How Digital Technology is Transforming Treasury

by Thomas Dolenga, Head of Cash Management Product Development, UniCredit

Digitalisation has already given rise to a number of valuable tools designed to raise the speed, safety, and efficiency of treasury operations. And as new technology companies encroach on the transaction banking market, competition is triggering further innovation – promising an exciting future for corporate treasurers.

As we enter 2016, the world is abuzz with enthusiasm for the potential of digitalisation. Digital tools are simplifying life for treasurers around the world, and the emergence of competition in the transaction banking market is bringing with it the promise of new and more powerful innovations.

Corporates are already feeling the influence of digital technology, with the Single Euro Payments Area (SEPA)’s ISO 20022 format now standard in Europe. Meanwhile, the Bank Payment Obligation (BPO) – a digital means of bank-mediated trade settlement – has been heralded as a transformative tool for its ability to combine rapid processing with robust risk mitigation, as well as its potential to improve trading relationships and resolve difficulties with payment terms. But the rate of digital innovation is set to shift gears. The reason? Competition.

Specialist technology companies are entering the transaction services space, offering their own platforms for corporate transactions – often faster and cheaper than previously available equivalents. Meanwhile, other innovations, such as cross-bank bidding platforms, now enable corporates to pit banks against one another in order to secure transaction services at better rates.

This development brings a welcome windfall for corporates – and a pressing challenge for banks. Indeed, banks are already moving to counter the threat – redoubling their innovation efforts in a bid to produce technology that maximises value and convenience for corporates.

This new zeal for innovation is already bearing fruit.

This new zeal for innovation is already bearing fruit. Virtual accounts, for instance, are a significant addition to the treasurer’s armoury. Underpinned by the principle of centralisation, virtual accounts enable firms to divide a single bank account into almost any number of ‘virtual’ accounts. These subsidiary accounts have their own funds, account numbers and administrators – just like regular accounts – but the funds they contain are notional allocations from the parent account.

The implications of such a system are impressive. For a start, virtual accounts can help reduce account fees and maximise interest return by enabling firms to scale down the number of full accounts they operate to as few as one per currency.

There are also strategic advantages to this approach. A single account for all operations affords treasurers a comprehensive and digestible bird’s-eye view of their companies’ finances – making it far easier to pinpoint areas of over-exposure. This structure also promises to put an end to the laborious process of cash pooling, as funds are already pooled in the parent account.

Furthermore, since virtual accounts are not ‘real’ accounts, they are far easier to open, close and organise. Indeed, many banks offer online account management platforms, which enable companies to shape their account structures to suit their needs. This makes companies running virtual accounts highly scalable, as accounts for new departments and subsidiaries can be created at the click of a button.

Yet for all the benefits of virtual accounts, BPOs, and other technological breakthroughs, banks remain wary of the threat posed by newcomers in the market. More innovations are needed and more are on the way.

Perhaps one of the most fertile areas of future bank innovation is big data. Many banks are looking to draw upon the large quantities of data already available to them to provide big-data services to their clients. These services could easily be integrated into existing arrangements. For example, clients can receive big-data analysis based on their regular transaction data – highlighting areas of risk concentration and other insights.

An interesting advantage of these services is that they can retrospectively increase the value of existing digital tools, including BPOs and virtual accounts – taking the detailed data they generate and converting them into valuable insights for strategic decision-making.

Armed with the technology, there is no reason why banks shouldn’t take things further. For example, they could analyse corporates’ internal and external processes, identifying where and how things can be improved. The potential of this approach to refine treasury operations is stunning – and so far we have barely scratched the surface.

It is clear that digital technology still has much to offer treasury departments. Looking forward, corporates can expect banks and their competitors to keep innovating – paving the way for greater efficiency, greater flexibility, and greater profitability.