Interest rates| blockchain use cases | cross-border payments: AFP 2017 key takeaways

By Vicky Beckett | 27 October 2017

Rising interest rates, excitement around blockchain use cases and cross-border payments were all hot topics at this year’s AFP conference in San Deigo.

The annual event was situated in sunny San Diego’s conference centre which was abuzz with educational talks and booths touting everything from mind readers to oxygen bars.

Interest rates and resistance to change

While many of their European counterparts are losing sleep about having trapped cash in a low interest rate environment, many in the US are preparing to experience the most significant rate hike in about 15 years.

Given that interest rates have risen and inflation has not really followed suit, Rick Burke, head of corporate products at TD Bank, questions whether there is now a market expectation, or potentially a desire, to be a lower interest rate environment.

“I don’t think higher or lower interest rates is what matters to treasurers. It is the potential for change.”

Despite US interest rates rising from historic lows to what some may view as near-normal levels, the changing workforce demographic makes it more of an issue.

Over 50% of the US workforce is now made up of millennials, meaning many younger treasurers have never operated in a high interest rate environment.

Rick Burke, TD Bank’s head of corporate products told GTNews: “I don’t think higher or lower interest rates is what matters to treasurers. It is the potential for change.”

Treasurers have policies that support a low interest rate environment and have migrated to working principles of safety and soundness, knowing there isn’t much to be gained by taking financial risks, explains Burke.

“If, in the short term, rates rise to 2.5-3% treasurers will have to do things differently to what they have done for the last ten years,” he added.

While a high interest rate environment allows for treasurers to make higher returns on their investment portfolios, the concurrently may have concerns about what this means for their mortgage and loaning a car.

“There is also a concern that if rates rise it will put the breaks on the high level of leasing and lending that is being seen in the US and UK,” said Burke.

“Will a rise in rates shut that off and lead to a recession? It has been too long to call it a double dip but nobody wants to go back in the other direction,” he added.

Blockchain use cases

Use cases for blockchain was another key topic at the conference that many treasurers were excited about. Up until it now there has been a feeling amongst treasurers that, while the technology is a revolution in computer science, they lacked use cases to implement it within their own treasuries.

But at AFP there were several talks based on examples of how blockchain can be used by treasurers.

Caitlin Long, president of Symbiont, led a session discussing blockchain use cases on Monday 16 October. One such application would be putting payments on blockchain technology, Long told GTNews.

Treasurers, sometimes managing over 1000 bank accounts, would be able to escape the burden of minimum cash deposits that prevent individual bank accounts becoming overdrawn, Long explained.

“Moving money can take as many as five days in some markets,” said Long.

“Reconciling all of those bank accounts and ensuring there is minimum cash in them every day – that is a pain point for a corporate treasurer.

“Blockchain can solve that problem, not by solving the accounting, but by speeding up the payments,” she added.

While many treasurers simply have an intellectual curiosity about cryptocurrencies, Long said that some treasurers are actively using bitcoin for small transactions. However, she was unwilling to name any.

“I worry about people relying on banks to help them with research, development and innovation. That is not a very forward-looking strategy”

Cryptocurrencies, digital currencies lying on blockchain technology, could have big implications for treasurers and global economies.

Long argued that if one the world’s three largest central banks, namely the Federal Reserve, Bank of England and Bank of Japan, were to put their currency on blockchain technology, “it would be a game changer” as most foreign exchange trading goes through one of these three central banks.

Governments would be able to speed up payments dramatically, free up capital, cut out fraud and monitor how changes in interest rates impacted the velocity of money within an economy.

Should you rely on your bank?

Grainne McNamara, co-leader of PwC’s blockchain for financial services practice, told GTNews she was concerned about treasurers expecting their banks to implement blockchain technology instead of doing it themselves.

“I worry about people relying on banks to help them with research, development and innovation. That is not a very forward-looking strategy,” she said.

“One of the things that could happen in the provision of services via blockchain is that banks could just reinvent their services in the existing model inside blockchain and that may not be cheaper. The goal of blockchain ought to eliminate some of the intermediary steps and to make things cost less,” explained McNamara.

“If that is not happening because banks are dominating some of the conversation then I don’t think that is good for corporates using bank services.

“Other people who are providing financial services are looking at this space quite carefully like the big credit card companies. They are looking at what they could do to deliver more value to their corporate clients using blockchain alongside their existing technology,” she added.

Visa is one such example of a large credit card company investing in blockchain.

On the second day of this year’s AFP conference Trump’s potential tax reform, using synthetic debt and the expected benefits of SWIFT gpi were all hotly discussed topics.

Synthetic debt: The ‘trade du jour’

With rising interest rates being a keenly discussed topic at this year’s event, many treasurers were discussing how they can structure their portfolios to minimise interest expenses.

“Many multinationals are thinking of taking their US dollar debt capital structure and using cross-currency swaps to turn it into synthetic euro debt,” Amol Dhargalkar, managing director of Chatham Financial, told GTNews.

“This lowers their interest expense pretty significantly. Treasurers can save 2+ points on interest per annum by synthetically doing euro debt. I would call it the ‘trade du jour’.

“The combination of this strategy with the new US hedging accounting standard that has come out is really beneficial for these multinationals in allowing them to lower interest expense,” he added.

Pelican’s innovation hub

Pelican announced the launch of its ‘Innovation Hub’, a fintech partnership model for banks, at the AFP and SIBOS conference.

It is designed to create a sandbox environment for banks to explore new technology products from proof of concept through to service deployment.

It allows banks to experiment with new tools before making a financial commitment.

The Pelican Innovation Hub incorporates multiple technologies including the artificial intelligence (AI) disciplines of machine learning and natural language processing, real-time payments, open APIs, and omni-channel user experience (UX).

Bill North, global head of sales at Pelican, told GTNews: “Banks really desire this because it is lower risk and lower investment. There is a lot more creativity than with the historic model – software companies selling banks technology which the banks then have to configure and run.”

Trump’s tax reform

US treasurers are slowing down some operations as they are hopeful that President Trump’s proposed tax reform will come into play in 2018.

“Most treasurers are quite hopeful that the corporate tax rate will come down,” Dhargalkar said.

The current administration has made plenty of noise, not only about corporate taxes being lower but about tax reform as well.

However, some treasurers are concerned whether it will actually happen, Dhargalkar said.

“Many treasurers were expecting it would already have happened by now. It is nine months into this new administration. It is worth remembering that it is a four-year term so you can’t get everything done right away,” he said.

“If the tax reform didn’t happen in 2018, there will be a lot of frustration. There are a lot of things treasury are waiting to do, such as repatriation.

“The tax reform proposals suggest a repatriation holiday and perhaps a one time tax on excess funds held offshore, so why repatriate now when you have to pay the full tax instead of waiting for the reforms? There is a bit of wait and see happening,” Dhargalkar explained.

SWIFT gpi is picking up speed but corporates must understand the benefit 

It is important that corporates understand how SWIFT gpi can benefit them as it is corporate demand that will provide banks with the business case to extend the technology, argued Sebastian Rojas, global corporate engagement manager, SWIFT.

SWIFT gpi will allow treasurers with payment traceability, visibility of fees and remittance data.

More than 110 banks are gpi members and subscribing to the services; SWIFT is starting to see banks integrating gpi payment feedback to their clients through their portals, meaning their clients can track their payments at any moment.

Ultimately cross-border payments will be available in real-time, Rojas told GTNews. However, he argued that real-time will never be a priority to treasurers over cross-border payments.

“Treasurers may be able to receive real-time information on their payments but treasury departments do not work 24/7,” he said.” They are not processing all of the information in real-time.”