Trade & Supply Chain

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Published: Sep 2016

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The world of treasury sits astride multiple corporate functions and is perfectly placed to see trends unfold. We look at some of the key developments of the day.

Oscar Wilde said of fashion that it is a “form of ugliness so intolerable that we have to alter it every six months”. Whilst treasurers may not suffer quite the same flightiness foisted upon the denizens of the catwalk, the speculators and manipulators of industry thinking sometimes act like fashion gurus, pushing certain notions far beyond their current actual value in their desire to keep ahead of the trends.

Mobile treasury is a classic example of a lot of hot air from the providers being met by a lukewarm response from the receivers. Treasurers do use the technology, but many – most even – are not conducting their day-to-day business on a smartphone. Supply chain finance (SCF) too receives the kind of coverage that would suggest it is used by most corporates. It isn’t. Respected industry pundit, Enrico Camerinelli of the Aite Group has said that whilst there is no question that the principles of SCF are strong and that the correspondent benefits are considerable, “the reality shows that SCF programmes are evolving very slowly and are far from widespread adoption”.

It’s very easy to get carried away with the hype or to become so involved with a process that it starts to feel like a fully-fledged mainstream movement in its own right. The truth about any treasury trend is that it will be an observable operational or strategic condition that affects some of the people all of the time, or all of the people some of the time but rarely all of the people all of the time.

Of course, unforeseen events of magnitude – such as political uprisings, natural disasters and even financial events such as the 2007/2008 financial crisis, the euro cap by the Swiss National Bank and the fallout following ‘Brexit’ – will always make an impact on treasury operations and they have to be tackled promptly. But the profession should always be mindful of the direction of the industry and the major themes that are carrying it that way.

Not all trends come to full fruition but awareness of what’s out there offers valuable insight for every treasurer, whether they have a domestic or global outlook.

With this very much in mind the following pointers – drawn from Treasury Today’s conversations with industry stakeholders over the last few months, should be a useful ‘awareness’ resource. Some of these are not so obvious but all have gained a lot of ground in recent times as issues that matter.

Currency volatility: not going away

It is impossible to provide a detailed forecast for the monetary situation in each individual country; what happens in one area tends to influence developments elsewhere. In the US, the Fed’s tightening bias has serious consequences for the emerging markets. In turn, this will have repercussions for the US economy, which is sensitive to share price movement. Sharp stock market pullbacks will hit the economy hard. Monetary policy divergence between different countries leads to currency fluctuations. This does not matter greatly in good economic times but now that growth is subdued, currency weakness may be a bonus in many places whereas a strong currency can do a lot of damage. The effects of Brexit saw at least in some quarters a welcome scaling back of sterling against the US dollar. The markets, keen to dump GBP, saw yen as a good home, for example. But the attention was most unwelcome by a Japan keen to keep its currency relatively weak.

All central banks will have to tread cautiously when tightening or loosening policy. For currency and interest rates markets, this all means 2016 going into 2017 will see more volatility than seen in say the last quarters of 2015.

Given the ongoing state of global economics, currency volatility is perhaps less a trend than the norm. For treasurers, with every FX hedging strategy (hopefully) being continuously reviewed for effectiveness, Switzerland-based treasury consultant and interim treasurer, Thomas Stahr, says one of the most important concurrent themes for many firms is the implementation of IFRS 9.

The IASB’s new reporting structure includes requirements for recognition and measurement, impairment, de-recognition and general hedge accounting. As such, it offers improvements over the IAS 39 rules it will replace, but also removes aspects such as the 80-125% effectiveness testing bandwidth. Although not due to fully replace IAS 39 until 2018, early adoption is permissible. However, says Stahr, “the tricky thing is that there is almost no experience in the implementation of IFRS 9 in the market and there is no audit firm at the moment who can say with a very high degree of certainty what is right and what is wrong”. Keeping ahead of the curve in difficult times is no easy matter.

Technology: virtual accounts easing the flow

Technology trends are prone to being carried on waves of hype. What treasurers need are solutions with substance, that can be used in the real world to their advantage. For many stakeholders, the hot topic around innovation in cash management is the ‘virtual account’. The idea has seen widespread adoption by insurance companies, FX brokerages and pension funds for a number of years but banks have been taking up the cause in recent times, offering it as a practical, sensible tool for corporate clients. In short, this is a trend that is delivering.

Virtual accounts are based on bank-issued virtual bank account numbers that re-route payments to the underlying physical bank account they are linked to, ensuring each remitter is uniquely identified. From a remitter perspective, virtual accounts look and function exactly like a real bank account number, and do not require any changes other than ensuring they pay into the new unique account number provided to them.

With companies seeking to use one central location for accounts in a single currency, one of the challenges is reconciliation and understanding precisely who is being paid for what. In a typical virtual account scenario, as the virtual account detail (VA Name and VA Account Identifier) is passed on to the beneficiary, when the beneficiary receives the payment it can see it has come from the ‘virtual’ account of the subsidiary. Equally, should a payment be rejected, the company paying on behalf of the subsidiary can see straight away which virtual account the payment has come from and return it to the right subsidiary for correction.

The virtual account concept is being adopted in many countries around the world but true global provision is not yet possible. However, progress is being made. In Asia, BNP Paribas’ solution is already live in more than ten countries. The bank told Treasury Today last year that it will not be stopping there; the Middle East and the Americas, for example, already in its sights.

For Marek Chruściel, Treasury Director of Polish telco, Play, virtual account technology has without doubt made cash management a great deal more efficient. The company now runs five billing cycles each month and payments are received 365 days a year – running to over 350,000 on peak days. Payment data files are delivered on a daily basis by the bank via secure file transfer protocol (SFTP) or web service every afternoon and they are processed overnight with payments assigned in Play’s billing system.

Payments are automatically allocated, with very occasional manual input for any individual payment that requires it. “The biggest benefit is the true automation of incoming payments,” says Chruściel. “But it can also help to improve customer satisfaction because you can avoid unnecessary interaction with the clients regarding any payments that you think you didn’t receive but did in fact receive. Virtual accounts give us all the information we need the same day as the customer makes the payment.”

The biggest challenge in implementing a virtual account system is actually working out technical details, he warns. This includes the structure of the virtual accounts, the composition of the data, and ironing out the service level agreement. “These processes need to be carefully thought through, to ensure maximum automation. Otherwise you might end up with a lot of transactions that still require manual entry and intervention.”

Diversity: advancing equality

The treasury profession remains largely male-dominated. If this is to be redressed, women need to be much more visible in their roles, both inside and outside of their organisation. Like currency volatility, this is not so much a trend as an ongoing issue for the profession but at least the movement towards equality is exhibiting an increasingly positive outlook.

As part of the move to address gender diversity in the financial industry, Treasury Today’s Women in Treasury initiative creates a platform to enable women to communicate with one another, to learn from each other and to network in order to help each other.

The Women in Treasury Asia Forum, held this year in Singapore, is a testament to the willingness of participants to be forthright in their discussion. A panel of prominent treasurers from the region agreed that whilst progress has been made regarding gender diversity, women can still do more to advance their careers.

If this can be achieved, it was widely agreed that business would be better placed to succeed. As Jaime Lee, Regional Head, Treasury and Risk Management at Courts explains: “The best teams are always the ones where both men and women work together to achieve something that would otherwise be elusive for an all-male team or an all-female team.”

For Deepali Pendse, Head of Corporate Treasury Sales, Southeast Asia, Bank of America Merrill Lynch, it has already been proven that gender equality is more than just an added bonus; it actually provides businesses with a different perspective and a competitive advantage. However, she feels that although quotas are often mooted as a way to build a more equal workplace, they remain a somewhat contentious issue. Structural changes within companies are what’s needed to provide a more prudent method of driving sustainable long-term gender equality in the workplace.

A large part of this structural shift will come from removing unconscious bias, which Pendse believes we are all guilty of holding in one form or another. “Unconscious bias can come into play when we are hiring, promoting, or in our day-to-day interactions with other people, so it is important to be aware of these and try to find solutions that are better for the firm.” Her advice is to question and evaluate the decisions being made in light of the bias that exists. In doing so, it will help managers to understand their staff better and help them flourish in the workplace.

Whilst business, and society in general, needs to make more changes, Pendse argues that women have a crucial role to play in building an equal and inclusive workplace. “These changes won’t happen by themselves. I encourage women to engage their managers should they feel an unconscious bias exists, or if support is lacking.”

Market liberalisation: China and India paving the way

China: moving up a gear

In a global market place, the strongest survive. For a country to be able to move successfully into overseas trade, the economic, social and political conditions need to allow businesses to transact in both directions as smoothly as possible. In most western markets, the rules are such that trade flow is relatively unhindered (the ramifications of Brexit aside). In emerging trade nations, where markets have demonstrated far tighter control over financial activities there is a notable trend towards liberalisation, not for internal consumption but as part of a new global outlook. In India and China, the giants of Asia, the two countries are at different stages of this journey.

“In China, the journey of RMB has been long and arduous, taking in three broad stages of development,” says Amol Gupte, Head of ASEAN and Citi Country Officer for Singapore. Its arrival as a trade currency has been largely successful (a quarter of all Chinese imports are already denominated in RMB). But its capital convertibility is still at an initial stage and the third phase of becoming a reserve currency is best described as ‘just off the starting blocks’ – joining the IMF’s list of Special Drawing Rights (SDR) was scheduled for October 2016 and this is only the beginning. Becoming a meaningful reserve currency is some way off.

For RMB to gain traction, it must attain the ability to be freely-denominated, it must be easy to transfer in and out of China, and there must be capacity to co-mingle the two expressions of RMB (CNY in China and CNH in Hong Kong). ‘Ease of use’ also means establishing a regulatory environment conducive to commerce and creating a general setting which market participants are comfortable with.

Many commentators also argue that there is a need for China to open up its capital account, creating and developing its offshore financial markets so investors can hold RMB-denominated assets overseas. China’s clearing infrastructure must facilitate easier movement and settlement of RMB across the world too. This is where the multi-bank China International Payment System (CIPS) project has a key role to play, enabling banks to offer their worldwide client-base settlement in RMB. The importance of ensuring deep liquidity in RMB both onshore and offshore must also be attended to. Only a handful of countries (including Hong Kong and Singapore) have so far used the currency swap lines that the Chinese government has opened up to enable market players to indirectly benefit from that liquidity.

Intrinsically linked to the development of China as an economic force is its way of approaching governance, land reforms, income inequality, healthcare, pensions, education, the environment and a host of other internal matters. These will all at some point intersect with and influence the financial flows of the country.

For corporate treasurers with a meaningful portion of their balance sheet in RMB, it will require an understanding of the influence of reform on their supply chain, in terms of their clients and suppliers. At the very least treasurers must understand how to link onshore domestic flows into offshore flows. But if progress was ever doubted, consider that just a couple of years ago money in China was effectively trapped cash. Today, the regulations allow RMB to be moved in and out under certain defined processes. It’s a trend that just keeps going.

India: picking up the pace

In 2016, the IMF predict that India will grow faster than any other major emerging economy at 7.5%, eclipsing the 6.3% predicted of China in the same year. This has taken some effort by the incumbent political and banking leaders. Indeed, in the two years since India’s Prime Minister Narendra Modi took office, he has taken a number of small but significant steps towards modernisation, liberalisation and opening up the economy to more foreign direct investment (FDI), making India a more business-friendly location. According to a Financial Times study, between January and June 2015, the country attracted $31bn of FDI, surpassing China ($28bn) and the US ($27bn).

The red tape has to an extent been loosened and many permits required to do business can now be obtained online. There has been increased spending on India’s infrastructure. Corporate tax is due to be cut an unprecedented 25% during Modi’s tenure and FDI reforms now allow up to 100% FDI in areas such as aviation and defence.

With an historical over-reliance on the banking sector for funding, corporate treasurers in India are certainly keeping a close eye on what is happening. “Discussions around development of a proper bond market have been around for quite some time and regulators are trying hard to push through, but the turn of economic cycle and loss of confidence is complicating matters further and shying investors away,” says Harish Barai, Senior Deputy Manager, Corporate Finance – Treasury at Larsen & Toubro.

In an attempt to diversify their funding needs some Indian corporates, in particular the highly rated names, have looked overseas to raise funds due to cost. However, companies can now raise funds overseas using the rupee. The so-called Masala Bonds look set to help internationalise the rupee and also deepen the financial system. The current Reserve Bank of India’s (RBI) norms allow an Indian entity to raise a maximum of $750m per year through Masala bonds with a minimum maturity of five years. For corporates, the ability to issue such a bond will not only shield the Indian entity against the risk of currency fluctuation, but also allow for a more diversified range of funding sources and perhaps even lower costs moving forward.

Developments in the payments infrastructure have enabled corporates to develop centralised models facilitated by the use of sweeping and pooling arrangements. Indian multinational engineering firm, Larsen & Toubro, for instance has adopted this model. “Our cash flows back to the head office banks and we utilise technology to ensure that we have high visibility in order to avoid running idle balances,” says Barai.

He favours the progressive approach, commenting that the regulators are removing lots of the restrictions for both foreign and domestic companies. “Before the Modi government came in, forms were being submitted to government agencies and they just sat there not being processed. Now we see these move through at much greater speed and it is my belief that in the next year or so India will substantially move up the ease of doing business rankings.”

Soft skills: for the benefit of all

Without the right people and the right approach, a business will always struggle to excel at anything. It is an increasingly powerful notion that managing people to get the best from them is a most expedient model. The required skill – often referred to as a ‘soft skill’ – is not something everyone is born with. “The problem is that nobody teaches you how to identify what you need in human resources, how to manage staff that aren’t performing – and how to manage those that are – and how to build good relationships with the banks,” says Gary Slawther, Financing Advisor to the CEO at Octal in Oman. It is, he determines, “something that only comes with experience”.

Soft skills include the ability to build relationships and to manage people and expectations. In a sales role this is vital, but it is increasingly a management requirement to get the buy-in of all stakeholders when planning change, for example, and on a day-to-day level, handling the peculiarities of people. Companies which overlook the value of soft skills do so at great cost, says Slawther.

But it is not just an individual manager’s responsibility to create the right environment. Vivian Peng, Asia Treasurer and VP of Treasury, Flex Group says company culture allows the team to innovate in a complex environment. That same culture fosters “a great team spirit”, informing Peng’s belief that “their hard work, their ability to work as a team and also their willingness to learn” is the very key to success.

The best teams are always the ones where both men and women work together to achieve something that would otherwise be elusive for an all-male team or an all-female team.

Jaime Lee, Regional Head, Treasury and Risk Management, Courts

Christine McCarthy, Senior EVP and CFO, The Walt Disney Company says that when it comes to working with her staff, she steers clear of micro-management. “I learnt a long time ago from one of my mentors in banking that when you find someone who has potential, you give them enough rope to hang themselves but hopefully they won’t.”

As part of her remit to develop talent, McCarthy believes it is essential to keep high-potential people motivated. To do that you have got to give them the ability to make decisions and earn acknowledgement for the work they do. “I want them to be out in front getting the recognition they deserve; the downside risk is that they must perform and succeed. It can be a high-risk strategy on my part so I can’t give everyone the same amount of rope; I have to discern who is ready for those challenges.” However, she will never just “put them out to pasture; I keep my eye on them. The more they can do and the more they can achieve, the more they will grow as professionals.”

When it comes to developing skills and knowledge, it is important to keep in touch with the wider treasury peer group too says Ingmar Bergmann, Corporate Treasurer and Head of Corporate Finance for Dutch real-estate firm, NSI. He is a firm believer that the international community of treasurers can help each other to do a better job. “If you want to take treasury to a higher level then you definitely have to communicate and open up to others, even beyond the company.”

The most effective teams combine significant diversity – of personality, background, outlook and skills – but with a shared set of values. This is important, notes Mark Loftus, a Chartered Clinical Psychologist, an Associate Fellow of the British Psychological Society and Managing Director of ‘The Thinking Partnership’. Just as shared values without diversity leads to stultifying group-think, so diversity without common values will lead to fragmentation.

Firmly believing that “teams become teams by working together on a common purpose”, Loftus comments that it is nonetheless rare for corporates to focus on helping people learn the skills of being in a team. Help is out there but, at his own admission, he says the team-building industry has not always covered itself in glory, prone as it is to “psycho-babble and mumbo jumbo”. Don’t dismiss it all though, he advises. “People are right to be sceptical but at the same time, do look for the small percentage that is useful.”

Dr Travis Bradberry, President at training and coaching services provider, TalentSmart, has a common sense approach. “If managers want their best people to stay, they need to think carefully about how they treat them,” he notes. The talent of good employees, he notes “gives them an abundance of options”. As such, managers “need to make people want to work for them”. In today’s uncertain times, this is a trend that should be encouraged for the sake of all parties.

Blockchain: from abstract to treasury reality

Because the distributed ledger or ‘blockchain’ concept gets so much coverage it would be churlish not to give it a mention in a piece on trends. Most people want to hear how it can be used in the real world. Here are a few trending possibilities (and remember it is early days).

Supply chain efficiencies

As head of Port of Rotterdam’s Strategic Finance & Treasury team, Tim de Knegt sees ‘industry’ close at hand (it is after all one of the world’s business ports). For him an opportunity is being missed to align the logistical, physical and financial supply chains. In respect of finance, he argues that if stakeholders 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.”

In a manufacturing process that could involve 20 or more suppliers, traditional supply chain finance is wasteful, he believes. “If the whole process could be financed at one point only – so the end customer finances the producers – then multiple individual financing stages are removed.” Doing so could save in excess of 10% of the total goods’ value. This could be applied to just about any manufacturing process that involves movement of multiple constituents from different suppliers towards a finished product.

However, the biggest challenge in the transition to a holistic model has always been data sharing. Blockchain can allow each data provider to retain full control, 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.

Commodities tracking

Tracking assets from production through to delivery is where Nick Weisfeld, Head of Data Practice at software and consultancy firm, GFT, sees real blockchain value being added. Whether that asset is financial (such as a bond) or physical (such as a commodity), he argues that “understanding where treasury’s assets are located and who owns them will allow the department to operate in a more streamlined way”.

GFT has produced a prototype which allows tracking of multiple physical commodities. 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 prototype is intended to showcase blockchain’s ability to create a full audit trail for each and every participant in the movement of physical commodities.

It 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 could be done by digitally capturing, locking down and 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) through each stage of its lifecycle. “It would be possible to transfer the parcel ID through the value chain, literally to the ingredients on the packaging of the finished goods,” explains Eyre.

A commercial settlement function is not yet included in the GFT prototype but parallel offerings from the likes of Bolero, the DBS/Standard Chartered partnership and others that follow may well solve this part of the commodities trade lifecycle too. Combining it with de Knegt’s holistic supplier finance model would make for a compelling solution. Indeed, blockchain is trending now because there are some real-world applications for it that look like offering as yet unimagined benefits to corporates and corporate treasurers.

And bitcoin?

Bitcoin should be mentioned here as the first very public incarnation of blockchain technology, but at what stage of its 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 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 $1000. A concerned Chinese government intervened, cutting off the flow of money between Chinese banks and bitcoin exchanges. 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, shows 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.

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