Emerging trends in treasury management

New-age treasury involves a more interactive eco-system around corporate treasury and banks, payment hub factories and consolidation by technology players, cloud offerings and outsourcing. The role of the treasury has evolved from being a centralized liquidity management function to that of a comprehensive payment, supply chain, liquidity and forex management function while becoming innovative in order to develop an independent identity for itself.

When we say treasury, we are not only talking about corporate treasury, but also about the treasury and capital market functions of financial institutions.

While the treasury function of a bank has its primary focus on managing the surplus and shortfall of its liquidity needs, managing short- and long-term borrowing strategy, driving appropriate investments to maximize returns and managing the foreign exchange exposure of the institution, the role of corporate treasury is more tuned to managing the working capital, repatriation of cash, managing foreign exchange volatility and keeping the cost of capital under control.

The advent of some of the new-age practices and their adoption has made a big difference to trends in treasury management both for corporate treasury and for treasury functions at banks and financial institutions.

Let’s explore them in a little more detail : –

1. Integral workflows
The integration in the treasury workflow of the bank with that of corporate procure-to-pay and the order-to-cash cycle is driving significant synergies in the transaction banking arena. Be it with liquidity forecasting, payments, settlements or with pure reconciliation, the savings driven through integration are significant. This ability to have online connectivity of banks with corporate treasuries has also created the need for a more agile and effective use of working capital, with a better outlook of the risk.

The connectivity, in essence, is three-fold : –

1. Firstly, with banks and their communication modes, including SWIFT, multi-bank reporting and payment confirmations

2. Secondly, with market data, including Thomson Reuters, Bloomberg

3. Lastly, the critical part of the connectivity is with function-specific applications for trade confirmations, investment portals and reporting systems.

The key implication is that unless banks continue to drive the integration with the corporate treasury and have a strong transaction banking offering, their ability to be a comprehensive solution provider to its clientele is likely to be seriously impaired. The downside risk of such an integral workflow is that of cyber risk and exposure of financial data, which needs to be proactively managed.

2. Payment-hub factories
The services of payment-hub, enabling better cash forecasting, standardized approach and transaction processing is emerging as a key factor in the corporate treasury landscape, particularly in the last decade. Essentially, the payment-hub bank enables a centralized and standardized payment process across the corporate, for all bulk commercial and treasury payments, local, cross-border and inter-company transfers, while also providing value-added services of reconciliation and netting.

This has also resulted in a key shift in the focus of the adjacent technology category – the payment system suppliers, with a large number of new players emerging in this area. Some of the recent industry consolidations (eg Misys with D+H) are significant in this context, given the industry leader of Fundtech, a D&H unit in the area of cash management and payment services.

An aligned phenomenon that is increasingly adopted by large corporates is that of in-house banks, where an internal unit helps administer inter-company liabilities and provides bank-style services to the affiliated entities. The model approaches just an external bank account to business, providing inter-company settlements, cash pooling, hedging settlements, etc. The key consideration of this approach is to reduce the number of bank accounts, and the external transaction costs.

3. Greater proliferation of cloud
While the larger tier-1 banks are comfortable with the specialized niche players, and the tier-2 banks would still be fine with treasury modules of universal banking solution providers, a large number of tier-3 and 4 banks continue to evaluate options that are specific, easy to adapt and cost-effective. Cloud-based offerings and Software-as-a-Service (SaaS) models, therefore, are seen to have their share of charm with smaller banks and are expected to continue to do so.

Essentially, there are three parts to treasury technology that banks are looking to be delivered:

• Liquidity management: Funding, risk, balance sheet management and hedging
• Investment management: Portfolio, collateral, investment instruments and optimization
• Capital markets: Trading, risk, transaction processing and accounting

While there are front-, mid-and back-office features that are related to the dealing, risk management and settlement operations for every deal cycle, multiple aspects of the above value chain are being addressed using the SaaS model, allowing the transaction fee to be structured on a pay-as-you-use model. The situation is identical even from a corporate treasury standpoint, where small and medium-sized enterprises would rather have a plug-and-play model that co-exists with their ERP applications.

4. Technology marketplace consolidation
Over the years, there have been multiple acquisitions on the Treasury and Capital Markets space, reflecting the nature of this industry. Multiple well-known treasury technology suppliers such as Sophis, FRS Global, Sungard have, over the last few years, been merged or acquired with other larger industry players, and the implication is not very hard to decipher: Banks are more comfortable with stability and larger, specialized players, which is either reflected by industry players who are uni-focused and deep in this space (eg Murex, Calypso, Wallstreet), or players who have a strong treasury offering as an integral part of a larger suite of offerings (eg Misys, Temenos).

A more unmistakable trend in this context is the significance of risk, compliance and governance and their implications to technology and analytics. The universal banking players stand to gain more in this context, and space for best-of-breed treasury players is likely to be increasingly squeezed out.

From a corporate treasury standpoint, while the core treasury functionalities of cash and liquidity management, interest and FX risk management, forecasting and reporting functions are provided by the treasury suppliers (eg Kyriba, Reval), the integration with other specialized applications and portals for transactions, dealing systems, hedge accounting, GL applications and BI systems form a critical part of the functional architecture.

There are also other investment portals, market information systems, risk management applications and reconciliation systems that are used in the corporate treasury context. Consolidation of players resulting in a more comprehensive end-to-end offering is therefore inevitable.

The integration of banking treasury with that of corporate ERP offerings also provides an edge to the large ERP players who also have a core banking offering, with an interesting market advantage (eg SAP, Oracle). The use of ERP for treasury management in a corporate context also comes with its own advantages: better data integration and leverage of existing data, ability to integrate across locations and reduction of operational risk.

5. Treasury operations
Although smaller in size, the front- and middle-office functions that manage the dealing room and the risk management continue to play the central role of a treasury function, both in banks and large corporates. It is natural that the back-office functions of treasury have seen a higher share of outsourcing, considering the fungible nature of the responsibilities, the time-zone leverage that offshore locations offer, cost reduction driven through the shared services model and a higher consistency of global standards, especially in treasury accounting and compliance norms. With the advent of Robotic Process Automation (RPA) and cloud technologies, operations digitization as a theme is inevitable.

However, what may be interesting to note is that MNC corporate treasury functions may be more comfortable in building internal centers of excellence, especially where the operations spill across multiple countries and consistency becomes key.

The benefits of these are quite obvious:

Scalable and cost-effective operating model, centralized liquidity management function, single point of relationship with banks, leverage of subject matter expertise, standardized operating model – resulting in higher throughput, lower pilferage and improved effectiveness.

Regulatory standards, compliance norms and emerging governance principles have all always necessitated both banks and corporate treasurers to review their treasury systems and reporting framework to stay compliant. Be it the IFRS9 norms or BASEL III or the Dodd-Frank regulations, these have made the higher degree of reporting rigour a significant impact area for the treasurer – either with the bank or in the corporate.

While the historical approach had always been a ‘wait-and-watch model until there is clarity on the regulations and their implications, a more recent trend has been stakeholders adopting early compliance, based on expectations. This is also partly because the number of supervisors to whom reporting is to be made has increased significantly, and the cost of non-compliance is increasingly prohibitive.

The outlook of the treasury function, be it within the corporate or at a bank, has seen a fair degree of shift over the last few years, and is also likely to go through a much higher degree of innovation and consolidation, both from the technology and operational perspectives. Keeping with the times and being aligned may just be the mantra for survival if you are an active participant in the world of the emerging treasury!