Treasury Practice

Question Answered: The future of treasury

Published: Jan 2019


What will treasury look like in ten years’ time?”


Carole Berndt, Strategic Advisor, Transition Hub:

As an industry we are optimists. Each year the agenda and speakers at industry conferences present a pot pourri of solutions to automate, integrate and sophisticate the treasury functions. The increasing importance of the treasurer is preached, often in contrast to the constant challenges they face in securing funding for the technology and regulatory projects they must complete.

A glance back to an industry event agenda from 2009 shows many of the same themes as today. Lack of real-time information, inconsistent processes, poorly integrated systems, paper statements, eBAM and the dark cloud of challenging times. We have progressed, but not in a game-changing way.

The future though I think will be different. Today, banking is not just done by banks, and this changes everything. Treasury of the future will benefit from the disruption that the changing regulations and fintechs bring. The combination of open banking, APIs, improved networks, generic standards and regulatory support for ‘Option B’ type banking licences will bring game-changing tools and capabilities into play. You double down on this when you take away the time and cost of proprietary bank development and add in the hyper-creativity of kids who code!

Ultimately, the treasurer will have available a range of plug-ins that will sit between them and their bank, augmenting, aggregating, disseminating information and performing functions in a way specific to the corporate’s needs: basically, a transaction banking app store. Just as Microsoft and Apple realised the benefit of their platforms was enhanced by outsourcing application development to third parties, the banks may too.

So yes, the treasury ten years from now will be significantly different. They will be smaller, smarter and more responsive. The treasurer will have time to be strategic, to advise and to look forward, no longer caught in the Catch 22 of transaction triage. Transactions, and their associated pain points, will be automated to a greater degree. Technology will be more user centric, easily integrated and development timelines aggressively reduced.

Banks will cede their proprietary development to fintechs and other vendors, providing instead secure infrastructure, the best in open banking services, optimised APIs and an open and collaborative approach to industry standards and shared utilities.

No longer will a treasurer have to operate multiple bank systems, carry around bags of ID tokens or run a plethora of Excel spreadsheets to close the consolidation gap.

And for those worried about what’s in it for the banks, they will have time to provide the advisor and regulatory advice that treasurers so often call for. After all, a treasurer does not just buy transactions, they buy people, expertise, security and relationships. This is where the real value of banks lies.

Yes, it’s nirvana, but I’m an optimist, and have been one since 2009! But I could be wrong and the robots might win, leaving us all on the beach and WALL-E left to do the keynote address at the next industry conference.

Michael Kolman, Head of Business Development, ION:

Within the next decade, treasurers will become much more effective and increasingly proactive as real-time information and platform technologies enable them to make decisions and manage their financial assets, liabilities and risk with greater speed and accuracy than ever before.

The availability and application of real-time data is poised to bring about dramatic shifts in how cash is managed. For example, technology providers together with banks are working for the delivery of real-time cash balances with the capability provided by APIs. Some banks can already return an organisation’s available balances with a single API call. This means a treasury management system could provide, in real-time, the same balance that is visible on the bank’s portal and corporations can view their cash positions globally across all currencies in real-time.

But the benefits of real-time information such as cash positions will be limited if that information cannot be transformed into actionable insights. To that end, it will become essential for treasurers to have a real-time view of liquidity and exposure forecasts, working capital allocation, insights into minimal cash required, investment opportunities, and counterparty risks. With the right data feeds, treasury systems today can provide crucial information such as cash deposit rates and the CDS spreads associated with investment counterparties.

As data becomes more accessible and the capabilities of new technologies expand, the treasury systems will be recommending and possibly even taking action based on pre-defined algorithms and rules. Armed with such data, treasurers will be able to adjust capital structure, execute capital markets activity and make hedging decisions faster and with better information that simply isn’t available today.

Technology providers will need to continue adapting their solutions to the specific ways that individuals consume data. For example, treasurers may want to perform simple approvals on a mobile device but then use a tablet or larger device when making more strategic decisions. In the future, machine learning will help vendors anticipate how their customers want to view and interact with data and then develop their solutions accordingly.

The rise of predictive algorithms could also fundamentally change how treasurers operate. Outside the world of treasury, sports owners use advanced analytics like time series and heat maps to make projection-based decisions on how best to build and manage their teams. Likewise, by harnessing predictive algorithms to make calculated decisions about funding and capital structure, treasurers will be better positioned to take advantage of market movements. While this type of approach might currently be considered speculative — and therefore outside the treasurer’s remit — we believe the future of treasury will include the utilisation of predictive data strategies to support a more proactive approach.

Finally, automation will soon make repetitive manual tasks trivial, which means that duties such as payment processing and invoice reconciliation will happen without any human intervention. With sufficient automation, some forward-thinking innovators should challenge themselves to expand their role to data scientists. Treasury is set to become less focused on processing, and more concerned with monitoring and investigating exceptions to these increasingly automated processes.

Sir Roger Gifford, Country Head, SEB UK and Chair of the City of London’s Green Finance Initiative:

We expect treasury will look very different in the future. This is assuming that it cannot remain an understaffed, manually intensive, support function. Treasury will develop into a technology-driven strategic advisor to leadership and front line business teams, supporting critical decision making.

The Fourth Industrial Revolution can be characterised by a fusion of technologies, blurring the lines between industries and the physical, digital, and financial value chains. As part of building these future ecosystems, many businesses are moving from selling products to providing services and collaborating across industries to build propositions.

In particular, significant resources are being applied to developing the ‘Internet of Things’ and ‘As a Service’ concepts. In both of these models, the financial flows will become an integrated part of the operation, not a separate process. Micro, real-time payments will become the norm as opposed to larger, less timely payments related to the sale of capital goods. Treasury will need to understand the impact of this on cash flows and how financing needs may be more dynamic.

Within treasury itself, we believe there are four areas that will involve developing new ways of working, competence building and deployment of new technologies.

  • Full and smart process automation – eliminating manual, repetitive, low value activities.
  • Being central to the business – working closely with the front line to help develop new business models whilst managing cash flows, securing liquidity and managing financial risks to support them.
  • Complete information control – deep access and understanding of company wide data.
  • Artificial intelligence at the core – applying smart processes to perform basic treasury functions with better outcomes, scenario planning and providing insights and analysis to the business and the CFO.

The question we are asked by treasurers is ‘where do we start on this particular part of the journey’. We believe that there can be a logical sequence, working on practical items initially and developing learning along the way as shown from the bottom up.

We can also consider the impact that global and national initiatives to address the world’s social, economic and development issues will have, as identified by the UN’s Sustainable Development Goals.

Increasingly, corporates need to show what they are doing to promote these goals. This includes demonstrating the source of goods traded and where finance is being applied. At the same time, banks are being put under pressure to measure climate-related risks far more than before, and report on them in their corporate and trade-related portfolios. This can rapidly become a shareholder issue as well – as we’ve seen in other reputation-linked challenges.

Investors want ESG (environment, social and governance) investments more than ever before and the UNPRI measure the demand in the tens of trillions of dollars. Companies and banks that meet these demands are clearly likely to benefit from greater investor interest.

The treasury of the future will use a different set of technologies to provide end-to-end automation, provide strategic insight and free up time to partner with business as it realises new opportunities or responds to macro trends. Developing some basic actions now and building a learning-based approach to these subjects will help treasury embark on this exciting journey.

Bruce Lynn, Managing Partner, The Financial Executives Consulting Group:

Having worked at both banks and corporations in the treasury function, in a variety of positions, over a long career, I have found the treasury function has been hampered by several constraints which need to be addressed if the treasury function is to evolve.

Market rates will continue to hamper treasury’s abilities. Result: Treasury needs to enlist ‘partners’ if it is to forecast the impacts of these forces on the company.

Treasury is in the liquidity and risk business, seeking answers to such questions as “am I over borrowed, under invested, or over exposed”? The proper answer to these questions requires partners at the business unit level (ie the users of funds) and at tax so the after tax cost of investing or borrowing is optimised.

Interest rates have been low for so long that some companies have become complacent in their views about liquidity and risk. When rates were low (ie over the last ten years) the urgent need for an answer to the questions above was less urgent. Therefore treasury became (remains?) less important, especially for companies focused on P&L performance. The good news (sort of) is that higher rates over the next few years will enhance treasury’s importance, especially for companies that are ‘liquidity challenged’. This appears to be every industry group with the exception of technology.

Volatility (interest rates, FX) should be a concern for most multinationals except that the impact of say, FX losses, is usually small – at least at the corporate level when gains/losses are netted together. The ability to link FX impact to a specific business is a necessity but is missing at most companies. While hedging can be used to reduce the current impact of uncontrollable market forces, the use of hedging places a premium on treasury and the business unit to forecast future results (ie the underlying exposure which necessitated the hedge). Failure to forecast well just shifts losses into future periods. Better forecasts will require a partnership to arrive at a degree of accuracy that is typically missing today.

Treasury has little influence over access to capital because it is being driven by the company’s overall performance and the view of banks or rating agencies on how much capital (ie leverage) is prudent. At best, treasury can obtain capital at the lowest cost. Is it ‘enough’? It is best if treasury can depend on a steady source of internal funds from operating cash flows.

Is treasury ‘successful’? Proper use of success measures will contribute to (or constrain) treasury’s future evolution.

Several surveys by the AFP have shown that the treasury function aspires to be a ‘strategic’ function, yet few have reached this state of nirvana. If treasury wishes to attain this blissful state the company will need to go ‘beyond EBITDA’ and use success metrics based not just on the P&L but on attaining various balance sheet and cash flow successes. After all, what gets measured gets managed.

Success metrics for treasury need to be based on its ability to succeed in its chosen businesses while contributing to the success of its operating partners, the business units. Some suggestions for metrics across the company include:

  • Risk – use a metric similar to the one banks are forced to use, namely RAROC (risk adjusted return on capital).
  • Balance sheet – the simple concept of setting cash balance targets is often missing; yet, name me one company that fails to have sales goals. Result, a company can be over borrowed or under invested without such targets.
  • Liquidity – free cash flow is already in use by many, but not all S&P companies. It talks to the cash flow statement (ie operating cash flow and elements of investing and finance cash flows).
  • Timing – the old concept of “cash conversion cycle” becomes more relevant as rates rise. The quicker you can generate cash internally the less dependent you are on forces beyond your control (ie market forces).

Finally, if treasury’s success is to be assured, a company must be willing to pay for it. A bonus programme, based on liquidity and risk, will make for a faster evolution.

From an ROI perspective, treasury is more than just an operating expense. Treasury controls access to a company’s banking partners and directly influences fees and interest expense with an order of magnitude many times greater than the cost of its operating budget. A well-constructed bonus plan based on liquidity and risk metrics could have an outsized impact on all concerned, and could heavily influence treasury’s future direction and evolution.

Next question:

“Forecasting and liquidity planning is often cited as a major challenge for treasurers. What would help gain the information needed?”

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