The 2018 Forecast: Wear Sunscreen, Take Your Umbrella

Steve Elms continues his annual series in which he outlines his thoughts for the year ahead. In recent years, the focus has been managing risk and improving efficiency during an extended period of uncertainty and turbulence. As Steve describes, the forecast for 2018 seems brighter, and treasurers need to support and facilitate growth without being complacent about ongoing instability and risk.

For the past few years, our discussions have centred around global uncertainty and turbulence. To what extent does 2018 look different?

We have definitely seen an upturn in confidence over the past few months with improving economic conditions, such as GDP growth and the easing of the asset purchase programme in Europe. There are signs too that we may be moving from the ultra-low interest environment that has characterised the past decade in the US and more recently the UK. This more positive environment is being reflected in our interactions with customers and the projects in which they are engaged. While the past few decades have seen more of a focus on cost management and consolidation, we are now seeing a greater emphasis on top-line growth through expansion into new markets or customer segments, and we expect this to continue into the year ahead.

Despite brightening on the horizon, storm clouds are never far away, and geopolitical issues and areas of instability remain. In Europe, for example, populism continues to hold sway. Even though this was not reflected in the overall outcomes of the recent Dutch and German elections, the results themselves were telling and the outcome of the recent Austrian and Czech elections and events in Catalonia illustrate its influence on the political landscape. During 2018, we will see more clarity on the future relationship between the UK and Europe which in turn will drive corporate decision-making, including in treasury, which may have been held off so far. Protectionist policies also continue to play out in the United States, emphasised by the proposed tax reforms and renegotiation of trade deals, and an overall focus on national over global interests.

Even so, we are seeing greater momentum amongst clients to undertake new projects and embrace innovation, increasingly focusing on growing the top line. Consumer behaviour is changing, The shift from ownership to access, and changes in the way products and services are consumed, as evidenced by the significant growth of the sharing economy and changes to distribution of goods and services such as subscription models, all illustrate the rapid pace of change in consumer behaviour. 

What does this mean in practice?

Whilst we can observe different rates of digital adoption, we should expect that all industries have or will undergo notable disruption in the coming years. These advancements have allowed for new entrants or fundamental changes within the business itself to emerge. Corporations will need to review and adapt how they do business to remain competitive and meet evolving customer demand. During discussions with corporate treasurers, we have observed three key areas of focus.

Adapting to real-time 

The new generation of real-time versus ‘batch’ payment processes is just starting to emerge, but the consequences for treasury and finance teams will be tremendous. As real-time payment schemes are adopted, along with the exponential adoption of APIs to support real-time processing and data flows, the ability to accelerate processes such as reconciliation, cash positioning and liquidity management will be fundamental. To highlight the extent of proliferation, there are currently real-time payments in 18 markets globally and this is set to double in 2018. In addition take-up for these schemes will rapidly grow as the value proposition extends beyond C2C and B2C payments and collections into B2B, and we will see continued adoption of new market places and ‘as-a-service’ models. The impact to treasury will be significant and will drive further automation and straight-through processing that will ultimately result in an autonomous treasury function 

Centralisation and automation

These themes are familiar to most treasurers, with the focus on ‘doing more with less’, but we are seeing an uptick in projects to improve financial and operational efficiency, control and cost management. We see an increase of treasury functions evaluating how to leverage systems and investments in infrastructure to increase automation and process efficiency, while others are rationalising account structures to improve visibility and control over cash and introducing virtual accounts with payments and/ or receivables on behalf of (POBO/ ROBO) techniques. 

In addition, we see an increase of projects that are the result of mergers, acquisitions and disposals that are driving efforts to increase efficiency. Treasury plays a fundamental role in both the execution of the deal and the subsequent integration or spin-off of business flows and internal processes.

Despite the pace of innovation and digitisation across almost all aspects of business, trade has remained a relatively slow, manual process with numerous variables. However, digital developments in processes, such as centralised bank guarantee issuance, and information flows relating to trade are increasingly important for clients looking to leverage bank platforms to enable better visibility, control and consistency. The benefits of new technologies have the potential to be significant for all trading parties by improving turnaround times, reducing costs and accelerating access to funding. Banks themselves are leveraging Robotic Process Automation (RPA) to automate the data capture of trade documentation, improving efficiency. There are a number of discussions about the use of RPA in shared service centres to increase automation but these conversations are also extending to include core treasury activities, such as aggregating and analysing data. While these discussions are still at an early stage in most cases, there are some clients that are moving quickly to take advantage of these new and emerging capabilities. Similarly, there is also significant potential for distributed ledger technologies (or blockchain) to shape treasury in the future and revolutionise the flow of trade documentation, although this impact is unlikely to be felt strongly in 2018.  

Risk management

As noted earlier, while corporations are investing in growth, they remain conscious of geopolitical, economic and social instability and as such, identifying, measuring and managing risk, including interest rate, FX, commodity and credit risk, remains a priority. The specific pressures, and therefore risk management priorities, will vary according to industry – for example, aviation, chemicals, packaging and other industries continue to manage exposure to oil prices closely.

It is not only financial risks that are occupying treasurers and finance managers. Every treasury debate and every customer discussion now highlights cybersecurity risks and the ongoing challenges to protect the organisation. For example, we are seeing significant attention in our Fraud Awareness Toolkit and Payment Outlier solution.

Given the balance of market and commercial risk and opportunity in the year ahead, and the broad range of issues and challenges with which treasurers are faced, what advice would you give?

This is the time when many treasury functions are setting out their priorities for the year ahead, so it will be essential to make sure that appropriate budgets and resources are assigned. This includes internal initiatives, but also essential projects to manage wider business challenges such as the implications of Brexit, where 2018 will be a critical year for preparation. I would also urge an ongoing focus on risk and cybersecurity, as these issues will remain crucial irrespective of the future shape of the economy.

Treasurers should not only be acting’defensively’, however. It is important to be proactive and work with the business to understand and anticipate disruption and change, and ensure that core treasury issues – liquidity and risk – are not negatively impacted. By doing so, there is the opportunity to influence and actively contribute to the future success of the business, whilst maintaining strong treasury fundamentals.