Published: August 09, 2010
As we reach the end of J.P. Morgan’s series on the issues that matter most to treasurers today, we take a look at some of the principal objectives that have been common to virtually every treasury both during and subsequent to the crisis. Firstly, companies are seeking to centralise their treasury activities, either physically or virtually, to achieve visibility and control over the company’s cash, investment and borrowing activities. Secondly, they are rationalising bank relationships, accounts and systems, to realise greater efficiencies and leverage the advantages of centralisation more fully. This article looks at some of the current drivers and enablers of centralisation and rationalisation, and how these initiatives can benefit the company.
Treasurers are now recognising the implications and potential benefits of SEPA more clearly, particularly since the launch of SDD.
For many treasurers, centralisation and rationalisation have been long-standing objectives; however, the crisis has intensified the business case and reduced internal resistance to change. During the crisis, difficulties in securing access to finance and the need to optimise the use of cash meant that visibility and accessibility of cash was paramount. In addition, many optimisation projects had to be postponed or frozen while budgets were constrained, so initiatives such as SWIFT connectivity or Single Euro Payments Area (SEPA) migration were often held off. As we see a start to the recovery, and new industry opportunities such as SEPA Direct Debits (SDD) strengthen the business case for centralisation of collections and SEPA migration, we see greater momentum for treasury optimisation projects amongst our clients.
Treasurers are now recognising the implications and potential benefits of SEPA more clearly, particularly since the launch of SDD. Some issues still remain, particularly around reachability of SDD, and the use of existing direct debit mandates in countries such as Germany. However, these are nearing resolution as, for example, reachability will be mandatory from November 2010 across the Eurozone. This means that there is now an effective start date for SEPA, which is proving a catalyst for migration amongst large corporates. While many were waiting for a mandated end-date of existing domestic payment schemes on which to base their plans, treasurers recognise that with a meaningful start-date and a defined business case, there is now the incentive to migrate to SEPA. This is a catalyst for further centralisation of financial activities and rationalisation of both internal processes and external bank relationships.
SEPA brings significant opportunities for centralisation. As the need to manage local clearing cycles and support local payment methods disappears over time, companies can implement standard processes and formats, making it easier to centralise payments into a payments factory or shared service centre (SSC). This will enable companies to leverage a single technology platform, reduce costs and rationalise the number of payment providers.[[[PAGE]]]
Many treasurers have sought to enhance the efficiency and control over payments for some time. Centralising payments is typically undertaken before other financial activities, such as collections, as companies have greater control over payment processes and instruments. A key part of centralising payments in the new SEPA environment is to select a pan-European payments bank. This is not necessarily an easy decision, as not all banks are likely to continue payments processing in the future. For major international banking players such as J.P. Morgan, payment processing is a primary activity today and will remain a key part of our strategy in the future. This ongoing commitment to payment processing is an important consideration in treasurers’ selection of a pan-European payment and cash management bank. Furthermore, as well as standardising the use of payments instruments under SEPA, companies can leverage industry-standard formats such as XML-based ISO 20022 together with pioneering proprietary banking technology and bank-independent communication channels such as SWIFTNet to enable real-time visibility over payments activity.
For collections too, SEPA brings considerable advantages. Collections have been difficult to centralise across borders in the past due to differences in payment instruments used by customers in each country, and the distribution of the collections function across sales channels. Internal resistance to centralising collections has often diminished as senior managers seek to optimise working capital. By rationalising collection methods, SEPA enables operational excellence and permits greater visibility and control over days sales outstanding (DSO). With a 140-character remittance information field on each transaction, the reconciliation process becomes more rapid and efficient as a greater degree of accuracy and automation can be achieved.
SEPA Direct Debit brings opportunities beyond today’s national or cross-border payment schemes. For example, cross-border direct debits are now achievable, which increases control and predictability of collections, and can be instrumental in reducing DSO. Under the business to business (B2B) scheme, authorised debits are irrevocable, providing creditors with certainty in their cash position and the ability to free up customer credit lines immediately. We believe that the SDD scheme brings the potential for companies to adopt new business strategies as it becomes far easier to deliver time-sensitive products and services without risk of non-payment.
The potential outcomes of centralisation and rationalisation extend beyond regional initiatives such as SEPA. From a foreign exchange perspective too, the recent financial crisis has had significant implications. The FX markets were highly volatile, so treasurers have focused on ensuring central visibility and control over exposures. Furthermore, companies’ choice of counterparties may have been limited by tighter credit limits or banks’ refusal to trade altogether. Treasurers have become increasingly aware of the need for a more dynamic approach to dealing with and anticipating the impact of market shocks on cash flows and exposures. By rationalising and optimising financial processes, both across Europe and beyond, and consolidating information, treasurers achieve greater visibility over FX exposures, and are in a better position to implement an effective hedging strategy, in line with corporate treasury policy.[[[PAGE]]]
For major international banking players such as J.P. Morgan, payment processing is a primary activity today and will remain a key part of our strategy in the future.
In some cases, companies’ needs will not be sufficiently complex to justify the use of specialist treasury management technology, and these treasuries may not have the resources to focus specifically on managing FX exposures. However, these companies still require tools to highlight exposures as they occur to allow them to respond appropriately, but delivered in a convenient and cost-effective way. To help treasurers implement an effective hedging programme conducted according to industry best-practices, J.P. Morgan provides both advisory and execution services, including automating external and inter-company FX transactions through a single solution. These tools promote efficient processes to reduce the resource requirement for FX management whilst ensuring that positions are neither over-hedged nor under-hedged, and delivering real-time exposure reporting.
A question we are asked frequently is whether SEPA will enable multinational companies that might have multiple accounts and banking relationships today to reduce their accounts to a single bank account with a single provider. It is certainly the case that SEPA will enable treasurers to rationalise their accounts and banking partners considerably, and many companies are choosing to work with a single pan-European payments provider. It should be achievable to reduce to one account once SEPA is fully implemented; however, there are reasons why a company may wish to retain more than one euro account, such as for making local tax payments.
By simplifying cash management across the Eurozone, treasurers are now looking beyond traditional cross-border notional pooling or zero-balancing, and looking to cross-currency pooling. Demands in this area are becoming increasingly sophisticated as simple cross-currency sweeps based on outright contracts are replaced by FX swaps, enabling companies to use cross-currency pooling as a means of managing short-term risk and optimising working capital.
By centralising cash management, which may also include rationalising account structures, there is also the opportunity to leverage new initiatives for enhanced efficiency and control. One example of these is the fledging project eBAM (electronic bank account management) which enables online account maintenance and signatory control. For shared service centres (SSCs) the benefits of this project, which are being realised jointly between banks, vendors and corporate customers, are significant, and at J.P. Morgan we are fully committed to the success of eBAM. With such considerable industry support, we are likely to see eBAM coming to fruition quickly, empowering corporate SSCs, reducing administration at both bank and corporate, and enhancing control.[[[PAGE]]]
SEPA is not a panacea to corporate treasurers’ centralisation and rationalisation objectives, but it is a catalyst for enhancing and standardising financial processes and structures, together with bank communication, relationships and accounts. By simplifying cash management at a pan-European level, treasurers can expand their focus from a regional to a global perspective more easily, leveraging opportunities such as bank-independent connectivity through SWIFTNet, standardised XML-based formats, eBAM, automated FX exposure management and cross-currency cash pooling. These initiatives bring significant potential for corporate treasurers to enhance efficiency, visibility and control over financial operations when working with a banking partner with the geographic reach, spirit of innovation, and resilience in financial processes. At J.P. Morgan, we are proud of our track record in supporting our corporate customers’ evolving banking needs and excited about the potential that SEPA and other industry initiatives offer to our clients. As a banking partner for the long term, we can help our clients to leverage these opportunities to create direct benefits for their business.
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