Cash Management and the History of Global Treasury

In the 20th century many businessmen thought that with technology the march of progress would homogenise practices and workflows in treasury. Cash management would centralise, payments standardise, and global treasury would become common. Yet for many companies, treasury is still a local or regional affair. The technology is there, and now that global markets are so connected we really do need to think about multiple regions, even when dealing with cash management within a single one. Yet this kind of global focus requires a shift in how companies think about treasury, and most notably cash management, as there are fundamental attitudes and infrastructural differences in cash and payments between regions–especially America and Europe.

If you had asked treasurers 20 years ago how they saw treasury evolving, you would have been told that it was going global. Business had made that jump in leading into the 80s, and technology was enabling more than anyone had imagined. Yet cash management has remained fairly regional, or even local, due to several key differences between Europe and North America which emerged early on, creating major infrastructural and attitudinal differences in how cash management functions between the continents.

Currency is, of course, an obvious difference. Europe has always been a continent of many markets, dealing with many currencies – and therefore also much currency risk. European companies have had to deal with heterogeneous issues in the field of payment transactions for decades and work hard to have common standards. This has resulted in a system where European treasury is either executed completely independently per location, or within the appropriate hubs: London, Zurich, Frankfurt. 

In comparison US treasury operations have had one main currency to work with, naturally leading to less of a currency/FX risk focus, and allowing a uniform payment infrastructure and greater centralisation of US dollar cash management.

Since cheques are still very much the norm in the US, where even very large payments are made with them, being able to calculate a value date more than a few days in advance is nearly impossible to do – at least with meaningful accuracy. As such, American treasury tends to focus more on short-term cash management, rather than long-term. After all, why scrutinise the future when your ability to measure what your cash position will be in it is so inaccurate?

There have been all kinds of ‘modernisations’ in US payments, of course, such as scanning, remote printing and lockboxes, etc. But, in many ways these have just made global integration harder.  And even if a corporation wanted to change their reliance on this payment form, many customers and employees are not prepared to accept electronic payments.

Meanwhile, electronic payments with one hundred per cent accurate value dates have been the norm in the Eurozone for a generation, albeit with varying standards. This has made medium- and long-term cash planning a much greater focus in Europe.

Different accounting roles

This difference in short- and long-term planning has also resulted in European and American treasuries taking on very different roles in regard to accounting. The long-term focus of Europe has created a hard separation of treasury and accounting duties. In Germany, for instance, the treasurer is focused on financial risk management, cash, risk, contracts, investments and financing, but rarely any accounting. Meanwhile in the US many factors have meant that their treasuries are still quite tied in to accounting, with a focus on cash, liquidity, debt, domestic cash management (lockbox, ACH, etc.), account reconciliation, cash accounting and more.

This has bled into every other facet of treasury, especially the different standards for electronic statements across each continent. In America the BAI2 format has taken root, while in Europe the SWIFT MT940 – a standard so  little known in the US that it does not even have a Wikipedia entry – is the stalwart of the industry.

So how do we bring together European and American treasury? It is tempting to say that the solution is ‘better technology’, but this may over-simplify the issue. For instance, the growth of web-based electronic banking, which should have standardised the industry, instead led to bank-specific electronic banking solutions popping up all over both the American and European markets. These payment methods ingrained themselves into treasuries, putting technical barriers in the way of group wide cash management. [[[PAGE]]]

So no, technology is important, but that alone is not the answer.

As treasury has been shaped so much by bank transactions, we need to start there. One could say that we have already succeeded in the first step towards reconciling cash management, and indeed treasury management as a whole: the unification of electronic banking standards. In 2008 all German banks were required to support Electronic Banking Internet Communication Standard (EBICS) transmissions, replacing the outdated File Transfer Access and Management (FTAM) protocol. Shortly afterwards France jumped  on board, integrating message types and signing standards from its version of FTAM, Echange Télématique Entre BAnques et Clients (ETEBAC). By 2010 EBICS  had replaced FTAM entirely within Europe. This helped to  set the stage for standardisation that would eventually come with regulation like SEPA and technology like SWIFT.

SEPA and SWIFT

SEPA has been a major force in pushing standardisation in Europe, improving the efficiency of cross-border payments and unifying a scattered market for euro payments. This should help create more unified European treasuries, as well as get the ball rolling on standardisation globally by encouraging adoption of standards and practices that make global integration possible.

SWIFT, on the other hand, is bringing real value to companies by not only providing electronic payments but also expanding electronic transaction options to include matching of money markets, FX transactions and the settlement of trade finance transactions–expanding bank communication, while helping standardise the industry.

Unfortunately, and even with standardisation, actually connecting and integrating all parts of the company in order to enable global treasury is low on the list of priorities for many corporations. This is where the most growth needs to happen if we want to start seeing treasury move forward. We need to start turning board-level attention to the importance of global treasury, focusing on the value and security that corporate-wide treasury and cash management provides.

US treasurers may have an advantage here, as the US financial crisis has driven many major American corporations to give board-level attention to the need for global cash forecasting, and a global approach to liquidity management and debt. American treasurers need to ride that wave.

The last piece of this puzzle is you, the treasurer. The technology is available, the standards are settling into place: what is left is reshaping the organisation of treasury away from an independent regional focus, and towards a global, integrated one.

The fundamental split of European and American treasury due to single vs multiple currencies and long- and short-term cash planning created by differences in payment types is going to require some fundamental shifts if we want to create truly global cash management. These involve technical standards and regulatory standards, but most of all a real push from treasury to shape the companies in which they function. If we are to change these structures, what we need are people – individuals focused on global treasury who can, as both treasurers and consultants, reshape treasuries around new technologies.  If we want to move treasury into the mid 21st century, it is going to take a push from treasurers themselves to drive the treasury department out of the back office and into the spotlight.