat, since the treasurers’ choice is not a matter of ‘either or’, it’s ‘both’.

There is no question that banks remain essential for a raft of credit, risk, trade, FX and settlement services, with increasing focus on real-time. Meanwhile, fintechs make it easier for treasurers to orchestrate their multi-bank needs more efficiently. A cloud-based PCM platform delivers increased automation and improved security, with a solution which is highly flexible while also allowing processes to be standardised and simplified wherever possible.

Facing the rise of fintechs, forward-thinking banks are partnering with these innovative solution providers which are keen to distribute their products to banks’ customers. Such partnerships become a win-win for banks and fintechs, to move forward together faster and deliver winning solutions to their shared customers. Crucially, treasurers will benefit too.

By integrating with a multi-bank cloud-based PCM platform, they achieve secure access to banks around the globe. With a pre-configured platform, developers’ sandbox, and a proven implementation plan, a corporate can be live within a few weeks, receiving statements from multiple banks.

Next question

“What does your IT department need to know about treasury?”

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