Innovation and digitisation: the treasurer’s imperative
Far from being mere industry buzzwords, the rapid evolution of payment systems and solutions, together with the growing digitisation of corporate banking services, look set to fundamentally change the way that corporate treasurers operate. From virtual accounts to in-depth analytics, the digital world is your oyster.
When we think about innovation, it’s tempting to skip straight to the ‘exciting’ part. But in addition to understanding the new technologies and channels that are re-shaping the cash management landscape, it is important to grasp how such innovation fits into a corporate’s operating model, and where it can help to solve specific treasury challenges.
Looking first at the macro picture, it’s clear that corporates operating internationally have to contend with numerous external forces that are impacting the supply and/or delivery of goods, as well as the money flows associated with them. Geopolitical developments are one such force, with tensions in Eastern Europe and the Middle East making corporates all the more aware of country and counterparty risk. Indeed, certain geographies are becoming increasingly difficult or undesirable to move funds into or out of, and certain banks are retrenching from non-core countries, leaving some treasurers with significant hurdles to overcome.
“Another factor, which is in many ways correlated to this geopolitical unrest, is currency volatility,” says Mark Buitenhek, global head ING Transaction Services. “The recent strengthening of the dollar, for example, has made it difficult to predict the FX impact on the payments streams of corporates,” he notes. Together with the economic uncertainty surrounding quantitative easing measures and the impact of negative interest rates, these bigger picture concerns are now heavily influencing the day-to-day business of a corporate, and specifically the treasury function.
Financial regulation adds another layer of complexity here. “Even though the vast majority of regulation is being imposed directly on the world’s banks, not corporates, there is inevitably a knock-on effect. Take Basel III, for example: the liquidity coverage ratio and the leverage ratio will impact the availability and cost of certain products of banks going forward, with notional pooling being of particular note,” adds Buitenhek.
As Dick Oskam, global head of Sales, ING Transaction Services, explains: “Put simply, under Basel III, banks must calculate their liquidity ratios based on the gross value of individual accounts, rather than netting the outstanding balances of accounts in the notional pool. In order to cover any negative positions in a notional pool, banks must therefore hold more liquidity - which will ultimately make certain notional pooling constructions more expensive for treasurers.” Oskam believes it is too early to say whether the demand for notional pooling will drop off sharply, or whether the product will remain a cost-effective tool for both treasurers and banks. “One thing that is certain, however, is that forward-thinking corporates are already starting to explore alternatives to notional pools,” he observes.
An alternative approach
The logical upshot of these discussions, he says, is to examine the potential of on-behalf-of structures (OBO), namely payments- (POBO) and collections-on-behalf-of (COBO). Although these structures require “a completely different way of operating,” they also offer treasurers the ability to significantly reduce the number of bank accounts they operate, and reduce general administrative expenses. “It’s about getting treasurers to re-evaluate the tools they have become accustomed to. For instance, while a notional pool might offer benefits from an interest point of view, the level of administration to maintain the pool, be it on the side of the corporate or on the side of the bank, is usually quite significant. By implementing a POBO/COBO structure and streamlining the account set-up, it is possible to massively reduce the administration burden, whilst also finding an alternative to notional pooling,” says Oskam.
'Although virtual accounts are yet to become globally available, there are certain countries, such as Poland, where they are being used with great success'
Another interesting development that is helping treasurers to find alternatives to previously clunky or complex cash management structures is the rise of virtual accounts. These can help rationalise the number of physical accounts held by a corporate, whilst allowing the company to gain superior visibility over its cash and liquidity, and minimising accounts receivable (AR) and reconciliation issues - without adding layers of complexity or expensive technology.
“Although virtual accounts are yet to become globally available, there are certain countries, such as Poland, where they are being used with great success,” Oskam adds.” Of course, in an ideal world, treasurers would be able to operate virtual accounts across the globe, or at least across the European region, but for that to happen we need harmonised legislation, which will take time. It is also due to having various clearing houses and schemes across Europe.” Nevertheless, Oskam believes that virtual accounts offer treasurers significant efficiency potential – and that the benefits will only increase as the solution becomes more pervasive.
Re-writing the rules
Just as virtual accounts and OBO structures are pushing the boundaries of international cash management, the global focus on instant payments could also dramatically change the way that corporates operate. “Imagine a situation where real-time payments can be made on a 24/7 basis. That would totally transform the way that corporates work – and it’s something the banks are very focused on right now. Not only are we seeing talks taking place in the US, Australia, and across Asia, but there is also a concerted effort around instant payments in Europe, orchestrated by the ECB, local central banks, and banks like ING,” says Oskam.
'Ensuring that all payments are instant could therefore be the final step that can ever be taken in this area, and we are keen to drive progress towards that real-time goal'
“Forty or 50 years ago, it took us weeks to get money from A to B. Over the years, the time delay became days, and then within a day. Ensuring that all payments are instant could therefore be the final step that can ever be taken in this area, and we are keen to drive progress towards that real-time goal.” This, Buitenhek explains, is part of ING’s strategy to become a truly digital bank. “Today, there are 23,000 start-ups working in FinTech - the majority of which are looking for ways to improve the customer experience and service, whilst creating efficiencies at the back end. Some of them are looking to work with banks; others are looking to provide an alternative to traditional banking models.
“And whilst competition in the sector should be encouraged, we believe collaboration is the way forward. That’s why we are working with a select group of smaller players across the globe and why we have set up an innovation centre to work towards digitising our complete offering. In fact, we are currently preparing the launch of our new electronic gateway for customers,” he notes. This will be a multi-channel offering, with desktop, tablet and mobile access.
Get with the programme
ING’s - and indeed the wider industry’s – digitisation push is not just about new products though; digitisation is also bringing traditional treasury tools up-to-speed, giving treasurers the benefits innovation, but in a tried and tested environment. “Take corporate cards, for example,” notes Buitenhek. “Today, with the advent of virtual cards, they are being used by corporates not only as a procurement tool but also as a tool for working capital management - since they significantly increase visibility and control, whilst improving payment cycle times and reducing manual touch points. And at a time when the treasurer is increasingly responsible for the whole buying process within the company, this can only be a welcome development.”
'Extending the benefits of electronic invoicing to include payment is an integral part of our strategy of taking advantage of innovation in order to serve the evolving needs of our customers'
Taking this a step further, ING has recently announced a partnership with Basware to support companies with further optimising their P2P process and their working capital management. This partnership will see ING offer an automated invoice payment solution that can be easily added to the existing P2P workflow. “Extending the benefits of electronic invoicing to include payment is an integral part of our strategy of taking advantage of innovation in order to serve the evolving needs of our customers,” Buitenhek explains.
These are just two concrete examples of how digital financial services and e-payments innovation can improve financial processes (including helping to reduce fraud), increase visibility and improve cash flow. But for the treasurer, the true benefits of being able to optimise liquidity positions, in real-time, come alive through the analytical tools that digitisation is fostering. “As well as providing a complete range of e-services, ING is incorporating advanced analytics into our new digital portal. These analytics will not only help the bank to service its customers in the best way possible, but also provide customers with an added layer of information that is only possible through digitisation - including reporting functionality.”
The analytics also give the bank the ability to flag potential opportunities for efficiency within the customer’s business. “For example, the analytics might suggest that, based on your dollar rating or on a supplier’s rating, now would be a good time to set-up a supplier finance programme,” Buitenhek explains.
“In short, it’s about gaining a fuller appreciation of the big picture, whilst identifying specific opportunities to improve, speed up and streamline a company’s working capital management,” he concludes. And where digitisation and innovation allow the treasurer to better react to the company’s current cash and working capital needs, analytics allow the treasurer to better predict what is coming down the line - so that they can take appropriate measures in advance. Forewarned is forearmed.
Mark Buitenhek has been global head of Transaction Services, ING, since 1 January 2014. Buitenhek has more than 25 years of experience in banking and particularly in the payments, cash management and the cards industry. Over the years, he has led many payments initiatives as well as strategic projects and change programmes in both the retail and commercial banking divisions of ING.
Dick Oskam, global head of Sales for Transaction Services, ING, joined the bank in February 2015. Oskam is responsible for developing and bolstering the transaction services offering across ING’s Commercial Banking. He has over 21 years of banking experience and has built a longstanding, international career within commercial banking. His most recent role was head of GTS Netherlands for RBS. Prior to his role at RBS, he spent 17 years at ABN AMRO where he held various senior roles in Latin America, Asia, Europe and the Middle East.
‘Payments is all about customer experience’, by Mark Buitenhek, global head of Transaction Services, ING
‘Keeping up with the revolution in the payment industry’, by Inge van Dijk, director of Instant Payments, ING
‘The impact of real time payments on consumers and their businesses’, a short write-up of an interview of Inge van Dijk, director of Instant Payments, ING