Euro treasurers weigh the merits of virtual accounts, discuss how to navigate sanctioned countries and consider changes in cash management solutions.
The European Treasury Peer Group’s May meeting, hosted by Lantmännen in Stockholm, focused on topics including the increasing importance of technology in treasury, the mitigation of cybersecurity threats, the challenges posed by sanctioned countries, and trends and innovation in cash management, including the pros and cons of virtual accounts. Here are the meeting’s top three themes:
1) Turning Technology into a Competitive Advantage. Treasury—by viewing technology as a strategic competency—must harness the rapidly increasing power of digital solutions to collect and analyze data, enabling treasury to do more with less. Viewing data as a competitive tool to enhance decision-making will help solidify treasury’s value as an essential part of the company’s reaching its strategic goals.
2) Tapping Cash Management Solutions to Meet Customer Demand. Danske Bank led a discussion of the drivers of change in cash management, including digitalization, new competitive forces and shifts in customer behaviors and expectations. How can treasury best leverage technology and innovation to improve cash forecasting and enhance cash visibility?
3) Finding Creative Approaches to Solving Sanctioned Country Challenges. Sanctioned countries and jurisdictions with trapped cash present regional treasurers with challenges that require creativity to solve. Regulations and sanctions pose obstacles to doing business in otherwise attractive regions, forcing treasury to provide support and infrastructure that demand out-of-the-box thinking.
Turning Technology into a Competitive Advantage
Members discussed using technology to improve treasury efficiency, controls and process flows, as well as to help to scale the business. Here are the top conclusions from a variety of tech topics covered.
KEY TAKEAWAYS
1) Maximize the ERP. In systems discussions across the NeuGroup network, we see attempts to remove technology add-ons to the extent possible and leverage improvements to the ERP instead. For example, significant enhancements by SAP have helped SAP S/4HANA make inroads with member companies, including several implementations. We have heard about companies abandoning their treasury management systems (TMS) in favor of using a combination of SAP and visualization tools to upgrade their analytics. Going with the ERP’s treasury module is also the path of least resistance for treasuries without dedicated IT resources.
2) Don’t automate a bad process. Robotic process automation (RPA) is a 2018 hot topic and holds a lot of promise. But thoroughly analyze the process to make sure it’s as streamlined and scalable as possible before putting robotics to work. A bad process is still a liability, automated or not (see sidebar).
3) Not all employees can keep up with structural job changes. Accelerating adoption of technology and automation requires companies to retrain and redeploy employees to meet future business needs with the appropriate skill sets. But the reality is that not all employees can keep up with these structural job scope changes. That calls for transitions to be managed delicately but efficiently.
4) Rationalize e-banking platforms to improve controls. One member plans to eliminate as many e-banking platforms as possible to streamline system administration and improve controls. He also wants to reduce platform users from 800 now to 200. Another member company has completed rationalizing e-banking platforms through early adoption of SWIFT connectivity; the company also built e-banking tools to improve controls and customize user profile privileges, reporting views and dashboards.
5) Dedicated IT teams give treasury advantages. One member’s dedicated IT team has built in-house technology tools to supplement a single-instance SAP ERP and TMS. The team’s knowledge of treasury’s business needs provides a competitive advantage by following best practices for IT projects. The head of treasury IT was also made head of cash management, and his purview includes reviewing procure-to-pay and order-to-cash processes to close any control loopholes. Conversely, another member touted the use of external consultants to quickly ramp up the technical expertise required for various projects. She said external teams can be flexibly deployed to align projects with broader finance team timelines.
Don’t Use RPA as a Band-Aid for Bad Processes
Robotic process automation (RPA) automates manual activities using software that can mimic human actions and perform common, repetitive tasks such as making queries, cutting and pasting, and merging data. A member shared her experience of piloting an RPA project using a free demo version of an RPA software license, operated on a dedicated computer, for some manual tasks, including retrieving data from three system sources, combining the data, doing simple calculations, then creating reports for distribution to an internal audience. While she was pleased with the outcome, her account led to warnings against using RPA as a Band-Aid for bad processes and a discussion of how to avoid that. The idea is that while RPA is significantly cheaper than methods of automation involving the integration of multiple systems, cost savings should not lead managers to having robots perform a human process that is flawed. Instead, consider first whether the process needs fixing. The decision to use RPA, some suggested, should come after an analysis of its cost compared to the price of system integrations for multiple business applications, taking into account the volume of transactions involved, speed of execution,and short-term goals and long-term objectives regarding business systems.
OUTLOOK
Technology is the cornerstone of providing scalability to best support business in the long run. Technology deployment needs to be strategically managed in treasury to ensure an optimal outcome. The decision on whether to find IT technical skills within treasury (or a dedicated treasury IT team) or rely on the flexibility and expertise of external consultants will differ from company to company, depending on the management philosophy regarding skills acquisition.
Tapping Cash Management Solutions to Meet Customer Demand
Members are focused on using the latest technology to enhance cash flow forecasting, increase cash visibility, reduce cash balances, establish efficient liquidity management and optimize the use of credit. Treasurers also want to eliminate unnecessary complexity, achieve simplicity in process design, reduce manual processes and improve fraud prevention. Members heard about how current technology and cash management solutions can bring tangible benefits to achieve all these objectives.
KEY TAKEAWAYS
1) Open banking provides benefits through collaboration. The term open banking refers to the use of open application programming interfaces (APIs) that enable third-party developers to build services around financial institutions. This API strategy allows fintech firms and banks to collaborate on solutions to meet corporate treasury needs. Bank-fintech partnerships can enhance the customer experience, generate new revenue streams and introduce ways of leveraging new technologies to achieve objectives.
2) Three ways digitalization is changing everything. Artificial intelligence (AI) finds patterns in data to generate insights that can help leaders make better decisions and anticipate future events. AI has countless applications in financial services where there is a high volume of data with lots of variables, including cash flow forecasting and FX risk management. Meanwhile, robots can increase productivity and work 24/7, taking out much of the tedious grunt work in treasury. The Internet of Things will make exchanging data easier, increasing efficiency and reducing human error. All these components will transform ways of working within treasury, especially in cash management.
3) The push for change in payments. There is a huge push in Europe to lower transaction costs, reduce processing time and add services to basic payment transactions. One solution is SWIFT’s global payments innovation (gpi) service, which improves transparency, speeds payments and increases efficiency. This service for cross-border payments credits beneficiaries in minutes, tracks payments using a unique end-to-end transaction reference number (UETR), provides transparency on bank fees and FX rates, and ensures remittance data remains unaltered. The SEPA (Single Euro Payments Area) instant payment scheme, meanwhile, offers 24/7 service, with 95% of transactions processed in less than three seconds.
4) Mobile payments are on the rise. Mobile pay giants including Samsung Pay and Apple Pay are growing fast. But banks continue to build their own mobile payment solutions, integrating more services to differentiate themselves. A group of major Nordic banks is exploring the possibility of establishing a pan-Nordic payment infrastructure, supplemented by common products.
Weighing the Virtues of Virtual Accounts
A debate over virtual accounts led members to conclude they are not the panacea some would have you believe. The argument for using them rests on slashing fees by eliminating many physical bank accounts. Another selling point: Virtual subaccounts with their own account numbers will allow easier reconciliations as well as on-behalf-of structures for payments and collections. But setting up an in-house bank (IHB) and IHB account structure in your ERP (not at the bank) or treasury management system (TMS) can deliver the same benefits. Following the discussion, one member said his business case for virtual accounts “went from yes to no.” Others are advised to do the cost-benefit analysis carefully and assess alternatives that would achieve the same objectives. Some members shared their concerns that banks may increase their fees on virtual accounts in the future, meaning that any bank fee savings will not last. Others voiced frustrations that banks’ virtual account solutions for multiple legal entities would involve similar levels of know your customer (KYC) documentation as physical bank accounts, meaning only a minimal reduction in KYC requirements for virtual account structures, if any.
OUTLOOK
The EU’s revised Payment Services Directive (PSD2) means banks will compete not just against banks, but all financial services providers. It’s a game changer for the payments value chain, business models and customer expectations. The changing landscape for cash management solutions requires all service providers to keep up to survive. Customers are the clear winners, both corporates and individuals.
Finding Creative Approaches to Solving Sanctioned Country Challenges
Several members need to sell to countries facing trade sanctions, such as Iran, where it’s hard or impossible to collect money or take it out of the country. Opportunities may exist to get cash out indirectly via another country, but they are for the most part unreliable. You need creativity to deal with countries under sanctions or where cash is trapped due to regulations.
KEY TAKEAWAYS
1) Consider cryptocurrency as payment currency. One member’s solution for sanctions: Have customers pay in cryptocurrency, such as bitcoin. The member would then convert the crypto to USD in other jurisdictions. The company is currently planning the process flows and contingencies.
2) Creative ways to use the cash—spend it! A member shared how his company spends money in trapped-cash countries instead of trying to conserve it. For example, it holds large sales team or executive management meetings that would involve spending significant sums anyway. This way, the money is spent where it would otherwise be inaccessible.
3) Use commodities as a store of value. One member’s former employer bought commodities with trapped cash, exported the commodities and converted them to cash in another jurisdiction.
4) Bilateral arrangements with other corporates. Companies with excess cash trapped in a regulated country can consider striking bilateral arrangements with other corporates that have borrowing needs in that country. The companies can address credit risk concerns using escrow accounts or other forms of collateral and securitized deposits in less regulated countries.
5) Stop business where the revenue earned is impossible to collect. Some members raised the point that treasury should be empowered to stand up against business unit decisions and voice recommendations to stop doing business in countries where revenue can hardly ever be collected from customers. Others said treasury should be involved to limit the credit risk exposure to sanctioned countries.
The Need to Give Banks Enough Bank Fee Wallet Size to Get the A-Team
Members discussed their experience with international banks, and there was acknowledgement that the footprint of a bank’s branch network was important to support multinational corporations whose own footprint covers a wide geography. Different members had varied client management and customer support experiences with the same bank, leading to the conclusion that it is important to give your key banking partners enough fee wallet to get the bank’s A- team in terms of relationship management. There are a few fair-weather banks that will be there for the good times but won’t hesitate to drop you at a moment’s notice during the bad times. It’s therefore prudent to always have contingency plans—an issue intertwined with the size of your bank panel. Some members use multiple banks to minimize bank concentration risk, and implement SWIFT to become bank-agnostic regarding bank connectivity.
OUTLOOK
Given a choice, members try to avoid customers in sanctioned countries, usually relying on trade compliance or in-house legal teams to identify potential transgressions rather than making this a treasury responsibility. If companies continue doing business in sanctioned countries, treasury teams face pressure to find ways to collect payments, and they cannot be complacent since any working solution available today may disappear tomorrow.