Sibos Topic 4: How are corporate treasurer requirements evolving?

By Nicole Miskelly | 9 October 2015

The role of the corporate treasurer has evolved over the last few years and has become increasingly more strategic. With comments from Alain Raes, CEO APAC and EMEA, SWIFT and Peter Wong, Director, PwC Consulting Hong Kong, both speakers at Sibos this year, bobsguide explores how corporate treasurer requirements are evolving and what banks need to do to continue being the preferred service provider for treasurers in the future.

Today’s corporate treasurers’ have different concerns and priorities than they had previously and according to Alain Raes, CEO APAC and EMEA, SWIFT, corporate treasurers now play critical roles as they serve as financial risk managers to protect their companies’ value from the financial risks they face from their various business activities. “Once considered a part of the accounting department, corporate treasury management has now evolved into its own professional body. Perhaps the most important concerns for them would be managing their cash pool and liquidity risks effectively.  Knowing where their cash lies, and ensuring maximum usage of available cash, making timely decisions, and minimising investment risks and operations control.”

Peter Wong, Director, PwC Consulting Hong Kong believes that as companies are becoming more vulnerable to external shocks, they need to be better equipped and prepared in protecting their P&L, cash flow and balance sheet. “On the business side, demand for their products and services is contracting. This translates into reduced cash flow from operating activities meaning they have to hold back capex to conserve cash and have a higher dependency on rollover of existing financing. Major efforts are required to prevent credit rating downgrade at a time when credit metrics (such as EBITDA/debt ratio) are deteriorating. On the financial market side, adding to the woes are foreign exchange volatility, uncertain commodity prices, reversion of capital flows from emerging markets and tight supply of affordable funds from both the bank and bond market.”

Wong also says that firstly, treasurers need to become more strategic and flexible in their approach. “The first thing treasurers need to consider is to change their mind set from transaction efficiency to more strategic focus. Companies need to be more flexible to adapt to changes, same for treasury. Liquidity contingency plan must be in place. Foreign exchange and commodity price risk have to be dynamically managed. Trapped cash and profit distribution strategy for subsidiaries have to be updated as part of capital management plan.”

According to Wong, treasurers also need to raise the bar in governance by getting the Board more involved in setting up a more robust risk management framework, policy, structure and establishing risk tolerance limit. They also need to adopt a stochastic approach (in contrast to point estimate) in decision making. Wong believes that sensitivity analysis and stress test should be used to quantify an internal risk budget that matches against expected market risk, which will help determine the hedging ratio and hedging strategy.

Digitalisation is also a factor that treasurers and vendors need to take into consideration and is an area of change, which according to Raes, is seen as a threat to more traditional banking methods. “We live in an era of unprecedented change and innovation, where secured, reliable market infrastructures play an increasingly important role to treasurers,” says Raes.

With investment in technology on the rise, what should vendors be doing to better provide clients with innovative solutions? Raes say that recent industry surveys indicate that corporate treasurers in Asia are increasingly turning to technology vendors, such as enterprise resource planning (ERP) or treasury management system (TMS) providers, for a single consolidated view of their liquidity, and increasingly building up an integrated platform, with not only cash management tools, but also effective interbank communication systems, be it host-to-host connectivity or web-based electronic banking solutions. “In order for technology vendors to ensure they are continuously providing their clients with the latest, most innovative solutions, they need to shift gradually towards more collaboration with traditional banks to ensure greater payment channel interoperability between all three parties – banks, technology vendors, and SWIFT,” he says.

According to Wong, technology companies need to address the needs from more of a corporate treasurer perspective - which have now become more complex and demanding. Wong says TMS’ are now expected to provide the following essential functions:

a) A database warehouse of all treasury transactions and records (including as basic as a bank account administration system)

b) A control point of all major fund flow/payment execution

c) A user-friendly tool of treasurers as decision support system doing all kinds of scenario analysis (on interest rate, FX and commodity price movement), cash forecast and stress tests

d) A multi-user system that enable segregation of duties (unlikely to obtain from Excel spreadsheet) in initiation to approval of payment

e) A risk management tool and dashboard that capture the credit risk exposure (by banks) and FX exposure

With competition on the rise, it is becoming increasingly hard for banks to foresee whether they will still be the preferred service provider for treasurers in the future. Wong says that to become the preferred service provider for treasurers, banks must be able to stay profitable to support sustainable growth to provide the range of products at the service level required and to continue investment in the business.

“Banking is a relationship business. Clients want continuity. They also want quality service at the right price point. To be profitable, just being mean and lean is not enough. Banking is a people business. Therefore the first and foremost is the ability of banks to develop and retain talents.  Banks should also build a more flexible workforce to equip staff with transferable skills to be deployed to a different business unit, switched among the front, middle and front office, or relocated to transfer best practices to other country offices,” says Wong.

Raes believes there has been a seismic shift for banks to need to understand corporates trending toward being bank agnostic. “Treasurers are better informed than ever to optimise their internal available resources and be less dependent on external sources of funding to better manage their liquidity and banking relationships. Treasurers are eager to take the treasury function to the next level by adding value and increasing efficiencies in their organisation, taking strategic decisions on how and where to deploy cash – the typical mainstay of a bank’s previous relationship with the treasury function.”

In order to keep up with changing treasurer requirements, Raes says, “As market uncertainty continues, the need for visibility, control, alternative cash and liquidity options will only intensify, thus a robust bank with the ability to understand key aspects of its client’s business – such as overall payment activities and data – can be more proactive in helping their clients better manage their cost and process efficiencies. Banks should also put heavier focus on enhancing their products and services, whilst working with technology providers such as SWIFT.”

In the financial industry today, Raes says that everything from cash to currency to financial infrastructures is influenced by digitalisation, new technologies, regulation, and evolving business and customer expectations, and banks who are able to enable customers to derive more value through modern cash management and supply chain solution, connectivity solutions, product and services adjacent to business intelligence, financial crime compliance services, cyber security, real-time continuous operations and standards interoperability, will undoubtedly be the leaders in this new era. 

In order for banks to remain successful, Wong believes that bansk should stay connected to their clients through devices such as smart phones. “The content ideally should be client driven. It could be FX alert (when spot crosses pre-set trading range), regulatory update and hot topics in RMB.  The client is provided with link to bank’s solution page specific to that topic where client can read the bank’s thought leadership viewpoint or reach out to the right contact.”

Wong also believes that banks should build a “partner bank arrangement” with regional and local banks to provide treasurers the coverage required to support client’s international business. This will require more than a correspondent banking relationship. It should be seamless for the clients on visibility of bank balances, transaction confirmation, deposit interest and fees/pricing on drawdown of facility.

“Thirdly banks should develop a fintech strategy. The popular use of smart phones opens up opportunity to use various B2C payment platforms online. Cybersecurity remains a differentiating factor among different payment channels and banks should maintain that advantage as a trusted partner being regulated with sufficient capital buffer,” says Wong.

Finally, Wong believes that banks need to improve internal work process and communications among front and back office staff to serve a client better from simple thing like opening a bank account to completing a billion dollar financing deal with complex documentation with multiple counterparties. “Common sense and open minded approach are needed to strike the right balance between service standard and regulatory compliance,” he says.

Hear more from Alain Raes at the ‘Corporate Forum Opening Address Day 1: Shaping the Future of Treasury and Trade’ at 8.30am on Wednesday 14th October and Peter Wong at ‘The Future of Corporate Banking – What do clients expect from banks’ at 9.00am on Wednesday 14th October.

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