June 2018

The nature of treasury automation is changing as the financial environment in which it operates evolves. What will a ‘real-time’ treasury look like in the coming years, asks Helen Sanders

Talk of a new era of ‘real-time’ treasury may be greeted with indifference, or even suspicion, by many treasurers. Batch processing, for example, is a distant memory for many, as for more than two decades treasury management systems (TMS) have updated risk and liquidity positions as soon as new transactions and information flows are captured.

Furthermore, many treasury functions have streamlined their payment processes and optimised their bank connectivity to gain daily – or even more frequent – access to global balance and transaction information. However, a perfect storm of new regulations, next-generation technology and evolving market infrastructures means that a move to a truly real-time treasury is now needed.1

Faster payments, faster treasury?

The most obvious driver of real-time treasury is the acceleration of cash. Governments and regulators globally are seeking to enhance the consumer experience and align the payments process more closely with emerging business models. As a result, we are seeing a rapid increase in the number of faster and real-time payment schemes, with longer clearing windows and accelerated clearing cycles for both real-time gross settlement (RTGS) and automated clearing house (ACH) processing. For companies operating with narrow working capital margins or high volumes of consumer payments, such as insurance claims or refunds, the ability to make ‘just in time’ (JIT) payments can enhance customer experience. For others, particularly those with well-established payment processes, the prospect of real-time domestic payments may appear less compelling or even irrelevant, particularly in countries where there is a cap on the value of real-time payments.

"The concept of the real-time treasury is

closely connected with, and enabled by, digitalisation"

 

Dismissing real-time payments as a consumer-only phenomenon entirely underestimates the impact these schemes will have. Turning payments on their head, the greater impact for many treasurers will be the acceleration and extended settlement window for incoming, rather than outgoing, flows, both from a process and liquidity perspective. For example, if incoming flows can credit the bank account at any time of day (or night), receivables management becomes a 24/7 operation. Treasurers need to know when cash has been received on a bank account; so many are starting to look not just at intra-day, but also at dynamic balance and transaction reporting. They also need to be able to identify and reconcile these flows, posting to both customer accounts and, potentially, intercompany accounts if they operate on a receivables-on-behalf-of (ROBO) basis.

Responding to these changes presents a variety of challenges. There will be growing demands on banks to provide real-time account updates, but TMS and enterprise resource planning (ERP) tools also need to be able to support this data, with processes to manage and curate high-volume, high-frequency data. Treasurers are also keen to see improvements to the quality, quantity and consistency of receivables information to allow them to automate reconciliation and account posting. However, responses to these challenges are already available or emerging. For example, the potential for application programming interfaces (APIs) to support highly bespoke data exchanges between banks and their clients is becoming a reality. In addition, corporations of all sizes are increasingly adopting virtual account solutions to facilitate automated processes such as reconciliation, and provide better intelligence on receivables. As these techniques become ubiquitous, the real-time treasury becomes not only achievable, but also the reality for many treasurers.

Real-time liquidity

Although treasurers are starting to think about the real-time treasury in terms of connectivity and operations, few have explored the wider implications, both in organisational and liquidity terms:

  1. First, as cash can be received on the account at any time of day or night, treasury departments will need to be organised to manage this. Unless the team is large (or willing) enough to provide 24-hour cover, or to ‘pass the book’ between regional treasury centres, then a high level of automation will be required to process incoming (and potentially outgoing) flows.
  2. Second, there are significant liquidity and working capital implications. As the cash conversion cycle becomes faster and shorter, and the time between payment execution and settlement all but disappears, managing working capital becomes a far more precise and interactive process than in the past. The need for large cash buffers could also be reduced, freeing up working capital and optimising the use of surplus liquidity.

25+
The number of countries where domestic instant payments are live (Press research)

 

To take advantage of these opportunities, treasurers will increasingly require dynamic, automated liquidity management solutions. Today’s liquidity instruments are structured around the current business day, but the concept of “end of day” and “cut-off times” will rapidly become obsolete. The need to develop new ways to manage liquidity will soon become a more pressing concern, not simply with auto-sweeps into the bank’s own money market funds, but also with the ability to establish and automate multi-provider liquidity solutions.

Beyond borders

It is not only domestic payables, receivables and liquidity management that are accelerating. Corporate interest around developments in cross-border payments, most notably SWIFT’s global payments innovation (SWIFT gpi) initiative, as well as a variety of fintech developments, such as Ripple, has been very high. The speed of payment is compelling, as are the predictability, traceability and completeness of data to identify and reconcile incoming flows automatically. As with domestic payments, innovations in cross-border payments and bank nostro management also represent a major step towards the real-time treasury, particularly for reconciliation, cash flow forecasting and liquidity management.

While managing liquidity will fast become a dynamic, and ultimately real-time, activity, so too will managing risk, such as foreign exchange exposure management. With supply chains in many industries extending internationally, treasurers are increasingly managing exposures in non-functional currencies, which can jeopardise margins and increase operational costs if not managed appropriately. The earlier that treasurers can identify FX exposures – not at the point that an invoice is raised, but as soon as the purchase order is raised or even earlier – the greater their ability to manage these exposures effectively. Furthermore, the more dynamic the FX hedging process, the more precise it becomes. Increasingly, treasury is working with the business to refine both processes and information flows to capture exposure data earlier. At the same time, dynamic FX solutions, multi-currency bank accounts and multi-currency virtual accounts are accelerating, automating and refining FX management, while relieving the operational burden.

The real-time roadmap

Just as today’s systems and processes vary in each treasury department, the real-time treasury will inevitably look different for each business in the future. Even so, the real-time treasury is in many ways an unfamiliar, and perhaps uncomfortable, concept, as it profoundly affects each of the organisational fundamentals of ‘people, processes and systems’. We, as people, do not operate in “real time”. We stare out of the window, we go for coffee, we pack up for the day, and we go on holiday. As transaction and information flows increasingly take place in “real time”, we will need to adapt our processes, systems and, potentially, working habits. As a result, the concept of the real-time treasury is closely connected with, and enabled by, digitalisation.

Some treasury functions will prioritise digitalisation, and, therefore, the transition to becoming a real-time treasury, more highly than others, depending on their industry, business model, culture and technology sophistication. For traditional industries, the drivers of digitalisation may originate within treasury itself, while for new, entirely digital industries, the move towards real-time processes and flows may be more integral to its business model. Whatever is motivating the creation of a digital treasury roadmap, however, the challenge is where to start and what the ultimate destination should be. Many treasurers are starting with connectivity, such as exploring the opportunity to use APIs to optimise the exchange of information with their banks. Some are looking at new financing models to support the business more effectively as it explores new ways of distributing products and services. Others are focused more on capacity building or data insights and analytics.

Whatever the starting point on the real-time treasury roadmap, each step has implications for the next: connectivity impacts on the TMS or ERP; changing cash flow dynamics affect working capital, liquidity and, potentially, FX solutions; and new liquidity and risk models necessitate new data analytics. Consequently, the roadmap needs to be designed based on a future vision with the steps mapped out along the way based on clear treasury objectives, and the way in which each objective will be achieved.

Completing these steps will take time, particularly as many companies have developed well-established processes and infrastructure. Furthermore, treasury is unlikely to become a real-time treasury on its own, and banking partners, established (and potentially new) technology partners, and other stakeholders within the business will all play a part. Embarking on the journey, however, will not only become a matter of necessity, but could also bring substantial operational and strategic benefits. And as time flies faster, with the potential to whip up a whirlwind within the business, it is up to treasury to be the navigator.

Helen Sanders is a specialist treasury writer and consultant and was formerly Editor of Treasury Management International. She was previously Director of Education at the Association of Corporate Treasurers and Director of Sales & Marketing at SunGard (now FIS), following roles in corporate treasury and tax in the oil and technology sectors

The Deutsche Bank view


Payment Services Directive 2 (PSD2)2 has enabled a new generation of fintechs, payment service providers (PSPs) and account information service providers (AISPs) to develop solutions that both compete with and complement formerly bank-proprietary solutions.


The agreement of API technical standards across the EEA, in addition to national regulatory harmonisation across APAC and Africa regarding API and QR code adoption, will further increase the flexibility of connectivity, data richness and bespoke dashboarding and analytics available for corporate treasury and the commercial sales team.


The use of API-powered integration layers or message broker services, whether from a bank, enterprise resource planning (ERP) or treasury management solution provider, former service bureau or licensed AISP, is now a market reality. This can provide real-time, cost-efficient and low-maintenance integration services to overcome fragmented ERP and bespoke hardware or software applications. In turn, these provide real-time working capital intelligence in a multi-banked environment.


Many corporates are considering the regulation-driven instant payments changes and open banking initiatives as an impetus to rethink their liquidity structures and how investment policy parameters can be automatically adhered to. Such automation leaves the treasury team free to manage event-driven or exceptional scenarios and broader liquidity and risk issues. There are three key areas of treasury focus in this context:

 

  • Virtual is the new notional

The rise in virtual ledger management is quickly becoming the hybrid in-house bank (IHB) destination model. This encompasses an “in real life” master account, with the ability for the corporate to reserve, self-determine and open client-defined virtual accounts to facilitate on behalf of (OBO) payment; receivables; and liquidity investment management. On this journey to virtual cash management, there are not only the typical fiscal and legal concerns, but also FX exposure management and OBO capabilities, along with the ERP/TMS technology implications in a multi-banked environment.

  • Real-time, smart investments

Once the cash conversion cycle becomes faster and shorter  – because of 24/7 payments, APIs for account information, optimal investment decision analytics and movement and AI to accelerate cash conversion cycle through auto-matching – the time between payment execution and settlement all but disappears. In other words, managing working capital becomes a far more precise and interactive process than in the past. The need for large cash buffers could also be reduced, freeing up working capital and optimising the use of surplus liquidity.

  • Auto-policy investments

Given the prevailing negative yields within Europe, US dollar volatility, the regulatory impact of MiFID II,3 money market fund reform and the placement of surplus non-operational balances across liquidity providers, treasurers expect that the liquidity providers are able to auto-implement/amend their investment policy parameters within their bank proprietary liquidity pools.  They expect providers to adhere to and provide a corroborating audit trail for on- and off-balance sheet solutions within their bank and with all other bank and fund providers. While the toolkit to move balances between entities, banks and liquidity providers has historically been MT942 based, the opportunity to use market standard APIs to get real-time information later in the day and more frequently than typical MT942 allowed, and to move balances JIT and more cost-efficiently, is now increasingly live in the market.

Vanessa Manning, GTB Head of Investment and Liquidity Products at Deutsche Bank

_________________________
Sources

1 See also the Deutsche Bank white paper, ‘The Road to a Real-Time Treasury’ at db.com/cm
See ‘Ten PSD2 essentials’ at https://bit.ly/2qirNjb at db.com/flow
3 See ‘MiFID II and AMLD4 implications’ at https://bit.ly/2ER0alI at db.com/flow

Helen Sanders

Freelance treasury journalist and former Editor of Treasury Management International

Helen Sanders

Vanessa Manning

Head of Liquidity and Investment Solutions, Global Transaction Banking | Deutsche Bank

Vanessa Manning

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