Published: August 01, 2011
When many treasury departments were first established, often in the 1970s and 1980s, they were typically tasked to manage the liquidity requirements and financial risk of the business, particularly as companies expanded their geographic footprint. Twenty or thirty years later, while liquidity and risk remain the lynchpin of the treasury department’s activities, the effects of the 2008 financial crisis mean that treasurers must now conduct a broader spectrum of activities. Treasury management has evolved as a result of certain drivers, facilitators and consequences of treasurers’ expanded role, and how banks are positioned to support them.
Since the liquidity crisis – and indeed, this is the best description for the global financial crisis as many companies found their access to liquidity severely constrained – treasurers have had increasingly to concentrate on liquidity beyond cash management. In particular they rapidly saw the need to maximise access to liquidity, and to understand and influence the inflows and outflows of funds in order to reduce working capital requirements. Furthermore, with access to bank credit lines often constrained and with capital markets contracting, treasurers started to look at alternative sources of financing, especially with regard to trade and structured finance.
Treasurers have also expanded their horizons from a risk management perspective. While they traditionally focused on interest rate, currency, counterparty and, in some cases, commodity risk, this has now expanded to an enterprise-wide risk framework, including credit, insurance, concentration and liquidity risks as part of treasurers’ overall objective to enhance financial stability and sustainability.
The emphasis on sustainability is crucial. Treasurers recognise that squeezing suppliers, for example, is an unsustainable way of enhancing liquidity. Instead, there is a greater emphasis on partnerships and ensuring the integrity and stability of the financial supply chain, from clients through to suppliers. While this is an issue that has been discussed for some time, we are now seeing concepts being translated into action, with proactive initiatives to work more closely and effectively with supply chain players. Strengthening the financial supply chain is critical both to creating an efficient working capital cycle, and also to leverage financial assets as collateral for alternative forms of financing.
For example, supply chain financing was one of the very first products offered by Deutsche Bank in the 1870s, with an emphasis on promoting and supporting international business. Today, supply chain finance is an integral part of our offering, but a wider range of companies, including large multinationals are going ’back to basics’ to consider the benefits of traditional forms of financing using financial assets as collateral, albeit in a more sophisticated way than in the past. Not only is supply chain financing now highly flexible and specific to each company’s needs, but it is facilitated by innovative technology and enriched by information that can be integrated with other processes and systems.
Without leveraging innovative technology and integrating processes and systems in an automated and seamless way, it is almost inconceivable that treasurers could have taken on such a range of new responsibilities, particularly as treasury departments themselves have rarely expanded and often shrunk. We recognise the significant role that banks such as Deutsche Bank have to play in delivering the right communication channels, standardised formats and versatile integration capabilities in order to facilitate automated processes such as reconciliation and account posting and indeed, we have invested substantially in these areas. Furthermore, just as treasurers have extended their remit into liquidity optimisation, so too must their banks respond by delivering wider liquidity management and optimisation solutions rather than simply focus on banking products and services.
Treasurers can now leverage both cash and trade instruments through a single supply chain portal.
There are a variety of ways in which progressive banks are enabling this transformation. Firstly, combining cash management and trade finance into a single business function was an important step, facilitating more integrated, client-centric solutions that span clients’ liquidity and risk management requirements. With both open account transactions and the use of trade instruments continuing to increase, treasurers can now leverage both cash and trade instruments through a single supply chain portal, maximising flexibility and transparency in financial management.
In addition to the provision of an information-rich, secure proprietary communication portal, large multinational companies that frequently work with multiple banking partners often seek to access services through a bank-neutral portal such as SWIFTNet. We are also seeing mid-cap companies accessing their banks via SWIFT in order to increase their flexibility in their choice of banking partners. This is a positive development that allows banks to differentiate themselves not simply on channel technology, although this will remain important to a wide range of organisations. Banks will meet and exceed their clients’ expectations based on the quality, timeliness and format of information they provide, the range of services available through the channel, and the ease with which data can be integrated with other processes and systems. [[[PAGE]]]
The combination of enabling technology and a wider view of liquidity is also changing the business organisation for managing transaction flows. For example, we have seen a growing number of companies introduce regional or even global payment factories, and centralisation of collections is also becoming a stronger trend. The introduction of standard payment and collection instruments in the Single Euro Payments Area (SEPA) is a catalyst for this, and we are likely to see the trend towards centralisation of payables and receivables accelerate now that the end date for migration from local instruments has been set. Once again, this is an opportunity for banks to move beyond the provision of basic payment and collection products to help their corporate clients to optimise their financial activities in order to reduce costs, increase control and enhance the strategic management of cash and working capital.
Deutsche Bank is playing a leading role in supporting efficient financial processes, data transparency and analytics and a strategic approach to cash optimisation. Before the liquidity crisis, treasurers often found it difficult to gain senior management attention and support for centralisation initiatives. With greater focus on liquidity and risk management issues, cost control and efficiency, it is often becoming easier for treasurers to justify these projects, and clients are increasingly calling upon us to help prioritise the initiatives that will deliver the greatest value to their organisation.
Centralisation at a global level is often very difficult to achieve due to the wide diversity of time zones, languages, cultures, regulations and financial infrastructure. Consequently, many companies find that a regional approach is more pragmatic whilst delivering the synergies, transparency and cost efficiencies that they require. This also typically matches the banking strategy of many large corporates that seek a primary banking partner in each region as opposed to appointing a global cash management bank. The reality is that although companies are seeking to diversify their counterparty risk and avoid excessive concentration with a single bank, there are only a few banks that can provide the depth and breadth of cash management services that large multinationals require.
While the geographic reach and range of services that a bank can provide are important criteria, treasurers are looking at a variety of issues when considering a potential banking partner. For example, financial viability is a critical requirement, as is the bank’s strategic direction to ensure that the partnership is sustainable in the long term. Treasurers need to be assured of a close relationship with a bank that will maintain the company’s interests and invest in the technology, services and countries that will maintain the company at the forefront of cash management industry practice.
At Deutsche Bank, we have closely observed and responded to these trends and have structured our business to provide clients with confidence in our financial sustainability, investment plans, management focus, solution quality and client-centric approach. We recognise that our clients are not seeking products but solutions that specifically meet their liquidity, information and risk management needs. Quality of our technology, solutions, people and transaction processing capabilities remains paramount, and we recognise that whether providing services directly or through partners in some countries, our clients demand, and are entitled to a consistently high quality. We are also proactive in helping our clients to remove inefficiencies from financial processes whilst lowering financial and operational risk.
Quality of our technology, solutions, people and transaction processing capabilities remains paramount.
One example of this is FX4Cash: an integrated element of our client access channels, enabling clients to send and receive cash in 130 currencies through one account. As a leader in foreign exchange and banking technology, our clients can leverage competitive FX spreads, reducing both risk and cost, whilst benefitting from the highest standards of IT security, integration and information availability.
Just as the past few years have witnessed meteoric changes in the financial services industry, the years to come will also bring uncertainty, as well as opportunity. For example regulatory change, such as Basel III, will impact the relationship between banks and their corporate clients, in particular by altering the way that liquidity is priced. In addition to the criteria that corporate treasurers use today to select their key banking partners, they will be increasingly looking for their banks to inform and advise them of the implications of regulatory developments and to help them to maintain a sustainable liquidity and risk management framework.
At Deutsche Bank, we are constantly focused on refining our offerings to exceed client expectations, anticipate and respond to new market trends, and ensure that our clients’ needs remain pivotal to our strategy. While we are gratified at the broad range of awards that we continue to receive, we know that complacency is never an option. Consequently, we will continue to refine, enhance and expand our breadth of solutions, invest in innovation that benefits our clients, and employ the best qualified and effective people in the industry to enable our clients to meet tomorrow’s challenges and facilitate treasurers in their ever growing responsibilities.
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