AFTER THE MAELSTROM
At a recent roundtable, Global Finance brought together some of the leaders in the treasury and cash management industry to discuss technology, corporate behavior and the realities of the post-crisis world.
Moderated by Joseph Giarraputo
Global Finance: Technology has been a key element in the development of contemporary treasury and cash management. What advances and new tools are on the horizon?
Michael Fossaceca, managing director, regional head of client sales management for North America corporates at Citi Global Transaction Services: Bank technology has traditionally been driven by demand for enhanced functionality in the execution and reporting of transactions. While treasurers remain focused on visibility, there are three primary forces that are reshaping the future of bank technology. The first is a focus on treasury management and ERP systems. Treasurers have invested heavily in these systems and are looking for holistic solutions that integrate seamlessly with their existing ERP systems to provide straight-through processing, enhanced data and analytics and SWIFT connectivity. The second force is Web 2.0. Banks are expanding and enhancing their capabilities to improve the user experience and provide clients with the ability to connect and communicate through multiple delivery channels. The third and probably most important is electronic bank account management (EBAM). We're doing a lot of work with our clients to migrate traditional, paper-based processes to electronic platforms. The benefits, from improved operational efficiency to greater transparency, are further enhanced by new capabilities that generate sophisticated analytics, enable user-generated content and provide access to platforms through multiple delivery channels.
Phillip Lindow, head of global treasury and investment management and head of international cash management for the Americas, RBS: Things that clients used to do manually, they're now doing completely electronically. There's been an increase in the automation of service requests and controls, and clients are asking for flexible banking platforms that work with their existing systems. We're also seeing an increasing convergence of cash and trade to further facilitate end-to-end straight-through processing.
Ather Williams, managing director, Western hemisphere regional executive for J.P. Morgan Treasury & Securities Services Liquidity Solutions: We have seen that with limited internal resources and constraints on investment dollars, clients are green-lighting projects that offer quick efficiency paybacks. Some clients are looking to us to take over whole processes, like managing their short-term investments. We have products that automate their investments in a way that meets their guidelines and provides diversification and detailed reporting, while enabling the client to maintain control over investment decisions. Clients are also looking for tools that make administrative and processing functions easier and more efficient. In response, we are rolling out products that leverage Web 2.0 technology so clients can self-administer and streamline functions associated with account relationships and entitlements. It's about helping them gain more control and alleviate staffing pressures.
Jeff Horowitz, managing director, head of sales and relationship management for North American financial institutions, BNY Mellon Treasury Services: Technology's essential, but first you need to know what the objective is and what needs improving. You want to be sure of what you're solving. EBAM, for example, can work wonderfully if you have a myriad of accounts in several countries, or even in one country, if the volume is there. Both front-end and back-end technology need to be considered. On the front end, the application needs to link into back-end systems, data warehousing, exception management and aggregators. Also, mobile technology is taking center stage. We move a great deal of payment volume around the globe, and quite often the recipients have only a PDA or a mobile device. So there is great interest in mobile technology on the retail side. And I believe there will be interest on the wholesale side as well.
GF: How are banks using social networking and other emerging technologies?
Fossaceca: Web 2.0 has provided the platform for us to transform the way we engage our clients. Video is a great example. We recently launched a Media Channel in conjunction with our electronic banking platform, which provides our clients with instant access to videos of industry experts across the world. Especially in the current environment, that can be a very powerful tool for treasurers.
Horowitz: We're using technology to enable thought leadership. Where we used to host face-to-face forums, we're now using webinars as a vehicle for thought leadership, using technology as a driving force to share information.
Lindow: These new channels are a great way to get feedback right away and to be able to adapt what you're doing to clients' needs.
GF: Direct debits under SEPA are now available. How is this being accepted?
Lindow: SEPA finally being available is very exciting. It creates a great opportunity to automate payments, consolidate accounts and increase efficiencies in payment processing and treasury management overall. But at the moment we're seeing a fairly slow take-up. You'll see movement when people start doing a new mandate or reinvigorating their treasury.
Fossaceca: Ultimately, the standardized framework for the free flow of capital facilitated by SEPA will revolutionize the way payments are handled across borders. Thus far, SEPA take-up has been slow. We're only seeing around 5% adoption in credit transfers. However, we expect to see major pick-up with the SEPA Direct Debit offering as it provides significant benefits to consumers. A critical driver of broad SEPA implementation will be country deadlines for migration. Once governments accelerate programs to adopt SEPA as the standard for disbursements, we will see tremendous growth in implementation.
Horowitz: The euro was introduced over a decade ago, so it actually surprises me some that SEPA and SDD [SEPA Direct Debits] are just now gaining some momentum—albeit gradual. There needs to be a business case—a return on investment in particular, for legacy structures currently in place—so new entrants will see more immediate benefits. For example, if an organization isn't in, say, 27 markets, instead of needing to link into all 27, it can virtually link into one for low-value clearing. For example, non-bank financial institutions such as asset managers, hedge funds and mutual funds can gain added value and streamline the process by being able to redeem and subscribe more shares throughout Europe.
Williams: While the business case for investing in SEPA is clear, constraints on internal resources and capital during the financial crisis have made it less of a priority. Also, many of the regulatory bodies that were pushing it forward had to shift their attention during the crisis, which caused things to slow down a bit. As we start moving forward again, we should see faster adoption rates and begin to realize the benefits.
Fossaceca: Uptake has been further compromised by country delays in SEPA implementation. The lack of consistency in SEPA adoption across the eurozone has contributed to growing complications in this process.
Lindow: One of the biggest challenges is the lack of a definitive end date for the legacy instruments. This affects the adoption rate of SEPA Direct Debits and also requires banks to support a dual infrastructure until the local instruments expire. In order to reach a critical mass, we'll need to see more entities such as governments and large insurance companies getting involved.
GF: What are corporates doing to reduce costs in transaction processing, and how can their providers assist them?
Horowitz: As with technology, you want to have an end in mind before you start. Three key areas we encourage our clients to consider are (1) quality, (2) impact on client service and (3) the enhancements (ROI) they'll gain once they've implemented cost controls. We've seen the most benefit over the years in paper and process-heavy payment applications. Two areas where our clients have looked to us to help them reduce costs are accounts payable and accounts receivable—by digitizing invoices and by streamlining applications like refund payments and utility/energy payments. We have also seen cost reduction efficiencies in trade processing—in North America and Europe as well as in Asia. In some cases, clients will partner with us in adopting enhancements, and in other cases they see a benefit in an "outsourcing" arrangement, either on a private-label or disclosed basis.
Fossaceca: Many organizations res-ponded to the pressure of the financial crisis by cutting costs across the board without considering the long-term impact of these decisions. Actually, a recent McKinsey survey showed that 79% of all companies have cut costs in response to the global economic crisis, but only 53% of executives believe that doing so has helped their companies weather the storm. Over the past year, we've worked with our clients to understand their strategic long-term objectives and identify opportunities to drive fundamental changes across their organizations. We've helped several clients to automate their processes with end-to-end supply chain solutions. These solutions are particularly effective because they not only drive operational cost savings, they also provide businesses with significant opportunities to improve working capital, which often result in savings that can be three to four times greater than operational cost savings.
Lindow: In addition to helping clients cut costs, we're looking at how they can improve their payments cycle. Despite the renewed focus on optimizing working capital, a EuroFinance survey showed that in the past year 75% of respondents have made no improvement in reducing their days sales outstanding. And two-thirds were paying their invoices at the same time or earlier than they were a year ago. So there is still ample opportunity to help our clients optimize their working capital.
Williams: Electronification has been a key theme with our clients. We've found that companies migrating 60% to 80% of their payables and receivables processing volume to electronics have seen savings of 50% or more. Companies are looking at various forms of card solutions, bringing commercial cards or single-use accounts into the A/P transaction flow to provide the treasurer with better controls, improved reconciliation and attractive financial returns. We are also seeing that automation can help clients pay suppliers early within a 10-day discount window, delivering risk-free returns of up to 36%, while providing suppliers with critical access to off-balance-sheet liquidity.
GF: Recent reports indicate corporations are trying to stockpile cash. Why are they doing this? How long will this trend continue? What are they doing with their excess cash? Are they more interested in safety or yield for their cash?
Horowitz: In 2009, BNY Mellon sponsored a survey conducted by the Association for Financial Professionals [AFP] on short-term investments. AFP interviewed 360 corporates and financial institutions—predominantly around North America, and across many industries; 80% were publicly held companies, and most were investment grade. From the study, 84% said safety of principal was the most important investment objective; 78% are invested primarily in three instruments—bank deposits, treasury bills and money market mutual funds—and 93% of survey respondents indicated that their organizations had taken at least one action, such as a flight to quality or strength, as a direct result of the credit crisis. I believe most will not forget the past 18 months and will invest in short-term cash accordingly.
Fossaceca: Prior to the crisis, corporates were focused on yield, liquidity and risk—in that order. Today, the same businesses have adjusted their priorities, placing a greater emphasis on risk, liquidity and then yield. We are seeing a fundamental shift in strategies and priorities with our corporate clients across the spectrum. One treasurer said to me, "It's not about a return on capital. It's return of capital." For today's leading corporations, the focus is on capital preservation and risk mitigation. Our customers are staying invested in short-term, highly rated, liquid instruments. The mindset has shifted—and I think it's permanent.
Lindow: We're beginning to see clients look for ways to increase yield while still managing risk conservatively and maintaining liquidity. A number of corporates are using account products with slightly longer durations—products that apply a term-type rate to cash that's left as a stable core in the current account. These products have more of a time-deposit type flavor but provide the liquidity of a current account. So instead of rolling overnight time deposits, companies are using an account-based solution that can get into the one- or three-month type earnings—keeping the money short-term but also looking for a bit more yield than we saw immediately post-crisis.
Williams: We are finding that cash levels vary by sector and geography. In sectors such as natural resources and technology, for example, we've seen a huge build-up of capital in the past 12 months as they continue to focus on principal preservation. Mid-size corporates are starting to go a little bit longer on the yield curve. They're holding extra cash because they don't see immediate opportunities in the next 12 months for additional yield pick-up from short-term rates or for reinvesting that capital in their businesses. Cash is also being held because there's still uncertainty about the 18-month horizon, particularly around what will happen as bank and government schemes start to roll off. Many non-US-based corporates in countries such as Mexico and Brazil are holding cash as well but have very strong local investment options, with relatively attractive rates in vehicles such as time deposits. Their challenges are around managing currency risk and tax issues, rather than relative yield on investments or the stability of their local banking partners..
Lindow: We're seeing that with currencies as well—and not just the major currencies. In countries where clients may be less comfortable with the banking system, we're seeing them pull currencies out of local banks and putting them in the larger banks. Companies are also going back into funds, but very selectively—and they're taking very deep looks at what the funds are invested in.
Fossaceca: There's a lot more scrutiny around the details of investments. Treasurers are spending more time reviewing investment guidelines and examining fund prospectuses to ensure their investment strategies are aligned with the fund's objectives.
Williams: Our clients are asking us to spend a lot more time with them to review their investment guidelines globally. The goal is to minimize regional differences and harmonize processes across regions so they have more consistency and control.
Horowitz: This is all bringing renewed focus on liquidity portals—technology that enables you to pivot from one family of funds to another or move into short-term investment options in different currencies. A new look at available portal technologies seems imminent, particularly since we can now build investment objectives into the technology and assist users with their investment strategies.
Fossaceca: With the very significant focus on counterparty risk, the portals have provided our clients an opportunity to really invest across multiple families—multiple financial institutions with the click of a mouse.
GF: Liquidity management is more critical than ever. How has the function changed in the past 18 months, and how might it change in the future?
Lindow: Early in the crisis we were concerned that much of the momentum toward centralization would slow as clients focused on diversifying counterparty risk. Interestingly, though, that momentum has actually picked up because clients very much want to get in control of where their cash is. If a company has money sitting idle in a network of 15 different banks in 15 different countries, they really have to know those banks to understand what's happening with their cash. If you centralize the cash, you can then control diversification at a group level. Rather than having local treasuries managing it, you move it out centrally. Another change is that as counterparty limits have been reduced by many banks, in-country operating accounts need funding up early in the day. So we're seeing more timed funding, where cash is drawn out of the local banks at the end of the day but then pushed back into those banks at the beginning of the next day.
Williams: Even before the crisis, the role of the treasurer was becoming more strategic. It is even more so now, with the treasury function having board-level visibility. The crisis prompted financial managers to better understand their internal liquidity and their ability to self-fund. They are looking to tap into pools of liquidity around the world and are using tools like multi-currency pooling to leverage internal funds, reduce borrowing costs and add transparency among entities. They are also looking to improve partnerships with other areas that impact working capital, such as sales or operations.
Fossaceca: The credit crisis has played a major role in substantiating the value treasury delivers through effective liquidity management. More and more corporates are relying on treasurers to examine their organization's current processes and execute more judicious management of internal resources—including more efficient use of funds that reduce reliance on external funding. Our Financial Strategy Group recently conducted an analysis of the world's top 1,000 companies. The study showed that over the past 18 months, corporates that are liquid and have a high degree of funding from internal sources have on average generated 15%+ more incremental returns than their less liquid rivals. In light of today's focus on liquidity, several corporates are using cross-currency solutions to mobilize cash and control counterparty exposure. These solutions provide the infrastructure to identify and extract pools of cash across countries and currencies, which is critical in the current environment.
Horowitz: Having access is hugely important from a reporting perspective, and SWIFT as well as proprietary systems can provide that—to help ensure not only intraday reporting, but intraday understanding of exposures. Also, you need to be sure you have the appropriate intraday facilities in place, country by country, currency by currency, and with your counterparty. High-volume users especially need true treasury settlements throughout the course of the day and need to have intraday credit in place. And they often need what we call a redirection model, with which they can move the payments they need to make for liquidity purposes from one partner to another.
Lindow: If you're in a very challenging credit position, and you need that money to be mobilized, you need to have the flexibility to break that pool apart intra-day and to move that liquidity very rapidly with great efficiency.
GF: More than ever, corporates are looking for ways to extract cash from their operations and increase working capital. What's working for them and what's not?
Horowitz: We work with our clients to help them meet four main objectives: (1) turning collections into available deposits as quickly and efficiently as we can, (2) controlling disbursements, (3) managing information reporting on an intraday basis (sometimes minute-by-minute) and (4) ensuring liquidity management tools are in place—whether for a net borrower or net short-term investor. Based on meeting these main objectives, we can assess how to improve each function by building metrics or by deploying technology. This typically involves how to handle the payment and trade stream and the information flow.
Fossaceca: Treasurers are relying heavily on solutions that provide enhanced visibility, control and centralization to optimize their working capital and extract liquidity otherwise trapped internally within the business cash conversion cycle. Throughout this period, our clients have leveraged a broad range of tools—including electronic payments, commercial cards, automated supply chain solutions and enhanced data analytics—to reduce costs, streamline operations, mitigate risk and optimize working capital. We've seen many companies look to supply chain finance solutions not only to extend their payables but also simultaneously improve the health of their supply chains by providing superior financing rates for suppliers.
Williams: We've been working with clients to implement technology with minimal footprint—automating purchase order delivery, invoice and payment processing, and discount management. In particular, there are a lot of benefits to automating the accounts payable function, such as eliminating paper invoices, streamlining payments, connecting buyers to a shared network of suppliers ready to transact, and reducing calls to A/P by using a self-service supplier portal that provides real-time invoice and payment status. The end-game is to transform A/P into a profit center.
Lindow: The intense focus on self-funding is forcing companies to continually look for greater efficiencies in extracting their own cash. To do this, you need to implement solutions broadly across your organization. You need to have your external accountants, your legal team, your tax team, your trade finance team all working together. If you leave out any of these key components, you're going to see much less success.
GF: The economic crisis has made counterparty risk a prime concern for treasurers. How are they dealing with this—and with their bank partners, vendors and customers?
Horowitz: Non-banks are looking at "KYB"—know your bank. It has become an important issue for many of the corporates we work with as well as those of our client banks who have corporates as their counterparty. Both the banks and the non-banks are scrutinizing the balance sheet and trying, from a partner perspective, to understand the ratings: What's the tier-1 capital ratio? What leadership positions are they taking? Are they investing in the business? Is the information transparent? These have become the foremost topics of conversation in the bank forums that we run.
Fossaceca: The landscape of risk management has drastically changed. There's no doubt that concern about counterparty risk has intensified and expanded over the past year and a half, with implications that extend across clients, buyers, suppliers and banks. Throughout this period, corporates have focused on establishing contingency plans and reexamining their exposure to risk, constantly asking themselves, "Am I diversified enough? Do I have contingency plans in place?" We have seen several clients leverage the opportunities afforded by SWIFT connectivity to connect to multiple banks through a single point of access in order to lower switching costs and enhance their contingency strategies.
Williams: We ask clients to look at counterparty risk along four dimensions—investment risk; FX risk, as well as interest rate exposure; accounts receivables exposure; and operating risk. We talk to them about the quantitative and qualitative measures they should think about in evaluating these risks. On the quantitative side, we discuss everything from CDS spreads to looking at third-party research, rating agencies and key metrics. On the qualitative side, it's about understanding the countries they operate in—what's the country risk and so on. We've also started to make some of our own internal products available to clients. For example, we have a unique product called Cash Trade Execution that gives clients access to the research of J.P. Morgan's asset management company to help them assess counterparty risk.
Lindow: Corporates are reviewing their counterparties much more regularly. They're also reviewing investment policies and taking a much closer look at the underlying instruments in their investments. The automated tools that treasuries use can create dramatic savings, but they also free up staff to do more of this risk analysis. Some of the solutions have been around for a while, but they're getting much more intelligent. The bank's providing real added value in an automated way so that treasury staff have the time to focus on these new priorities.
Horowitz: Earlier I spoke about liquidity portals. Counterparty risk concerns have caused treasurers to refocus their efforts around these types of applications. Overall, our clients tell us they are looking for up to six key things to allow them to automate the process of moving liquidity from a cash concentration account into various short-term investments. First, they want trading flexibility to make sure they're able to trade from one short-term investment into another. Second, robust reporting capabilities built into whatever tools they use, and third, a straight-through process. Fourth is customization, including account monitoring and ensuring the account complies with the organization's investment policies. Fifth is risk mitigation—knowing the fund data, the credit rating, the average maturity, the holdings. All the information a treasurer needs for short-term investment has to be embedded in the tool. Finally, it has to be multi-currency.
Lindow: In the past an investment portal would have been a nice added feature. Now it's the central part of any cash concentration solution you're putting into place.
Fossaceca: Being able to provide a portal where clients can invest across multiple counterparties is extremely valuable. Whether clients invest all of their money with us or have investment guidelines that dictate the diversification of investments across multiple counterparties, we provide tools to make investing easy and effective. That's really key—taking a consultative approach and working with clients to implement customized solutions that address their specific needs.
GF: Businesses are looking for global solutions for cash management. What does this mean, and what progress has been made?
Lindow: The issue seems to be as much about centralization as globalization, and gaining visibility and control of your cash no matter where it is or who it's with. It's important for banks to have the capabilities at a local and regional level so they can deliver their global solutions in an automated, seamless way. We're seeing quite a significant pick-up in global optimization schemes—not necessarily pooling, but optimization, where you can start doing a global play with the balances. While payment technologies are still predominantly regional, there's also a huge opportunity to globalize these activities.
Horowitz: When you look at a global or regional scheme, there are a few elements necessary to incorporate into your analysis. Understanding the value dating embedded in any kind of global cash management solution is vastly important. It's different in each country and different from a cross-border perspective. Secondly, you have to be clear about payment movement—whether it's construed as an international or domestic transaction—so the account structure is important, whether it's a resident or non-resident account. You also need to be aware of the FX implications and exposure in an international solution. Finally, the tax and legal frameworks need to be in place.
Fossaceca: Whether businesses are buying or selling goods, managing liquidity, or accessing capital markets, every company is global to some extent today. As corporations continue to expand their operations and enter new markets, they need a bank that can provide seamless global functionality, transparency across borders and on-the-ground support across the world.
Williams: In addition to country differences, there are definitely sector and industry differences. We spend a lot of time with clients to understand and evaluate those differences. It's relatively easy to put together a global solution for a company in a global industry like oil and gas, or for a company that manufactures and sources everything essentially in one location and distributes globally out of a hub. But you also have large companies with subsidiaries all over the globe, with local treasuries and so on. In that case, our work is less about finding a global solution and more about simply helping them to regionalize their operation—creating an in-house bank, for example—so they can start to pull together liquidity.
Lindow: More medium-size companies are sourcing internationally and have a diverse supply chain or sales base. While they tend to have more control over treasury functions, the treasurers tend to be stretched because there are only one or two of them. We're helping these companies leverage solutions that are already working effectively for larger companies. For these clients, an automated global solution can have a tremendous impact.
Sponsored Interview: American Express Corporate Services
American Express' commercial card business handles travel, entertainment and purchasing spend of large corporations and mid-size companies. Global Finance spoke with Sanjay Rishi, executive vice president, US Commercial Card, American Express, about the increasing use of commercial card programs by firms to reduce costs and inefficiencies and improve working capital in the order-to-pay process.
How did the recent recession affect the way companies looked at payments?
Companies are under increased pressure to manage their short-term capital. They are focusing on spend visibility and policy compliance while also looking for effective ways to cut costs and enhance employee productivity.
What are corporates doing to reduce costs, and how can their providers assist them?
Currently in the US, 70% of settlements are made by check. Forward-thinking companies are looking at alternative payment solutions such as commercial cards and electronic payments to reduce costs, improve spend visibility and maximize working capital to become more competitive.
Providers are developing vehicles that are looking at everything that happens before they make a payment, from initiation of the order to receiving invoices electronically, to find opportunities to automate the end-to-end payment process. In a card transaction, the client is billed once a month, which gives them better float and predictability of payments. That means a firm's treasury department can better focus on their cash needs. As a result, use of commercial card products is enabling companies to become more competitive. On the supplier's side, if the buyer is paying by card, it also means they typically getting paid earlier.
More than ever, corporates are looking for ways to extract cash from their operations and increase working capital. What's working for them?
Sanjay Rishi, executive vice president, US Commercial Card, American Express
Companies are focusing on extending terms, leveraging discounts and managing key supplier relationships. They are realizing that they need to take a more strategic approach to paying their suppliers. We find that companies are having the greatest success in building a payment strategy when considering a range of factors, including spending policies, financial controls, internal business processes and overall business objectives. Once they develop a payment strategy, firms are able to decide what form of payment is best suited to the type of purchase. It is not just about enhancing cash flow but also about reducing the manual work that is required and improving visibility over transactions, which makes controlling expenses easier and more efficient.
Technology has been a key element in the development of contemporary treasury and cash management. What developments are coming, and what new tools are available?
We are seeing increased interest from our corporate clients for platforms that help them achieve savings, process efficiencies, control and cash flow.
For example, our vPayment technology provides unique account numbers for each transaction that expire once the purchase has been authorized. A single-use account number gives firms an exceptional degree of control, as they can set the time the dollar value of a card is available for and the kinds of transactions it is used for. Consider a company that regularly purchases a commodity such as industrial supplies, for example, and wants to pay via card to eliminate invoices and checks but wants to maintain control over payment amounts. That company would recognize time and cost savings by implementing vPayment.
Another solution, Buyer Initiated Payments (BIP), enables companies to pay for items that typically require an invoice for controls purposes. This also provides the benefit of helping companies to manage working capital. Instead of the buyer sending a payment file to the bank and remitting the funds immediately, they send it to American Express and we make the payments to the supplier, giving the buyer additional "float." If you consider another company that uses hardware, they might find BIP more advantageous because it enables them to approve the invoice as they normally would via their standard controls, while leveraging funds from American Express to extend their days payable outstanding and accelerate payment to the supplier.
What do you see as the key trends in payments?
There are a number of trends we see across our client base. Firstly, there is a move away from check-based payments to card-based and electronic payments, which is driven by the need for information, cost reduction and cash-flow improvement. Secondly, companies are integrating their global card programs with their ERP systems globally to develop a more consistent approach in their order-to-cash cycle across the world and realize a return on their technology investment. Thirdly, firms are using the information generated through card transactions to make better decisions in terms of who they should buy from and how they should pay.