Adapting treasury operations to excel in the current landscape.
The Global Cash and Banking Group (GCBG) met in Thousand Oaks, CA, along with sponsor Deutsche Bank, to discuss how to deal with current market challenges while advancing on the path of operational efficiency. A big discussion topic was the possible effects of proposed section 385 on liquidity structures and intercompany lending management, although it was too soon to tell. Other topics important to the treasury managers in this group are:
1) The Future of eBAM. Treasury sees the value, but adoption rates are low due to a lack of standarization among banks.
2) M&A Integration. As the wave of M&A continues, it is critical to build a model to integrate/divest businesses in a more efficient manner.
3) Resurgence of In-House Banks. As companies move away from notional pooling, in-house banks are emerging as an alternative.
The Future of eBAM — Finding the Middle Ground to Move Forward
Last year, the group discussed how technology should enable best-in-class treasury operations. One of the takeaways was that increasing adoption of certain technologies, like eBAM, requires that the treasury “ecosystem” (corporates, banks and technology vendors) find common ground. In this context, the group hosted eBAM players to discuss the different needs and limitations on each side and to start moving together in the right direction.
Key Takeaways
1) There are many potential benefits of eBAM for corporates. eBAM leverages ISO 20022 messaging and SWIFT FileAct to support account opening, maintenance and closing. Adopting eBAM promises to turn a slow, paper-intensive, expensive, ad hoc manual process into a faster, dematerialized, less expensive, standardized and automated process. Members’ feedback over the years has been that they spend significant time and resources keeping up with this process, so a standardized, automated option would be a huge benefit, even if it were adopted by only the main global banks.
2) Banks benefit, too. Banks also spend significant time and resources in supporting the opening, maintenance and closing of accounts. This is still a very manual process, prone to mistakes, so the value of eBAM lies not only in savings but also in risk reduction for the banking community.
3) A disconnect between potential users and providers of eBAM remains, however. Potential users will not adopt eBAM until it can provide a comprehensive end-to-end (including KYC) service on a global basis that is consistent at least across the major banks. Potential providers will not invest significantly in a more comprehensive, standardized solution until it is clear that the adoption rate will be significant. As Deutsche Bank pointed out, most banks do not adopt a new product/technology unless they consider it urgent, prevalent and profitable.
4) So, more needs to be done. It seems neither potential users nor banks want to take the first step, so the only option is to jump in together. SWIFT has established a working group that focuses on eBAM with the goal of harmonizing the standards and fostering adoption. However, most of the members in the room were not aware of the work group or were not involved in it, so it seems more needs to be done to get corporates that can influence banks involved in the process.
Outlook
The benefits of eBAM are clear. The next step on the corporate side might be to come up with a proposal on what eBAM should accomplish and states the business case for adopting eBAM. This proposal can be then used to involve other parties. The NeuGroup will support its members as they go through this process.
Is Your Asia Treasury Set-Up Optimal?
Deutsche Bank discussed the benefits of having a centralized vs. regional approach to managing treasury operations in Asia. In their opinion, some of the benefits of establishing a Regional Treasury Center (RTC) in Asia are that (i) having local presence provides a better understanding of the local nuances and government regulations; (ii) there are tax incentives for setting up RTCs in certain locations; (iii) operations can be managed from the same time zone; and (iv) an RTC enables global business contingency planning. According to Deutsche Bank, three common criteria for establishing an RTC in Asia for most corporates are:
- the company generates at least 15% of its revenue in the region, or
- the company has business in more than
five Asian countries, or - the company expands into “trickier markets” (e.g., Indonesia, Thailand).
M&A — Lessons from the Trenches
In the wake of mergers and divestitures, members are left with the task of integrating or dividing treasury operations, sometimes with little warning. One member shared with the group the top lessons learned at her company that could also be applicable to cash managers in other corporates. These are some of the highlights of the members’ discussion:
Key Takeaways
1) Develop a standardized process to gather critical technical, functional and process details needed to expedite integration/separation efforts. The model should be tailored to your company’s needs.
2) Gain “buy in” from upper management and educate key teams to ensure critical resources are available for each deal.
3) Every transaction is unique and “small” does not necessarily translate to “easy.”
4) Leverage knowledge from outside of treasury and beyond finance and create cross-functional groups that can quickly integrate or divest a business.
5) Track lessons learned from past implementations and build institutional knowledge. For example, develop resource tools such as a questionnaire, deal sheet and contact list and update them on a regular basis.
6) When possible, retain key employees from acquired company (S/T & L/T) and meet with SMEs early on and often in person.
7) Ensure good knowledge-transfer occurs and key documentation from the acquired company is retained or archived properly.
Outlook
M&A activity will remain strong as treasurers figure out the best use for their excess cash. In this context, treasury managers will continue to be occupied with integration and separation projects. The sooner they set up a systematic model to deal with them that can also build upon the learnings of each transaction, the easier the management of these projects will become.
Best Practices in Banking Relationship Management
It is not news that the introduction of Basel III and market conditions have fundamentally changed the way corporates and banks interact. This new paradigm requires that treasury managers reassess their views on best practices in managing banking relationships and RFPs.
- Bank relationship management is challenging. Corporates have to fairly divide the treasury wallet, deal with frequent coverage changes — notably inconsistent levels of coverage, and manage the disparity between product and systems capabilities across banking partners.
- Complexity has increased in recent years. Although most members have not changed their approach to bank relationship management after Basel III, they are feeling the effects in their relationships. Members agreed that they are experiencing consolidation of bank relationships, revising legal documentation in place and taking a second look at notional pooling structures, among others. In fact, 58% of members said that at least one bank had told them the value of their relationship had changed in the last three years and 33% terminated or significantly reduced a banking relationship due to lack of value to the bank over the same period. It seems that the way banks value their client relationships has changed.
Member Spotlight — In-House Banking
There is increased interest in in-house banking structures as members continue to move away from notional pooling and explore alternative structures. One group member enlightened the group on the operational details of implementing and managing an IHB.
Key Takeaways
1) IHBs offer efficiencies. This member leverages the company’s IHB for I/C netting, cash pooling, and pay-on-behalf-of activities. Although the structure has been in place for some years now, all of the functionality was not necessarily in place at the initial rollout, and there are still opportunities to increase efficiencies. For example, this member initially leveraged a third-party provider to process all netting, and now netting is managed by the company’s ERP. Also, this company is still looking at adding the benefits of SEPA on top of its current structure.
2) Intelligence from your peers. Here are some of the key learnings from the conversation started by the member spotlight that can be taken into consideration when implementing or running an IHB:
- Consider the implications of your IHB location and coverage. The location and mandate of the IHB entity is very important, especially based on the most recent discussions regarding potential BEPS impacts. It is critical to show the substance of the entity and to ensure that the activities of key treasury professionals driving IHB operations belong to the legal entity that hosts the IHB.
- Gain the support of tax and legal early in the game. In many cases, tax and legal hold the key and have the last word in whether these structures get implemented or not. Having their buy-in from day one and partnering with them along the way are critical to the success of the structure. Also, with tax as your partner, make sure that all intercompany agreements are up-to-date and in line with the structure you are choosing.
- Understand which technologies can enable the implementation and efficient day-to-day management of your IHB. Depending on the type of activities handled by the IHB, your structure might not need a treasury management system to be up and running. However, leveraging one might make the day-to-day management more effective and less dependent on a vendor or banking partner. In addition, the absence of very specific functionality on your ERP or TMS might make it impossible to run a POBO structure, as one member noted, so check your technology backbone.
Outlook
Although there is an increased interest in implementing in-house banks, doing so is not an easy or quick task. These projects will be on treasury managers’ radar for the foreseeable future. In addition, the proposed Section 385 Regulations may impact the timing of implementing in-house banks or the feasibility of implementing them at all, depending on how the rules are actually applied.
Cash Visibility in Asia
Asia is a challenging region because of the diversity in regulation, languages and business practices. The point begs the question: Can 100% cash visibility and centralization be achieved in Asia?
More than 31% of members have 10-plus banks in Asia. Managing that many partners is challenging and implies that many of the banks on the list are local or regional banks. The ability to achieve cash visibility will depend on the ability of local banks to provide reporting in a standard format. In many cases, the formats are not standard or there are language issues to consider. Achieving 100% of cash visibility will depend on finding the right balance between using local partners and a global partner that can concentrate cash reporting, as well as options on the middle. Cash centralization will prove even more challenging as the diversity in currency restrictions and regulations makes it very hard for countries to participate in cash pools, if at all.
An RTC can help reduce the friction in managing treasury operations in this environment while still levering on a unified strategy and best practices. As companies continue to expand in the region, the prevalence of RTCs will continue to increase.