Strategic Treasury

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A Custom Approach to Treasury Outsourcing Treasurers have become increasingly aware of the opportunity to outsource their treasury operations to banks’ agency treasury services (ATS) in recent years. What is often less apparent is the differentiation that exists between ATS, and how this affects the type of services that an agency treasury can provide.

A Custom Approach to Treasury Outsourcing

by Roger Saunders, Lloyds Banking Group

Treasurers have become increasingly aware of the opportunity to outsource their treasury operations to banks’ agency treasury services (ATS) in recent years. What is often less apparent is the differentiation that exists between ATS, and how this affects the type of services that an agency treasury can provide. In particular, many ATS’ business model is to provide a standardised service to treasury clients, which in turn enables them to leverage economies of scale. However, at Lloyds, we have focused on delivering a highly personalised, custom solution for each client, enabling us to meet their current and evolving business needs and exceed their expectations.

The rationale for treasury outsourcing

Treasury is increasingly recognised as a business-critical function, and as such, it is imperative for every organisation to establish the most appropriate policies, procedures, people and technology. The cost and complexity of achieving this can be considerable, however, in particular for companies which lack the scale and scope of treasury activities to justify the investment required. For example, to achieve the necessary controls over treasury processes, there needs to be adequate segregation of duties so that the same person is not responsible for both dealing and settling transactions. As an alternative, treasurers have the option of outsourcing their treasury operations to a specialist agency treasury, typically within a bank, that produces the daily cash position, conducts the day-to-day transaction processing and produces the necessary reporting. This enables internal treasury staff to concentrate on more strategic activities, such as financing, risk management, and business advisory, without losing control over daily activities. As treasury activities are conducted in accordance with the treasury policy, and treasurers have full visibility over all transactions, they benefit from a best practice treasury environment without the need to invest in the necessary infrastructure.

In the past, treasury outsourcing was most popular amongst US multinationals, that outsourced their European treasury activities to agency treasuries in Dublin, Ireland, taking advantage of the favourable tax situation. This is no longer the case, and while the number of organisations outsourcing their treasury remains relatively modest, agency treasuries now serve the needs of a wide diversity of companies. There are three key reasons why some treasurers have been reluctant to outsource their treasury activities to a third party:

i) The service offered by the majority of agency treasuries is standardised, in order to create economies of scale. Therefore, some treasurers have found that the specific needs of their business, such as reporting, may not be supported through an outsourcing route.

ii) As the majority of agency treasury providers are part of a bank, treasurers are often concerned that they are obliged to award their wider banking business to that bank.

iii) Treasury is a highly sensitive area, and as such, it is essential that data is held entirely confidentially.

At Lloyds’ ATS, addressing these concerns remains pivotal to our operation. Our services are bespoke to each client, enabling them to leverage operational best practices whilst supporting the specificities of their organisation. All information is held confidentially, with a separate physical and technical environment. Furthermore, ATS is part of the Financial Institutions business within Lloyds, giving clients access to products and services from across the market, not only from Lloyds Banking Group. Clients are not obliged to establish a wide relationship with Lloyds, so they are able to select Lloyds ATS for the services we provide, unencumbered by other considerations. By conducting our business in this way, Lloyds ATS has a strongly differentiated service offering that provides the benefits of treasury outsourcing without the perceived disadvantages.

Background to Lloyds’ agency treasury services

Lloyds first established its ATS division over 20 years ago, initially providing all the company finance and administration for the newly formed, special purpose vehicle, Guaranteed Export Finance Company PLC (GEFCO), a structure developed by Lloyds in conjunction with the UK government. From the point that GEFCO was incorporated, Lloyds provided all the relevant functions for the company, including issuing Eurobonds, transacting interest rate and currency swaps, refinancing loans, placing funds on deposit etc. In return, Lloyds charged a fee to GEFCO for the services it provided, as opposed to a margin on transactions. With excellent feedback on the quality and responsiveness of service provided, it was soon suggested that Lloyds extended its ATS to other third parties.

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