Treasury Convergence: Technology-driven Business Model Transformation
Today, more than ever before, corporate treasurers play a critical role as they help their firms implement strategies and transform their business models amidst an increasingly unpredictable and complex environment.
The world is in flux, and businesses and the finance departments that support them, have to create order, efficiency and clarity so that opportunities can be identified and captured. From the convergence of geopolitical and demographic shifts, to regulatory change and rapid technological developments, the challenges facing today’s finance professionals require them to be more deeply embedded in their organisations, collaborating with colleagues in other business divisions, and driving innovation.
While change and complexity are not new for the seasoned finance professional, what is new is the pace and acceleration with which the change is taking place. These fast-paced shifts are resulting in a continually evolving set of liquidity and cash management needs, even as more and more of the treasurer’s time is spent on addressing the business’ long-term strategic plans. Needless to say, it is an exciting time to be in treasury!
Personally, this has been a particularly invigorating period for me as I reflect on the developments that I have witnessed in my last two decades in the banking industry. My experience in varied roles in relationship management, global markets, trade finance and cash management across North America, Europe, Asia, Australia and the Middle East has provided me with invaluable insight into my clients’ diverse and evolving challenges, as well as their winning strategies. More recently, together with my colleagues at HSBC, I have had the opportunity to speak with clients all over the world –in their offices, at conferences, and at the events we at HSBC host around the world. The message I have received from clients is clear – with so much happening at such pace, they need banking partners that are committed to both support them as they manage through today’s challenges, and help them transform their businesses for the future.
I am fortunate to be working for an organisation that is dedicated to responding to these imperatives. HSBC is embarking on a plan to invest USD 15–17 bn 1 in growth and technology over the next two years, demonstrating our commitment to helping our clients’ businesses thrive through digitisation and automation. We will do this while continuing to offer HSBC’s sector and market expertise, connecting our clients to opportunities in both the emerging and developed markets.
This report aims to bring together the insights we have gathered while speaking to clients, and to explore the changing expectations on the modern corporate treasurer amidst an unprecedented velocity of change. We hope that it provides you with insight into the converging trends that are driving business model evolution, and how we at HSBC believe treasurers can cope with these changes and ultimately make a significant impact on your organisation’s strategic agenda.
Section 1: Introduction
We live in a world where businesses face an unprecedented amount of change in the macro environment within which they operate. The Greek philosopher Heraclitus noted that “change is the only constant in life”. This rings even more true today.
The imperative to manage through a constantly changing macro environment is not new for businesses. What is remarkable however, is the velocity and degree of discordance of many of today’s changes, all converging to create a highly contradictory and ambiguous environment, rich with both challenges and opportunities that businesses must navigate.
Equally, finance and treasury departments, tasked with supporting their firms as they execute on their strategies, have to adapt, plan and operate in a world of converging, yet often seemingly conflicting priorities. They have to manage global financial value chains amidst globalisation and protectionist policies. They have to harness the benefits of technology while ensuring cybersecurity and data privacy. They have to maintain competitive advantage while participating in increasingly collaborative business ecosystems. And they have to drive game-changing innovation while mitigating risks to established revenue streams.
In this report, we explore these converging and conflicting trends, and discuss how treasury management needs to evolve in order to support their firms’ changing business models. To operate effectively and efficiently in a world where boundaries are both being broken down and put up, and where the quest for simplicity often creates more complexity, corporate treasuries are leveraging new technology and techniques, while also increasingly amalgamating their own siloes of financial operations and data in order to gain greater central visibility, control and insight.
Section 2: Convergence across the macro environment
In this section, we explore some of the macroeconomic, geopolitical and demographic trends that are converging to create the imperative for businesses – and consequently, treasuries – to adapt their models in order to succeed.
Globalisation dampened by protectionism
While globalisation has been breaking down geographical, financial, trade and information barriers and driving world economic growth, the recent wave of populism and nationalism is giving rise to protectionist policies aimed at safeguarding local industries and interests. For instance, on one hand, a number of significant markets such as China, Mexico, Myanmar and Saudi Arabia2 are striking trade agreements with new trading partners to open up their economies to the rest of the world, albeit often at a controlled pace. In contrast, other major economies are looking internally or taking protectionist stances in a bid to create what they perceive as a fairer playing field for their constituencies.
For example, the United States, in an effort to ‘make America great again’ is looking to protect its domestic industries by potentially putting in place higher tariffs on old and new trade partners. Countermeasures are expected, potentially sparking a trade war. And this is even before the ongoing, protracted debate on the trade environment for the UK and the EU post-Brexit is factored in. The resulting uncertainty presents a potential fragmentation of economic and financial markets that businesses need to plan for.
This balkanisation will have significant impact on firms’ global supply chains and their underlying financial value chains. From threatening the stability and consistency of supply of goods and services, to creating uneven regulatory regimes, and driving unpredictability of interest and foreign exchange rates, market fragmentation creates even greater complexity for firms and their treasury departments.
Corporates, therefore, need to assess the impact of potential trade wars – whether they are fluctuating foreign exchange and interest rates, the need to identify alternative sources of supply, or consider new markets for their products and services. Consequently, treasuries will need to embed efficient processes to establish visibility, control and mobility of cash across new counterparties – partners, suppliers or customers – and new geographic markets.
Rapid regulatory change
Alongside the redrawing of trading lines and shifts in policy comes the complexity of conducting business amidst a rapidly changing regulatory landscape. Regulatory complexity does not just come from different regulatory regimes from market to market, but also from varying regulatory approaches across industry sectors. And as industry sectors converge and business models change, so do the regulations that firms need to comply with.
Take privacy and personal data for example. In a digitised world, more and more information is being generated and shared – both knowingly and unwittingly – online. In response, the European Union has introduced the European General Data Protection Regulation (GDPR), which came into effect in May 20183. GDPR does not just impact European domiciled businesses – it applies globally to any organisation collecting, storing and utilising EU persons’ personal data.
And with non-compliance seeing the threat of significant fines, business models need to be adapted to ensure the compliant processing of personal data. Gartner, a research and consultancy firm estimated that over 50% of companies affected by GDPR would not have been compliant by the regulation’s implementation date4.
Applicable across the firm, GDPR also poses specific challenges for the corporate treasurer. Corporate treasuries hold significant amounts of transaction information – including names, addresses and bank details of counterparties, as well as data of employees. Treasury will, therefore, need to ensure that they meet GDPR requirements themselves, as well as ensure that their vendors are also treating data in compliance with GDPR.
GDPR is but one example of new regulations coming into force due to the changing digital environment.
Another example is the ongoing debate between businesses and legislators on the very definition of what constitutes a ‘worker’ in today’s business environment. With the rise of the gig economy and new business models created by platforms such as the transportation app Uber, when a worker becomes a permanent employee has become a grey area. Proponents of the gig economy value the freedom to work as and when they choose, while those looking more closely at workers’ rights are pushing for clearer regulations.
Individual industry sectors are also experiencing regulatory flux driven by macroeconomic and technology developments – from debates within the tourism and hospitality sector on how to address offerings like Airbnb, to the Net Neutrality issue in the telecommunications industry. As more and more industries go digital, the regulations governing these sectors will also shift to respond to new risks.
Corporate treasuries must, therefore, take these new risks into consideration, building agility into their systems and processes to enable swift compliance with changing regulations. Working with banking partners that are sector experts will also enable treasuries to have foresight into developments and how these may potentially impact their treasury management approach.