EuroTPG members discuss the next generation of virtual accounts, the value of the treasury function and troubled countries at the recent first-half meeting.
Omnicom Spotlights HSBC’s Next-Generation Virtual Accounts
At NeuGroup’s spring EuroTPG meeting, members got a preview of HSBC’s new virtual accounts offering.
At NeuGroup’s European Treasurers’ Peer Group (EuroTPG) meeting at Equinix in London, sponsor HSBC co-led a session on virtual accounts with two guests from Omnicom. This was prior to the bank’s recent launch of its Next Generation Virtual Account (ngVA) product for corporates and institutions.
By using the next generation of its virtual accounts, clients can “consolidate hundreds of bank accounts into a handful, or as few as one account for each currency that they use,” HSBC said in its launch announcement. This can be done by having transactions flow through the underlying physical accounts, “with the virtual accounts acting as ledger records.” HSBC said this feature “will save treasury teams the operational cost of managing cash across multiple accounts and reduces the need for complex cash sweeps and pools.”
Virtual accounts—no, for real. The presentation drilled into the design and use of ngVA—in the spirit of “don’t tell me what it is designed to do, tell me what it can do!” These new virtual accounts, according to HSBC’s announcement, will “help wholesale clients increase their cash management efficiency by consolidating bank accounts and centralizing transactions.”
Why that’s important. Because a virtual account is a ledger record, not an actual bank account, it allows users to dis- associate information management from cash management by providing the ability to track payments to and from legal entities via the virtual accounts, easing reconciliation, but with natural cash concentration in the master account. This is particularly valuable to a company like Omnicom, with its extended 60- to 90-day cash cycles, 1,500 legal entities and multiple ERPs. Objectives for the ngVA project included increased control and visibility, and centralized payments and collections.
In with the new. The effort to “centralize payments and virtualize collections” replaced the old zero-balancing structure while improving visibility and efficiency, a key goal for the CFO. To get buy-in for the change, treasury identified a lead subsidiary in each country to build ownership and help deal with implementation laggards. The EuroTPG guests also recommended pushing bank partners (HSBC in this case) to handle segregation of duties and access permissioning via HSBCNet so the company can avoid having to set all that up in its TMS. Others may choose the opposite.
What about the audit concern we brought up last time? One of the legitimate concerns about virtual accounts is how tax authorities will see them; Italy was one country that members were skeptical about in this regard. Omnicom’s experience with VAs for ten years in the US has been positive, however; no audit issues there. Our members may argue that different European countries can still present challenges, depending on where the “auditable physical account” is domiciled.
Treasury Org and Its Value-Add
A smooth-running treasury not only adds value, it’s invaluable. But getting to smooth means tracking success.
Three members shared their organizational structures for EMEA and how they measure themselves.
One question that comes up often in NeuGroup peer group meetings is how to tell whether treasury or teams within the department are doing a good job. It’s asked a lot because measuring job performance can be a challenge. Nonetheless, many members of NeuGroup’s peer group universe have developed effective approaches.
Walking the talk? At the EuroTPG meeting, one member said its challenge when asking “Is the treasury team delivering what’s expected?” is to translate that question to metrics. Currently, for the relatively young company, which has a strong mandate to deliver dividends, treasury’s metrics fall into cash forecasting accuracy, cost and efficiency/scalability buckets. At a member company with huge trading operations and market volatility in the pricing of its products, a key objective is to maintain adequate cash buffers and the ability to redeploy cash quickly.
Why it’s important. The time-honored saw that what cannot be measured cannot be improved is very important in corporate treasury. There’s a lot of money on the line! Still, it’s never easy to do a performance self-assessment. However, if you start with the right tools—the right tech, talent, goals and path to reach those goals—treasury can stay ahead of the chaos. One suggestion: Don’t go overboard on KPIs. Conduct a KPI brainstorming session to drill down and identify the indicator that shows the success (or failure) of the objective.
Troubled Country Risk Reduction
The number of countries causing problems for EuroTPG members is increasing. Here’s what can be done to mitigate the pressure.
The number of countries causing members trouble is on the rise, whether from sanctions, tariffs and trade tensions, or other government policy changes, for example, in FX controls. It would seem that governments are trying to undermine each other in any way they can, often with tools (or weapons) like tariffs and sanctions, to achieve their political objectives. Thus business is caught the middle; the consequences can be both high and unpredictable, ranging from fines to debt default.
Who’s on the list. Leaving aside obvious challenging countries, such as North Korea, Sudan, Zimbabwe or Iran, most treasurers would agree that Turkey, Greece, Pakistan and Venezuela require their full attention. However, while the list keeps growing, what makes it more time-consuming is that risks are not uniform across industries. Therefore, depending on the nature of one’s business, the target can be moving, elusive or amorphous. This is true for places like South Africa, Russia, Argentina, Ukraine, Algeria, Egypt and Nigeria. Even Brazil made the list after its new president started to implement protectionist policies.
What should you do? Members should establish an alert mechanism with a country classification from high to low, using objective measures of risk: credit ratings, CDS, government debt spreads, FX volatility, GDP growth, external debt, balance of payments and inflation, and subjective measures like the company’s stance on headline news, social unrest, policies, regulations and tax.
Lean cash levels. Members also suggested making a big effort to minimize the amount of cash deposited in or transiting through riskier countries by structuring flows and balance sheets with a view to making domestic business activities cash self-sufficient by reducing intercompany AR and increasing AP, increasing local funding access, etc. Other actions to take include:
- Use domestic supplier and/or customer financing.
- Confirm letters of credit.
- Limit scope of guarantees to financial risk, making sure to exclude political risk.
- Diversify banks for sources of funds and deposits.
- Declare regular dividends.
- Communicate the list of high-risk countries across the organization to create awareness and encourage risk avoidance.
Level of equity a source of disagreement. Depending on whether a company sees turmoil as a long-term threat or an opportunity, there were differing views on equity. Optimists were ready to actively support their business by increasing direct equity to reduce domestic interest payments to banks. This would leave a business with more leverage to manage operating margins. It can also be used to raise the company’s local profile and gain market share. On the other hand, the pessimists wanted to keep equity to a minimum and were even ready to pay for this privilege by going below the level required for tax deductibility of bank interest.