Thriving in the 2020 Treasury Ecosystem

As we enter a new decade, treasurers must learn how to juggle their traditional responsibilities alongside the new reality of disrupted business models and game-changing technologies, says Steve Elms, EMEA Region Sales Head, Corporate and Public Sector, Treasury and Trade Solutions, Citi. Proactive engagement with treasury stakeholders – existing and new – will be paramount, together with sustainable business practices and a healthy dose of creative thinking.

TMI: How has the treasury outlook shifted over the past year and what eventualities should treasurers prepare for over the coming 12 months?

Steve Elms EMEA Region Sales Head, Corporate and Public Sector, Treasury and Trade Solutions, Citi

Steve Elms (SE): What’s markedly different from last year is the growing need to balance the demands of ‘traditional’ treasury against the requirements of the ‘new’ digital business ecosystem. I’m not just talking about evolving treasury technology and the growing value of data – these themes are important, but there are wider issues that treasurers need to have on their radar too.
For example, digital business models are disrupting supply chains, cutting out distributors and enabling business-to-business (B2B) organisations to sell directly to the end customer. As a result, financial flows are changing and treasurers have a critical role to play in enabling all types of customers – business and consumer – to pay the organisation as easily as possible.

The nature of business is also shifting as a result of the increasing awareness and focus on Environmental, Social and Governance (ESG) factors across a range of stakeholders. Treasurers are not immune to this change. On the contrary, they are increasing expectations and driving change by exploring green and sustainable financial instruments and embodying sustainable values in their day-to-day running of the department.

Meanwhile, traditional treasury responsibilities such as efficient funding, cash management and comprehensive risk management remain front of mind. And faced with an ever-growing list of topics to keep on top of, treasurers will need solid stakeholder partnerships in order to continue to do more with less. Being a true strategic partner to the business, in particular the marketing and sales departments, as well as engaging with technology providers internally and externally, and banking partners, can plug treasury fully into the stakeholder ecosystem. And by engaging and empowering those stakeholder relationships, the ecosystem can thrive.

TMI: You mentioned that traditional treasury responsibilities are still critical – but are these changing too?

SE: Absolutely – there are underlying trends influencing the nature of cash and liquidity management as we head into 2020. For instance, investor concerns around return on capital are putting pressure on treasurers to focus more closely on working capital efficiency. As a result, treasurers are continuing to explore new and creative ways of looking at improving their days payables outstanding (DPO) and looking at solutions to finance receivables as a means of reducing their days sales outstanding (DSO). Inventory finance solutions are also being explored by a number of treasurers.

The other ‘traditional’ issue with a contemporary twist are the interest rate environment. The low and even sub-zero rate environment is now becoming more of a global phenomenon as more and more Central Banks look to stimulate growth. With this in mind, treasurers are gearing up for the possibility that some currencies that have never previously displayed negative interest rates may do so in the near future. This will complicate returns and yields and treasurers will need to think creatively about contractual arrangements and where to leave their cash.

Of course, the ongoing trade tensions continue to play out, impacting foreign exchange volatility and supply chains. Treasurers will need to keep a close eye on geopolitics as 2020 progresses, with continued nationalist rhetoric potentially adding fuel to the fire.

TMI: We can’t talk about treasury in 2020 without mentioning technology. How do you see technology changing the role of the treasurer?

SE: The pace at which technology is advancing is unprecedented and treasurers certainly see the potential benefits – which is why so many treasury teams are taking on technology transformation projects. We are seeing the rise of robotic process automation (RPA) as well as the shift towards cloud technology, especially in the TMS space. However, the true power of technology comes not in individual solutions but in a network of interoperable technologies. As such, investment in technology infrastructure will be critical in 2020 and treasury will likely need to engage more with their in-house technology teams and outside vendors in order to get a robust technology backbone in place.

In the wider context, treasurers should also keep an eye on the digital innovation coming from governments and regulators across the globe. E-Government initiatives including new Financial Market Infrastructure and on-line tax payment capabilities will likely become far more real-time and user-friendly. We may also see KYC and AML being transformed through governmental and regulatory innovation – so there are some interesting market developments to watch out for.

TMI: You mentioned earlier that business models are being disrupted. What impact is this having on treasurers?

SE: Treasury is now seen as a function that should help to drive business growth, rather than a backseat support function. In this environment, treasury has a significant role to play in enabling the sales and marketing teams with the correct payment/collection tools to help drive sales. This could be a solution to provide more time for customers or distributors to pay, for example, releasing working capital for the company’s distributors in a way that doesn’t impact the organisation’s DSO. The ability to create structures that free up credit lines is another way that treasury could enable growth.

B2B business models are also changing with new marketplaces developing across a range of industries, with increasing B2C flows and direct-to-consumer relationships. Previously, treasury may have relied on aggregated collections, perhaps an invoice driven procure-to-pay process that was very batch orientated. Today things are much more instant, with 24/7 payment and clearing cycles. Not only will this have a significant impact on working capital, corporate liquidity management and cash flow forecasting, it will also impact working capital management, because previously organisations may have been receiving funds on a 30-40 day basis, but funds could now be received on day one or two.

TMI: Being much closer to the end customer presumably requires treasurers to keep abreast of consumer behavioural trends?

SE: Definitely. A good example of this is the shift from purchasing and ownership to leasing thanks to the sharing economy. Consumers are no longer just leasing cars – they are looking at all kinds of aspects of their lives and questioning whether they really need to own goods outright anymore. Even baby clothes can now be leased! From the treasurer’s perspective, this will have a significant impact on working capital, and on the balance sheet – and it’s never too early to start thinking about the potential impact such a shift could have on financial flows and statements.

Consumer sentiment is also a factor in the rise of ESG. In today’s digital world, consumers have far greater information about who they buy from – with public scrutiny into supply chains, carbon footprints and corporate ethics. But it would be a mistake to think that ESG is purely being driven by consumers, or that it is still a tick-box exercise. Business models and technology are furthering the ESG agenda, but so too are employees and investors. As such, ESG is a topic that touches all of treasury’s key stakeholders, and a prominent theme for 2020.

TMI: What kind of ESG initiatives are you seeing treasurers involved with?

SE: On the credit and lending side, we are seeing everything from green bonds to Capex-related projects whereby treasury can link to a specific initiative that supports the organisation’s ESG goals. More recently, we have started to see the emergence of sustainable such as supply chain programmes – which offer pricing differentials between suppliers based upon their ability to meet certain ESG criteria.

Meanwhile, ESG-compliant deposits and investments are also gaining traction. There are a number of developments within money markets and we are starting to see the emergence of green MMFs, green deposits and so on. At Citi, we are also looking at rebate programmes.

TMI: What do treasurers need to make a success of their involvement in ESG?

SE: As well as a genuine appreciation for the importance of ESG, it is vital to have trustworthy data around all ESG-related topics – from supply chain activities to green investments. Without robust data internally, and from independent third parties, accusations of ‘greenwashing’ could potentially arise, and the reputational damage from such occurrences can be difficult to manage.

In addition, the partnership between treasurers and their banks is a vital ingredient in making ESG a truly mainstream business consideration. Financial institutions must reflect the demands of their clients and customers, and treasurers should not hesitate to ask their banks to present their sustainability credentials and solutions during RFPs, for example. At Citi, we have many examples such as creating some of the first financial sustainability goals in partnership with the UN and our $100bn Environmental Finance Goal.

TMI: Finally, how are banks adapting their own business models to the new normal – and what does this mean for treasurers?

SE: This all goes back to the stakeholder ecosystem – and banks are the lynchpin of financial flows within that ecosystem. To ensure easier movement of funds for all, banks like Citi are opening up their platforms to work alongside other banks and new entrants such as fintechs.

Partnerships are a great way of bringing balance and value-creation to an ecosystem and also ensuring that it evolves; working in isolation is no longer the way of the world. As the sharing economy takes hold, so too must collaborative networks that aim to feed the business ecosystem, rather than drain it. Treasurers will hopefully benefit from truly interoperable solutions, as well as more rapid innovation and efficiency, all of which should assist them in helping the company to thrive, rather than just survive.