By Anne Friberg
Has treasury reached its “tipping point” and what does that actually mean? Who is doing the tipping and who is being tipped? And is this good for corporate treasury? This year’s EuroFinance “International” in Vienna set the scene for getting some answers.
EuroFinance’s 25th annual conference on International Treasury and Cash Management took place last week in Vienna and looked at all the change coming treasury’s way from seemingly all directions, prompting the question of whether treasury is “at the tipping point” and if so, one might ask, over into what?
Risk, Risk, Everywhere Risk
Political change is imminent with Brexit—Britain’s exit out of the European Union—about to be negotiated and the US presidential election between two of the most polarizing candidates of the two major parties in modern political history. “Hold your nose and vote for Clinton,” former finance minister of Greece, Yanis Varoufakis summarized the received consensus in his remarks on the future of Europe on the last day. But what if people don’t? What if US voters “pull a Brexit” and vote in Trump?
No wonder the prospect of increased risk—political, currency and otherwise—loomed so prominently over the conference. In “Managing the Evolving Global Risk Landscape,” panelists representing PayPal, Constellium, Deutsche Bank and the Economist Intelligence Unit discussed treasury’s role and unique skills in risk mitigation when so many geopolitical, regulatory and market risks have the potential to disrupt their businesses. Deutsche Bank’s Michael Spiegel, Head of Trade Finance and Cash Management for Corporates, noted that after a historically unusually stable period, the world is now unstable again, and growth is more about market share now than absolute growth. On regulatory risk, PayPal’s treasurer, NeuGroup Tech20 member Tony Glasby, observed: “Good regulations should provide an even and predictable playing field across the world. But, despite regulation, shocks will happen.” So, “whatever you do [as a treasurer], do it with integrity.”
Political Risk Calls FX Management to the Fore
This year, nothing has demonstrated the potential impact of political events on markets the way the Brexit vote has, followed by the more recent tumble in the British pound. I moderated a panel called “FX markets at the tipping point” at the event, comprised mostly of corporate practitioners, Bruce Edlund, Citrix; Steven Krippner, GE Oil & Gas; Todd Yoder, Fluor Corporation; Tim van Raemdonck, LyondellBasell; and market advisor Frederic Ponzo, GreySpark Partners.
Mr. Ponzo started by highlighting a few trends in the FX markets, namely: (1) dealers no longer provide liquidity to clients and net risk among each other; instead most banks net internally and monetize the skew, providing corporates with the best deal only “on one side;” (2) dealers have “retrenched massively and are focusing on larger corporates, which leads to a gap” for other corporate customers, pushing them to e-platforms; (3) buy-side sophistication has increased and much of the value added “assembly of hedge or investment strategy by banks/dealers is now gone.”
So do banks still make money dealing FX? Well, not very much, according to Mr. Ponzo who claimed that platform trading has taken the profit on FX trades from $250 per $1 million to $15, and in the latest BIS survey, two-thirds of FX transactions do not have a bank/dealer as a counterparty.
“Good regulations should provide an even and predictable playing field across the world. But, despite regulation, shocks will happen.”
— Tony Glasby, PayPal
Corporates, on their side, do track the FX pricing they get from their dealers, but whatever the market changes mean to corporates in terms of benefits or disadvantages, what animated the panel more were business objectives and how treasury can help the business with a risk management program that is aligned to those goals. This goes much deeper than just “reducing volatility” and requires frequent interaction with business leaders (these challenges are discussed in great depth in peer meetings of the NeuGroups for FX managers, the FXMPG 1 and 2). Mr. Krippner of GE Oil & Gas summed it up thusly: “Clear objectives and truly understanding the business needs keeps treasury relevant.”
Banks Mitigate Brexit Risk with Diversification
Regarding Brexit, the big unknown is what will happen to London as a financial center and how that will impact corporates with important bank relationships there. J.P. Morgan, for one, “isn’t waiting for Brexit.” It already has a subsidiary bank “hub” in Luxembourg that’s “open for business” with 300 people, targeting Luxembourg treasury centers and MNCs generally and has onboarded 10 multinational corporate clients and their subs there, according to Simon Jones, Head of Treasury Solutions, EMEA. JPM also has subsidiary banks in Dublin and Frankfurt, should corporates decide that Brexit might cause disruption to their banking setups in London.
Data Mining the Top Trends
In “The Top 10 Trends in Transaction Banking,” unveiled at the conference, Nordic bank Nordea showcases a data mining exercise analyzing transaction banking perspectives drawn from 20 million words from articles, white papers and news reports published from 2010 to 2015 (with a bias toward those published in 2015). Word frequency revealed correlations and a ranking of the most important themes. Nordea then interpreted and contextualized the data showing the interconnectedness of certain trends such as the growing importance of SMEs in global trade, the funding gap SMEs often face (compared to larger corporates) and initiatives like supply-chain finance and working capital improvement. Another set of interconnected themes is fintech innovation, SCF techniques, integrated platforms and changing bank relationships.
Treasury Priorities and the Universal Bank
Brexit aside, the four key themes that Paul Taylor, Regional Sales Head, GTS EMEA at Bank of America Merrill Lynch, highlighted as recurring priorities for customers in 2016 are (1) compliance: managing a changing agenda in a sustainable way without adding too much overhead; (2) cost-cutting and efficiency; (3) company growth in the wake of an M&A boom, and treasury’s increasingly strategic role, both post- and pre-M&A; and (4) digitalization and technology in the form of TMS, e-banking, and other tools that need to work seamlessly together to manage the required processes. Mr. Taylor posited that the universal banking model adds value but “doing it all doesn’t mean doing it all yourself.” A universal bank provides an overlay to access other banks and services via interoperability, just like a smartphone is a platform that allows access to a number of third-party apps.
So, who’s tippin’ who?
Is treasury at a tipping point? Yes, probably. A tipping point toward a broader and more strategic remit, under increasing pressure to do more with less, but with opportunities to take advantage of innovation from banks and fintechs, while perhaps faced with bank relationship challenges in the context of the choice to bundle or unbundle certain services.
The Rise of Fintech (and “Regtech”)
Other than Blockchain, which had its own Blockchain Lab venue at the conference, the rise of fintech was a big theme, much of which was discussed in the Treasury Lab, where my own “FX in Action” panel took place. In it, Janet Thomas and Philippe Gelis, CEOs of TouchFX and Kantox, respectively, debated the disruption their respective companies might bring to the FX space.
Kantox takes much of the guess work out of FX risk management and execution, primarily for SMEs that do not enjoy the level of service provided by banks to larger corporates. Kantox provides a platform for FX spot and forward transactions and international payments that automates much of the process while providing price transparency SMEs typically don’t enjoy, according to Mr. Gelis.
“TouchFX gives corporates and investors transparency in markets,” Ms. Thomas said. “In FX there is not just one marketplace like in equities where transparency has existed for a while; FX should get to that point. Unlike asset managers who have a fiduciary responsibility to ensure best price, corporates don’t but they still want and need best execution. TouchFX shows the interbank rate and corporates can benchmark their trades against that.” This may contribute to some tense treasury wallet discussion with banks, as well as toward the product and service “unbundling” trend resulting from the new normal in bank relationships and the rise of third-party fintech solutions many highlighted at the conference.
In FX there is not just one market place like in equities where transparency has existed for a while; but “FX should get to that point.”
— Janet Thomas, TouchFX
Fintech may be the term du jour, but what it brings is often solutions to regulatory inefficiencies, at least that’s the case for Earthport, a “regtech” (as they call themselves) specializing in making low-value cross-border/FX payments more efficient and less costly. Earthport’s Peter Klein participated in the last conference panel, “Cutting through the hype” of fintech, with both banks and fintechs, and led by Financial Times Alphaville blogger Izabella Kaminska. Commenting on the not so imminent demise of banks, Mr. Klein said SMEs [particularly] have financial service gaps fintechs can fill efficiently but you still need banks.”
Banks on their side are increasingly embracing innovation from the fintech space to bring new solutions to their customers, which validated Mr. Taylor’s “universal bank as a smartphone” thesis above. As his BAML colleague Matthew Davies, Co-Head of EMEA Product Management, GTS, said: “By partnering with a fintech, we can bring a product to market far more effectively; that’s how banks can be agile.”