The Future-Proofed Corporate Treasurer, who will he/she be?

One of the few merits and benefit of the recent long pandemic is the repositioning of corporate treasury, closer to the C-level. The treasurer’s role has become more visible, as after every crisis, with a more focus on his/her future role, more strategic and more as a partner of operating businesses. We want to address the key priorities for the coming years and how the treasury department skills must evolve.

Fast-changing role in a fast-changing world
In a fast-changing world, the corporate treasurer’s role had to adapt and evolved a lot in the last years. In such a moving and complex landscape, treasurers must keep adapting and on-boarding the right skills and mindsets within their teams. I would not say their role became more strategic, as it has always been, by nature. However, I believe treasurers must become better business partners. There is room for a better collaboration between finance (i.e., treasury) and operations. Furthermore, treasurers can play a key role in ESG, in M&A and in finance department general digital transformation. In the meanwhile, their role is broader and may cover new areas. Technology and fintech’s, associated to API’s, are the best friends of treasurers in their quest to repositioning their role. Obviously, each crisis is a new opportunity to put treasury in the limelight and to make it more visible. The COVID crisis brought new challenges or reinforced existing ones. They have a fantastic opportunity to make something of it if they are proactive.
But to be more strategic or more visible, treasury must act smartly and demonstrate capacity to change things, to be resilient and to create value. When value has been created, it is equally important to communicate it to the c-level. The opportunity comes from the demands from the operating businesses and subsidiaries, in terms of guidance, risk mitigation, new methods of payment, ways to enhance customers experience, as well as suppliers’ satisfaction, or in terms of way to tackle new markets and emerging countries with all implied complexities they bring. They must calculate, evidence, and present the added value they brought to convince the management of the value of investing in treasury IT solutions and human resources. Treasury should also explain why they need new skills and profiles to complement their teams and increase their delivery capacity.

Much more than a simple risk manager
However, the modern treasurer is much more than that, if he/she properly take responsibilities for which they are perfectly fit. The treasurer can also become a commercial partner of the operations. For that, the treasury must be agile, proactive, and looking how to best help and support operations. For example, in centralization FX risks and in automating them, they can enable operations to sell/buy in local currencies of counterparties and get them hedged by treasury via automated dynamic hedging processes and tools. Then, they bring value to operations and a competitive advantage to the company. It also passes through a better understanding of the underlying businesses of the subsidiaries, from commercial and operational sides. By offering new methods of payments, new ways to collect funds, they also bring valuable support to operations, while enhancing working capital.

Increasing role in M&A
For couple of years, we have many M&A operations. Nevertheless, the corporates and the real economy is victim of the extremely dynamic acquisitions by Private Equity Funds. The corporates are more selling and spinning of assets rather than buying new ones. One of the problems wit spin-offs is the decoupling and how individual assets without own treasury will survive. It implies periods of decoupling and again complexifies life of treasurers. We should also consider that in decoupling some staff members can leave and make life heavier. It is therefore important to involve treasury team into the M&A operations as soon as possible to organize exits (spin-offs) or/and acquisitions (for integration).

New e-payments
There is a major change in payments too. We see emergence of crypto currencies and even Government digital currencies (i.e., CBDC’s), new methods of payments and even SWIFT has started to develop faster payment methods. All these new e-payment methods complexify the life of treasurers. But it also opens doors to opportunities. Payments are now possible in real-time and enables payments against deliveries. Time is the issue and treasury doesn’t escape to this basic principle. In a very competitive environment, it is essential to offer customers and suppliers alternative payment solutions. The adoption of new online business models during the pandemic has made it more important than ever for companies to offer customers access to the right payment methods. The speed of execution and speed for paying and collecting may soon impose to manage cash even more dynamically and to review treasury positions even during the day. With all these new payment methods and by on-boarding new ways of dealing, treasury can bring a real added-value to the business.

“Please little treasure” (Depeche Mode)
One of the most complicate tasks of modern treasurers is and will be recruitment. You cannot imagine how complicate it is to recruit different profiles from his/hers and to change what you have always done in recruiting colleagues in treasury. Yet, it is crucial to start shifting recruitment habits, to get rid of past requirements and to search for other types fo profiles more adapted to future needs. I recently saw a large tech American company recruiting for its treasury department executives with R studio and Python skills. It proves that mindsets have changed. Herding is not the right approach. We need new sorts of sheep. Priorities have changed and IT become so important that we must diversify our team skills and competencies. The good news with companies well organized and highly digitalized, home working works well and doesn’t increase risks. But it is also important to maintain a good team spirit, a good coordination among treasury staff, given the nature of our business. The new way of working was for lots of us a catalyst for changes and automation. We should not forget soft skills too. These skills also become important to fulfil this evolving role of treasurer. Appetite for innovation, curiosity, openness to changes, ability to work alone (with increasing home working) and the desire to improve the organization are certainly the main qualities I would suggest considering when hiring future members of the treasury team. The future treasurer will have to partly work remotely and should be prepared to work in solo. It also means that recruiting treasurers in future may be more challenging and difficult. Working from home is great and appreciated by many workers. However, in treasury, working as a team is key especially when processes are not completely and well automated and secured. Digitalization is in my opinion the first pre-condition for successful homeworking. Without, your business would be at risk.

Increasing role of technology
Technology has enormously changed over the last years and keeps evolving fast(er). Nevertheless, it also offers opportunities to enhance the treasury organization and to reach the next level of digitization. It is a challenging situation, but with high potential of disruption and improvements. Of course, no IT project is simple to implement. The good news come from the fintech’s proposing native SaaS solutions, which are more adaptable, customizable and fit for needs, while cheaper and faster to implement. Once implemented (and it requires new / additional IT skills), the challenge is to analyze data produced and better reporting to make use of it and take faster decisions. The digital journey started years ago is suddenly reaching the next level and can be accelerated, if properly addressed. We are still far from the final developments and capabilities machines will offer. Nevertheless, we can feel the great potential and need to prepare our teams to these coming changes and to adopt the right technologies, rather than to patch new solutions or ETL on IT legacy, often outdated and not anymore adapted to the needs of the groups. An example of area where AI has demonstrated capabilities to help treasurers and to enhance significantly results, is cash-flow forecasting. Some IT systems offer even real virtual accounts (i.e., not the bank IBAN’s) to completely change the way treasury is run and to reduce to a tiny portion the number of bank accounts. IT and new technologies, as well as Fintech’s and API’s, will become the best allies of treasurers to broaden further their boundaries. For example, the acquisition of Bellin by COUPA may pre-figures a move into the procurement and a better integration of the financial chain by treasurers, who can see their role extended given technologies. Treasurers are fantastically placed to be “the controllers” of all key financial flows within the corporation.

Sustainable treasury
We all know that ESG and sustainable finance are also changing the function of treasury. The growing focus on sustainability and Environmental, Social and Governance (ESG) factors will continue in the coming years. Treasury may play a major role in this new way of doing finance. The ESG must be embedded in finance decision processes and having an ESG fiber, an ESG appetite may be qualities searched by recruiters. A good and clear ESG strategy may also be a good factor for attracting new young talents, often interested in ecology. By this role in ESG compliance, treasurers can bring value to the business and to operations.

You will not become a modern treasury by miracle
A modern treasury function, adapted to a changing and global world must be build and created gradually, based on solid technologies and evolving teams. With a broader role and new missions, the treasurers must develop skills or hire them. Treasurers need to understand new technologies if they are to fulfil their “broader mission” effectively and will need to onboard colleagues with broader and more tech-oriented skills to adapt to the changing environment. An open mindset and diverse skills will be an absolute necessity to cope with new duties and evolving tasks. Treasurers must be able to manage changes and be open to changes, which is often a counter-nature attitude to adopt.
The chance is somewhere the recent COVID crisis, which as each crisis brought focus on treasury function. It is also a fantastic opportunity to re-design the treasury function and to adapt to changing environment. Obviously, all those changes require new mindsets, new skills, and a more adapted and diversified team to fulfil new missions and roles. Such a role requires a services mindset and ability to serve customers, even internal ones.

François Masquelier – Luxembourg December 2021

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

Pro’s Treasury for everyone

Treasury, perhaps because it is still considered a mysterious and complicated function, is often neglected or even non-existent in many entities, funds, or companies. However, no one can deny its usefulness and the benefits of a dynamic management of treasury and liquidities, financial risks, and an optimized banking relationship. We explain how to adopt professional tools easily with, if necessary, the support of treasurers.

Renewed interest in treasury

For various reasons, such as persistent negative interest rates, an economic crisis consequence of COVID 19, a sharp increase in fraud cases and cyber-attacks, a need for more efficiency and productivity and other technical reasons, there is a renewed interest in treasury management in certain industries (i.e., SME’s, Private Equity Funds, Fund Admin, Family Offices, …). No one can deny the difficulty of getting on-boarded by banks. For various reasons, banks are becoming more selective, in particular because of increasingly strict KYC requirements, increasingly cautious banks, a lack of profitability for certain clients (e.g., Private Equity Funds), the absence of a banking strategy among clients who disperse themselves by working with too many banks, and above all a lack of digitalization and banking connectivity (penalizing bank’s profitability). The customer is too often used to forget the interest of its banker. Forgetting the interest of its counterparty leads to a radical reaction from the latter. Therefore, let’s ask ourselves the question of how to get the banker’s favor and ensure on-boarding.

The solution to all problems

Yet, a smart and easy way to facilitate on-boarding by banks, to increase productivity in the management of front-office operations, to reduce financial costs and to mitigate operational and financial risks is to automate and digitize treasury management. The good news is that it is possible to implement simple, efficient, and automated treasury solutions at very low cost to facilitate and consolidate the banking relationship (given the savings on the banking side), while reducing costs and risks. The idea is simple: why not adopt an IT cash management tool like what multinationals use? There are platforms, in SaaS native mode, that can be implemented in a few weeks, which enable you to manage your cash flows and treasury operations in an efficient and effective way. The idea is to install a single bank gateway and to totally get rid of the tons of tokens in the drawers and remaining manual payments (via scan documents). You’ll think that having a high-performance vehicle at low cost (i.e., low implementation costs and reasonable monthly costs), is great. However, without a “driver” to manage the tool and the treasury, it may look complicated. Nevertheless, you can find a treasurer to manage your liquidities in “Treasury as a Service” mode (i.e., outsourcing), to achieve the same results as larger multinational companies, but a very low cost. We think of platforms such as FENNECH or STP, for example. And so, by setting up such a platform, with the use of an experienced treasurer in “rental” mode (subcontracting), a fund, a “family office”, a large SME can obtain the same performances as professionals of treasury.

A simple idea

The idea is to set up a native SaaS treasury management platform, a sort of APP’s store, with “à la carte” (customized) applications, to manage liquidities and FX like the largest multinationals. If you have any doubts, consult a treasury specialist who will analyze the return on investment and show you that such a platform will revolutionize your cash management and make you the banker’s best friend. Such a solution offers an impressive ROI, an ultra-fast pay-off and virtuous consequences.

By mixing and matching the applications and functionalities you need, you get the complete set of the perfect treasurer at low cost. If you add a “Treasury as a Service” solution, you get an efficient and unstoppable result. You will be able to manage your value date positions, invest your excess cash more prudently, more dynamically and more profitably, produce more relevant (tailor-made) reports, keep your bankers happy and improve your financial management by significantly reducing the risks of fraud. Not to consider professionalizing or “uberizing” your treasury management under the pretext of costs, complexity, or some complexes like “it’s not for me” would be guilty and a shame. By implementing an STP (i.e., Straight Through Process) the fund or family office will be able to automatically reconcile accounting positions, reduce costs and avoid any risk of payment fraud through digitalization and banking connectivity (via SWIFT). Who wouldn’t want to strengthen their internal controls? If there is a virtuous solution that is unquestionable, inexpensive, and easy to implement, it is this one. The qualitative and quantitative gains to achieve are immense and yet often ignored.

François Masquelier, CEO of Simply Treasury Luxembourg

Why is FX management still a big issue for Treasurers?

The perennial problem of FX management

After a long COVID period, we would like to explain why FX management remains a major issue for all treasurers. Among the different factors explaining this focus on FX we should mention and underline volatility, manual processing (mainly on the pre-trade phase), inefficiencies in some TMS solutions, absence of link between operations and treasury, globalization of businesses including more emerging countries and exotic currencies, margin preservation, which is key and (accounting and compliance) reporting, also essential and too manual. For all these reasons and many others, FX management remains, in general, in top three risks and priorities for corporate treasurers.

1. Margin preservation

Foreign Exchange exposures management remains essential in an extremely volatile economic context to preserve our business margins. Some currencies can refrain from selling to some counterparties to avoid related FX risks.

• Manual Processing

We notice that among our treasury community, a lot of peers have still heavy manual processes around FX management and over-use XL spreadsheets to make the link and fill in the gaps of their systems.

• Volatility

Although we have always faced market fluctuations, the current health crisis has exacerbated the volatility, which can have deep P&L impacts if not properly hedged or monitored. Time is an issue and daily swings could kill margins in couple of minutes.

• Reporting

Effective reporting on FX management (i.e., financial and accounting/IFRS) requires ad hoc IT tools and often more than what TMS’s are proposing. It explains why some vendors bought other solutions to complement their suites or why treasurers use ad-on’s or ETL solutions to make the job. Same issue is notice for EMIR reporting (although highly simplified since refit).

Lessons learnt from the last crisis

The two major lessons learnt are: further centralize and further automate processes to become more efficient, more resilient and generate added value for the group. It appeared clearly in recent surveys (e.g., EACT 2021 or PwC Global Treasury survey) and frequent talks with peers that one of the means to sort FX management issues is technology. The first problem starts with collection of total and net exposures. Without good estimate and FX forecasts and without a precise view on underlying exposures, no way to effectively manage FX risks. The identification of underlying exposures is essential and requires discipline, coordination with affiliates, tools, policies, sound strategy, and rules. The sooner an underlying risk is identified, the faster it will be hedged. As volatility and more importantly intraday volatility increases, time becomes the key to successful FX strategies. Depending on the underlying businesses, the strategy and the one-to-one approach make the more sense, providing you can hedge immediately 24/7. Who can claim he/she is doing so? Therefore, no doubt, the sooner and the more automatically you hedge an exposure the better you will be protected. Couple of minutes may cost a lot in terms of pips lost (or gained). In industries with low margins under pressure because of health crisis, it became even more important to survive. Furthermore, theover-hedging given economic circumstances is back and reinforced by COVID. It explains why it is important to identify risks, ad hoc hedges and to unwind the surplus if, and when any. To track efficiently the over-hedging is not as easy as it looks like.

Why not fixing it so?

Having talked to CFO’s, some told us but if it is a major issue why not fixing it as there are solutions. There are solutions to complement TMS’s. Nevertheless, there are not that many. A common misunderstanding consists in believing FX platforms solve problems. Maybe for a part of it but not if not fully integrated and orders automatized for its feeding. The reasons listed above, explain why some corporations are still far from being fully automated for their FX management: e.g., lacks in TMS’s, absence of coordination with operations and interfaces with their IT tools, reluctance to changes and love stories with XL or no audit of weak internal controls around FX management. But time has changed and the momentum for revamping strategies and processes has increased, given COVID consequences. Thus, the first step is to get a firm commitment and sponsoring from the C-level. You also need a comprehensive review of programs and strategies, which are often lacking. No strategy, no policy, means no efficient hedging process. What do you want to achieve at the end of the day? Do you know that lots of treasuries do not have policies and procedures in place and no documented and tested internal controls? The approach should be clear, written, policed and programs in place to be systematically applied. Systematicity is also the key to succeed (no exception and no breaks in hedging with 24/24 policies). But, as always, (treasury does not escape to this fact) we all have a lack of human resources. It even reinforces the idea of automation to free up this precious and scarce time. It is virtuous if by reducing workload, you increase availability of resources for more added-value and analytical tasks.
Education and communication are required

It is difficult to change things without explaining the reasons and demonstrating benefits. Although it is easier than it seems. For example, a solution like KANTOX can make precise estimates of your savings and benefits. People are not always aware of the importance of internal controls to mitigate risks and of being consistent and systematic when hedging. The risks of errors and frauds have been exacerbated by COVID and lockdown. We still overuse XL spreadsheets for doing what systems cannot deliver. A pity and an increasing risk: the risk of XL errors because it is a personal and individual tool, not enough robust these days (although useful for other purposes). FX management is not only highly manual or too manual but also not the most interesting process, as hedging can be extremely heavy and repetitive. Delegating hedging of volumes to a (machine make sense to allocate free time to analysis. Hedging exotic currencies or monitoring currency pairs with high IR differentials can give you a competitive advantage on peers. Treasurers need to enhance their soft skills to communicate better and educate the management on what should be done and why it hasn’t been done so far.

From a problem to an opportunity…

It appears that the FX management function and role is increasing over years. It consumes lot of energy because it remains highly manual. We must say too manual. It important because of market volatility (e.g., Turkish Lira or Rubble reached historical low levels) is increasing and margins are tightening, because of the economic crisis. FX management becomes more strategic and not only a “finance topic only”. The objectives and policies should be agreed and approved by the C-level and the strategy and procedures by the Treasury Committee. We can notice a general lack of ad hoc technologies, even when treasurers have state-of-the-art TMS’s as they cannot execute everything. We need an additional layer to manage in a comprehensive and efficient way the FX management. Treasurers (in general) remain too XL-dependent for management, reporting and dashboarding. XL is not robust enough, risky as error-prone, usually belongs to one employee and is not structured, shaped for being used by many. Reporting of the FX risks and exposures as well as IFRS remain complex. No one could contest that CFO’s usually complain about the poor quality of FX reporting produced by TMS’s. Usually, you need additional tools to effectively manage the FX risk automatically. Robots and RPA’s can help up to certain limits. Therefore, treasurers should better “sell” the needs for automation given growing importance of FX management.

Take-aways

We can recommend to first assess current situation, define pain points and weaknesses and areas for improvement, contemplate solutions to automate processes to hedge 24/7 for freeing up time for more analytical tasks. By being more consistent and systematic in applying an FX policy or a strategy. Adopt a one-to-one approach, if you can, but with machine to make treasurer’s life easier and start hedging in exotic currencies to give your sale forces a competitive advantage. Often, companies refuse to deal with countries with exotic currencies and high differential of interest for financial reasons and not for commercial reasons. COVID has increased uncertainties and underlying cancellations or delays in deliveries impact P&L under IFRS (e.g. roll-overs, de-designations, re-designations…). It requires perfect coordination between operations and treasury to track all changes. Centralization of FX management is also key to succeed. Concentration of expertise at HQ treasury level is an obvious best practice. Volatility will not disappear soon, we guess. Time will remain “the” main issue. Therefore, machine can overcome this problem and systematize the hedging approach for consistency and increased efficiency. Machines also enable the dynamic hedging, and to mitigate swap points noise and impacts into P&L, that’s the cherry on the FX cake. If you have problems, talk to your peers and to specialists to contemplate new best-in-class solutions.

François Masquelier, CEO of Simply Treasury

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

Technical problems, like weeds, always come back…

When a corporate treasurer is asked what the main pain points are and technical issues they encounter in their day-to-day work that consume resources, time, and energy, they often answer, invariably, KYC procedures and signing authorities (among a few others). At a time when technology is sending us into space and cars are flying on electricity, isn’t there a gap? How do you explain to a young treasurer that nothing could be done? Yet, solutions are finally emerging, and we don’t talk about them enough.

Maintaining banking relationships requires the exchange of documents

You cannot maintain a banking relationship without being in order in terms of KYC and signing authorities. Without this, if you are missing an LEI or UBO, you will be blocked or even banned from dealing with your banker. In the digital age, what a nonsense it is to exchange paper documents by mail or at best by email, right? Why should certain activities or tasks remain manual and risky? This is the question to ask, as solutions emerge. Compliance for various reasons, such as banking relationships, auditing, risk of prohibition to deal, risk, etc… is vital for everyone. No one doubts it anymore. But why not automate what can be automated and which causes so much trouble, without bringing any added value to the business, unfortunately? The problem comes from the risk of error, from the repetition of requests and the sending of information, for example, in the context of KYC, the signing powers. In large groups, they change very (too) often, creating unnecessary stress for any company treasurer. What if the Messiah had finally arrived without you knowing it? Miracles also happen in treasury…

Digitization of signing authorities, the long-awaited solution.

Why would it be so expected? Simply, let’s think about the very low added value of this repetitive and laborious, yet risky activity. While every CFO expects his/her treasurer to increase productivity by digitizing and transforming his/her department, and additional human resources cannot be considered, we continue to favor the manual for a vital (even if boring to death) process. Paper-based processes are still costly, risky, inefficient, and potential sources of human error. Teleworking has only crystallized this need to change the way we work digitally if we are no longer in the office. As is often the case, the manual nature of the process implies the repetition of data entry without guaranteeing completeness. Why repeat computer entries when you could do it once, guaranteeing the segregation of duties and the four-eyes principle? The fact that the banks each apply different processes and procedures, depending on the network or country, adds to the complexity of the exercise. Keeping powers of signature up to date and being sure that they have been communicated to your banking partners (and others) in due time is never a given nor a certainty. This adds an avoidable layer of stress to the treasurers’ work. The archaic or too basic transmission methods add another layer of risk, which modern technology and the subject matter do not allow to be tolerated.

The more centralized the treasury activity and the more you operate as an In-House Bank or Payment Factory, the more complex this subject becomes. The number of entities included in the scope can make the task, if centralized, simply impossible, or inhuman. In addition, it generates enormous risks that are too often underestimated by management, internal audit, and the CFO. And yet…

Never sure to get the full picture

One never has the full picture nor the assurance that all records and accounts are in order. It is the risk and uncertainty that creates this stress for the treasurer, who is ultimately held responsible if the accounts are not in order from a signature point of view. However, when you think about it, it’s like a certain bus, train, or plane ride, you get the impression that it takes and has always taken the same amount of time, as if technological progress had stopped there. What a frustration, no? It’s the same with KYC and signing authorities, a desolation that some feel they must endure forever. This is a point that we often hear from the treasurers we meet in Europe. A kind of insolvable fatality…

Standardization and digitalization

The worst risk is for a corporate to have forgotten to notify a bank of its changes in signing authority. However, even if perfectly organized, it remains a risk when it is done manually. To have a solid, robust, exhaustive, and up-to-date database (re. PoS/Power of Signature), the process must be digitized and systematized. This means standardizing and then digitizing the signature powers and their secure transmission. Moreover, let’s not forget that this will greatly facilitate the external audit, at the end of the accounting year. The keystone is digitization, the only way to finally solve an age-old problem for treasurers. Ask a “Z gen” member of your team and they won’t understand that the problem hasn’t been solved yet, and they’ll think you’re backward. Let’s also remember that beyond the obvious gains for your company, there are also significant gains for your banking partner. It’s time to tackle a recurring problem and get ahead of your peers. A solution like DELEGA seems to me a “no-brainer”. If you are wondering how to be more efficient and effective, this point must be addressed. Start with what costs you the most, brings you the least and bores you deeply. Do not fear change, because here it is beneficial and virtuous. I believe that this process of digitalization is integrated with the adoption of (e)BAM (i.e., electronic Bank Account Management) and KYC solutions. Human nature is such that we don’t tackle the things that make us angry and upset first. Yet, that’s what we should do. I have sometimes thought of an ideal treasurer’s world in daydreams, and guess what, among other things, I had imagined, an automated and digitized KYC (including signature powers). The dream seems closer than ever to reality.

The panacea

When credentials change, for whatever reason, speed is of the essence. The sooner the bank updates the credentials, the safer the position of the corporate client. Fraud has only increased in recent months, perhaps exacerbated by COVID. Even more reason to protect yourself further, isn’t it? Moreover, treasurers too often forget that banks could only be happy, prefer and value this type of approach, thanks to the savings they will be able to make and get from it. Banks (all of them without exception) have started to select their customer portfolios and one of the criteria is and will be digitalization. Any bank will prefer a fully digitalized customer to a partially or not digitalized one, because of the intolerable costs involved. There will come a day, not so far away, when banks will demand it or charge the right price for not digitizing. You must be aware of this and explain it to the C-level. The treasurer is also tired of depending on the bank. Furthermore, it takes time to banks to adapt required changes. This latency can lead to many problems, even if the treasurer claims and proves to have transmitted the information on signing powers in due time. The risks also come from the different processes and requirements from the banks (it differs from bank to bank) making its life even more complicate and increasing risks of lacks. The bank fragmentation complexifies the tasks of treasurers (i.e., 45% of companies in Europe have 3 to 10 banks and 25% have more than 10 banks). It seems undeniable that a virtuous, win-win solution is advisable, anyway. Tell me what CFO would be foolish enough not to validate a solution that has only advantages, on both sides (i.e., buy & sell sides)? the key element is the risk and the possibility to mitigate it strongly for a process that is high risk, by its very essence. I love it when cash flow shows real technological advances that revolutionize everyday life.

François Masquelier, CEO of Simply Treasury November 2021

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

How virtual could the bank accounts be?

Virtual accounts are a concept often proposed by cash management banks. However, behind the concept there is a need to give more clarity on the terminology. We would like to differentiate “real “virtual accounts from the Virtual IBAN Accounts. The “real” virtual account concept offers broad functionalities and opportunities to increase efficiency and to reduce costs of cash management. Let’s discover how.

Value of Virtual Accounts

Virtual Accounts have been a fashionable topic among corporate treasurers for couple of years. We have though the impression they are more popular at bank level than at corporate level. What they are and how they can improve reconciliation, cash liquidity and payments are frequent questions addressed.

Often, we can hear that Treasurers can use virtual accounts to increase the efficiency of the working capital processes. Virtual accounts have the potential to deliver benefits to help reconcile and allocate client monies. It is useful for large collections businesses such as utilities, insurance, etc.… that can use virtual accounts to improve their heavy reconciliation processes and accelerate account reconciliations to “free” credit lines of customers. Of course, that helps treasurers with high volumes of domestic cash flows coming in from different legal entities, in disparate locations and denominated in several currencies. The virtual accounts can streamline cash management processes and even reduce the drain on staff. Broadly speaking virtual accounts are mostly used as a synonym for Virtual IBANs, what is most of the time what some Banks offer. Yet many Virtual IBAN schemes do not provide all the benefits claimed for virtual accounts.

Definitions of what we consider as Virtualized Bank Accounts and Virtual IBAN Accounts

We would suggest the following definitions to separate Virtual IBANs form real Virtual Accounts:

Virtual IBAN Accounts or Payer ID. (i.e., V-IBAN): a range of account numbers (IBANs) offered by the Bank to the Corporate. The Corporate then assigns an IBAN to a subsidiary, business line or counterparty to identify transactions relevant to that entity on a single bank account.

Virtualized Bank Accounts (i.e., VBA): the comprehensive concept, a true Digital Cash Ledger overlaying a few masters or settlements accounts maintained with Banks, all working exactly in the same way as a real bank account. In this scenario, the Virtualized Bank Account can book any type of transaction and maintain a cash balance for the entity “holding” the VBA.  What you call “Real Virtual Accounts”

 Advantages of VBA over V-IBANs

It is important to make this distinction between the different types or definition of “virtual accounts”. Of course, the second category (V-IBAN) has its benefits and present strengths. However, the first one offers a more holistic solution and is the sole true and comprehensive virtualization of bank account.

Let’s dig more into the subject:

A V-IBAN (or Payer ID), is a list of bank account numbers or references all linked to the same real bank account (i.e., one per customers even if millions of customers). You can immediately identify who paid. It may be useful for B2C businesses, to identify payments without references. It is indeed a sort of key helping corporates to sort and filter transactions to reconcile and book them correctly, job they still must do themselves. It is important to highlight here that the offers may greatly vary from one bank to another (assuming they have such an offer), but also you may face unexpected limitations like EURO only, or payments only and not direct debits, or ACH only and not urgent payments.

On the other hand, and to make it simpler, Virtualized Bank Accounts are sub accounts that effectively replace physical current accounts, with payments and collections routed instantaneously through these virtual counterparts to a linked master account. Like normal bank accounts they maintain a balance and can be managed following a set of credit and limits rules and do not present some of the V-IBAN limitations we have seen above.

Not to make it more complicated, it is possible to combine both offers that indeed may be more complementary than it initially looks. A Treasurer can overlay with one single virtualization process several real bank accounts maintained with several Banks and benefit in a harmonized way from the various V-IBANs / payer ID solutions.

The real value of Virtual Bank Accounts

The advantage with all type of virtual accounts is that banks can keep in control of the physical account, while treasurers create and administrate themselves as many shadow accounts as possible that they need, increasing efficiency by reducing complexity. In simple terms, as a Treasurer you can dramatically reduce the number of bank accounts to a handful, while allowing the businesses to open as many as they need.

VBA’s present advantages and benefits despite the need of appropriate tools. They can be an alternative to traditional cash management solutions, help centralizing treasury functions, be a substitute to liquidity management tools, reduce costs while increasing efficiency, enhance Straight-Through Processing (STP) reconciliation, and simplify bank relationships by reducing number of accounts at minimum. More importantly they allow a treasurer to harmonize the virtualization of all its accounts irrespective of the Banks and their capabilities (as we have seen not all V-IBANs are equal). What matters is simplicity: one process whatever the Bank, the country, or the currency, isn’t it? Something you cannot get directly with the various offerings from Banks.

It is worth mentioning that virtual accounts are not a new concept. In fact, products that bear a striking resemblance to modern virtual accounts have been around for the last two decades, providing corporate treasurers and SMEs solutions for specific purposes. In a regulatory landscape becoming more stringent and with higher customer demands, combined with cost cutting focus and in a fast-changing world, the interest in virtual accounts has intensified. Operating bank accounts become an issue as the related costs keep increasing. KYC checks increasingly require more effort and disclosure.

Virtualized Bank Accounts for an effective In-House Bank (IHB)

While not a new concept, only a few MNCs have today managed to build and run a comprehensive IHB. That has taken them years, significant investments, and has proven to be not particularly cheap so far. Some even applied for a Bank license to do so, in the pre-PSD era.

Virtualized Bank accounts may eventually become the backbone of a company in-house bank system. Typically, companies look for key banks serving multiple products in multiple markets. With virtualized bank accounts, they can rationalize and get full control on their own bank account management. Have you ever dreamt of opening, amending, managing, or closing yourself your bank accounts, in a matter of seconds without having to fill tons of paper forms?

The idea is to rationalize bank accounts in two ways. First within a single legal entity by closing all bank accounts that have been opened over the years for accounting or segregation purposes, and second at a higher level within a group of companies by the virtualization and use of payments and collections on behalf of (POBO/COBO).

Not only very useful to manage and sort payables and receivables, reconcile and allocate them as we have already seen, but such a technology is also very appropriate to build a new type of liquidity management that we call “native cash pooling” Instead of managing daily sweepings between several bank accounts to centralize liquidity on a master account, in that case all liquidity is natively held on that master account, and the virtual accounts represent the various balances related to subsidiaries or businesses. No need to sweep cash physically anymore, you only need to daily track and book intercompany loans and borrowing positions. Virtualized Bank Accounts allow now to manage segregation of funds, intercompany loans, and borrowings management properly and automatically, booking, interest calculation and distribution, but also thin capitalization monitoring and risk and credit control.

Also, with such a structure, you can avoid complicated and useless processes and benefit from better trading conditions. Imagine your affiliate in Honk-Kong must pay USD. It will buy USD from the HQ treasury center (or from the local bank). Then it will instruct the bank to pay USD to the supplier in USA. Conditions aren’t always maximized and optimized locally, as volumes are lower. The treasury fully controls payment timing and related costs. With the IHB, the payment is directly transferred by the HQ on behalf of its affiliates and generates intragroup transactions and potentially current account movements. With virtual accounts, treasurers could even imagine one single bank account per currency to manage 100% of their treasury into a complete IHB. Companies like Fennech Financial Ltd offer now all of components and services required to run a highly automated In-House Bank. The price is much lower than you can think, in such a way that return-on-investment counts in months, not years.

Virtualization of the organization for efficiency increase

 Clearly, one issue in processing incoming payments across any type of Virtual Account is the difference in naming between the beneficiary (who holds a Virtual Account) and the legal entity holding the actual bank account. This issue should be considered on the compliance and legal angle. While current European regulation and practice manages this reasonably well, this may not be the case for all the accounts and entities everywhere else in the world. But even in that case, virtualization of bank accounts at legal entity level still provides significant benefits, overlayed by the usual traditional tools you already use. Obviously, the power and size of the system and its smooth integration with your ERP must be appropriate. It requires organization, discipline, and new support processes. If you take out the small local bank, treasury becomes the only contact and can be inundated by local affiliates with questions. What we mean is that it is not only a question of IT, but also to revisit the organization and the processes.

Take-aways

In conclusion, it is possible to leverage virtualized bank accounts to enable a ‘payments and collections on behalf of’ structure, a native cash pooling, internal short-term loans, centralized FX management, or netting, all leading to a comprehensive in-house bank. Virtual account concept has been certainly mispresented or wrongly named by banks. Virtual accounts promise corporate treasurers many benefits in terms of enhanced cash management as well as providing a clearer overview on company’s accounts, allowing treasuries to have a largely more influential role within organizations. interest in Virtualized Bank Accounts will rise significantly now virtual account management (VAM) platforms offer treasurers a simple out-the-box solution. These give them ability to reinvent treasury management. That is not the future but the reality you should consider.

François Masquelier, CEO of Simply Treasury

Luxembourg

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

BEPS, the logical tax shift

The 15 BEPS actions have profoundly changed our tax and financial universe. They are the logical consequence of crises, and they result from the will to restore more tax equity between countries. It is a groundswell, inevitable and which reshuffles the cards between jurisdictions. It changes the choice between the most interesting locations to establish one’s financial center of decision. The tax element is losing its importance as a determining criterion of this choice, to the detriment of other criteria that should be considered more carefully.

World tax reconstruction

BEPS, an acronym that did not tell us anything and that today speaks to all financiers. The OECD, thanks to the work of Frenchman Pascal Saint-Amans, has played an important role in the modification of tax laws allowing to put an end to banking secrecy in certain countries and to international tax evasion. However, there is still work to be done in the framework of this long and delicate mission of tax reconstruction. In the space of a few decades, tax laws have evolved considerably to put an end to certain practices such as tax evasion. A lot has happened since the financial crisis of 2008. The framework in which we were evolving until then has been profoundly challenged. The main founding principles of BEPS and its 15 actions were: transparency, substance, and consistency, which were too often lacking. They tackled aggressive tax planning by implementing the “Base Erosion and Profit Shifting” project initiated by the G20.

Harmonized corporate taxation, a myth?

Most recently, the OECD reached a framework agreement on the taxation of multinationals, which imposes a minimum tax of 15% on these companies from 2023 (on October 8, 2021, the Organization for Economic Cooperation and Development announced that 136 countries have adhered to the Declaration on a two-pillar solution to the tax challenges raised by the digitization of the economy). With this latest decision, we have reached the end of a logic of coherence and relative equity. We know that it would be futile to think that we can put an end to all attempts at tax optimization, but at least we now have a sort of safety net against the reduction or avoidance of the tax burden of these structures, which guarantees that they do indeed pay a minimum tax.

Substance

It should be noted that ATAD 3 will target companies or hedge funds without substance or personnel, which have no real activities in the country, and which exist essentially for tax reasons. Hedge funds have understood this in Luxembourg, for example, by increasing their staff and local presence to avoid recharacterization. It will certainly take some time for all players to react and get up to speed. Time is also needed to obtain clarifications on the rules adopted. Progress has been made. However, we still must hope for the publication of documents interpreting the rules and case law to see how the authorities react. It does not seem that outsourcing 100% of these regulatory, accounting, tax and other activities and obligations is the way to go. Hiring experts for part of the financial and treasury activity, for example, is a way to protect against this tax risk and at the same time to develop more efficiency and reduce costs. If there is one thing to control internally, it is this. 

No more tax havens?

Some countries that are rightly or wrongly called “tax havens” have cleaned up their tax organizations. But it remains particularly difficult to change their reputation. However, each country has to think about where to place the regulatory cursor to allow the development of business without facilitating tax evasion. It is a delicate balance to find. We must accept the idea that this work is linked to a macroeconomic evolution: the transition from a globally closed economy to a globalized open economy. In this context, to achieve more effective regulation, most large countries have agreed to lose some of their fiscal sovereignty to international rules. Of course, there will always be some small countries that will jump into the breach by proposing more attractive tax regimes, which has obviously been taken very badly by the large countries, which are obliged to respect more restrictive rules. We have also seen that the trade wars launched by certain giants are in nobody’s interest. For small countries, it is therefore much more interesting to also comply with international regulations, to avoid suffering even more damaging consequences. So, in this context, some people ask whether tax optimization is still possible. It remains possible and advisable. However, as we know, some countries are still trying to exploit loopholes in the current regulations to make themselves more attractive, using optimization maneuvers that are not based on any legal provisions.

Game changer

There is also an element that has changed the game completely, it is information technology. It will undeniably have a role to play. It has already done so within the framework of the BEPS project, with the implementation of the automatic exchange of information, particularly regarding rulings, inter-company operations and other international tax structures. So, it is difficult to claim that the world will be more just and more balanced socially and economically. However, it is understandable that from an ethical point of view and to protect the public finances of states that have suffered some serious crises in recent years, such measures were finally adopted quite easily. This fight against tax evasion may be perceived as partisan but unfortunately it is very real, and it is therefore necessary to adapt to it because it is only the beginning at a time when we are talking about BEPS 2, DEBRA and ATAD3. This is a tax dimension that has a significant impact on the finance function. The purpose of international tax regulation is to regulate what cannot be regulated spontaneously and self-disciplined. There is an emergence of populist movements, whether we like it or not, that are pushing for more transparency and tax fairness. Companies have had to adapt to and accept this. The tax factor has become minor, or less preponderant, in the choice of the location of a cash center. It is true that regulations always bring their share of constraints and reports to be issued or audits to be carried out. However, all this tends to ensure the sustainability of the system and its resilience to future crises. We must accept that international taxation continues to evolve for more justice, say its supporters, and more constraints, say its opponents. It is up to us to adapt. In a more standardized world, in terms of financial and tax regulations, the determining criteria for choosing the location of cash centers, funds and other structures will change and priority will be given to the expertise and competence of the places. It will be necessary to distinguish oneself in a different way by know-how, political and legal stability, multiculturalism, and flexibility.

François Masquelier, Simply Treasury – Luxembourg December 2021

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

When should you hire a treasurer and develop a dedicated treasury department? Then, when should you implement a treasury tool? These are the questions we aim to answer. It is complicated because there is no perfect answer. It depends on each case. However, technology and outsourcing allow us to equip ourselves like the best. So why should we wait? We give you some keys.

Threshold for hiring a treasurer

I have often heard the question of how big or small a company should be to have a dedicated treasury department and an experienced treasurer. This is a tricky question that is impossible to answer. At most, we can give indications of the size and complexity that require a seasoned treasurer. But unfortunately, there is no perfect answer. I would say: it depends. However, like Monsieur Jourdain (i.e., Molière) who was writing prose without knowing it, every company does treasury operations, at whatever level. In the smallest structures, it is often a Financial Director, an accountant or any other person versed in numbers and equipped with a version of EXCEL. Not doing treasury is unfortunately impossible. When you pay down a loan tranche, fix a rate, hedge a foreign currency, cover a negative current account position, place cash in a bank deposit, you are doing basic treasury, perhaps without knowing it. The problem comes when the transactions become more sophisticated, numerous, complex, and daily. This is where a solution is needed. It is twofold: either you hire a dedicated and specialized person, giving him the technical means, or you decide to subcontract to experts who manage the treasury daily.

Technology at the service of treasury for all

The beauty of technological evolution and new IT solutions is that they allow today, with “SaaS native” solutions, to manage cash easily and to implement these tools quickly and at low cost. The days of Treasury Management Systems (TMS) reserved for large companies because of their high price are over. There are now more affordable and accessible solutions. The cost and implementation time factors are reduced and enable access to smaller companies. However, the problem remains real. You offer me a car, for a reasonable budget, but unfortunately, I don’t have a driver’s license. What should I do? The solution is to hire a driver (i.e., a treasurer) or to outsource to treasury specialists, with tools.

Treasury, as a mean to reduce financial costs

However, treasury is virtuous because it allows to reduce costs, by the implementation of cash-pooling, by a dynamic management of excess liquidity, by a consolidated and centralized approach of the debt, by the automation of payment processes and reconciliations, by the reinforcement of internal controls, by the expertise when hedging financial risks, by the application of coherent strategies of the banking relationship, by the negotiation of the fees and margins applied, etc… Having a treasurer has a cost, can be a luxury, but it also enables to significantly reduce costs. Doing an ROI for medium sized companies that would not think they are big enough to justify a tool and a treasurer, are often surprised by the result. It’s amazing and encouraging. This is why I bet that many SME’s or mid-cap’s will have tomorrow a professional treasury worthy of the name, as efficient as those of multinationals. The same goes for hedge funds, Manco’s and other family offices, which will be able to have their cash managed like the big guys. No, cash management is no longer and will no longer be the sole preserve of large international companies.

Treasury for all

In the future, treasury will be available to everyone, and every company of a certain size will be able to manage its treasury in a dynamic, professional, and efficient way, thus greatly reducing its financial risks. The technology, by its progress, allows faster implementation and more affordable system rentals. The icing on the cake is that the missing element, the treasurer, or the expert, can also be outsourced to experts. We can only encourage companies to have this type of diagnosis performed, often free of charge, to measure the usefulness of this management and the qualitative and quantitative gains generated. You will no longer be able to write prose without knowing it, like Monsieur Jourdain in Molière.

François Masquelier,  Simply Treasury  –  December 2021.

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

The digital transformation of treasury departments is inevitable. It has already started intensively and very fast. Most MNC’s are on the road to digitalization. But this road is long, uncertain, confusing and complicated. What will be the right roadmap and points of attention? These are the questions this article tries to answer. Let’s try to imagine what our treasurer’s future will be or be. A future that will be, no doubt about it, promising.

Treasury fiction

It is always difficult to try to make "treasury fiction" without running the risk of falling into clichés and common places. Yet, no one can claim that the treasury function has no more than any other in finance evolved significantly over the last ten years. What does the future hold for us? The acceleration of changes, the advent of a new generation (i.e. “Z”), which will revolutionize the way work is done, the logarithmic evolution of IT developments and innovations, and finally the new financial regulations are projecting us into the future at an overdrive. Change is now. Yet the difficulty is knowing how to take it and apprehend it. This is the most important challenge of the treasurer. The latest technical developments leave us with the reasonable expectation that what is imagined, wished and guessed is well on the way to materializing and being effective. The question is not so much "if" but rather "when". We need to prepare for a major change without knowing how far it will go. The fear of cannibalizing our jobs frightened more than one treasurer. Moreover, the use of subcontracting is not the real solution. At most it would be partial. We will therefore try to describe the axes of change that we will face and how best to apprehend them in a complex economic and political context and the most jostled. It is not easy to imagine one's future when the present is already so complicated and monumental. But the effort deserves to be tempted to draw its future, to prepare it adequately and to live it fully and serenely. It is a challenge of another order: a moral, mental and philosophical challenge. Being able to question yourself is the best proof of intelligence and resilience possible. Before changing and evolving, we need to be mentally prepared and aware of all the potential consequences it may have.

“Back to the future”

Treasury should be rethought by CFO’s and Group Treasurers to face the growing risk management challenges. Chief Risk Officers are worry about the best way to adapt the organization of their whole finance department, including their treasury department, to (better) react to the increasing and new risks in a faster and more efficient way than currently. The treasurer must become at the same time risk managers (what they have always been) and strategic or/and business partners. CFO’s according to couple of recent treasury surveys seem to have a full confidence in the ability of treasurers to support them to navigate through complex issues, new financial risks and uncertainties. The CFO ideally should have full faith in his/her treasurer to protect the corporation with best-in-class risk management techniques and tools. The treasurers must accept this new enlarged role and adopt a new vision more strategic than before and more long-term based. Usually, treasury is focusing on short term issues and now should develop long(er) term approaches. To revamp treasury is likely linked to a further digital transformation, promised for years by Treasury Advisory Guru’s. To explore new ways of working, treasurers need to consider new skills and to exploit further technologies. Nevertheless, resources remain tight. That makes the challenge even more complicate to face and sometime insurmountable. By successfully passing this complex process and by moving towards the second level of digitization, treasurers have an opportunity to play a higher-profile role in their future organization and prove an invaluable level of expertise. The timing to adapt is perfect as the whole finance function is under review too. It is great to have a vision of your future role, but you need to convert it into a practical implementation and better get a grip on the treasury transformation process.

Finance and Treasury of the future is now…

In a world that becomes increasingly interconnected, how could CFO’s and their treasurers creating more effective partnerships to deliver a strategic vision of the future organization? One thing is accepted by all: risk management and FX risk are on the top of our list of concerns. They are under pressure to do more without the ad hoc resources. However, digital technologies can play an increasingly important role to bridge gaps between limited resources and expectations from CFO’s. The world is marked by uncertainty and market environments change faster than before. The treasury must ideally be very agile, which is not its first known quality. The challenge is the following: spend time (which is sorely lacking) to gain through digitization to devote to the strategy for which the preliminary analysis is necessary. This technical analysis will be facilitated by the advent of technology such as artificial intelligence and other algorithms. Paradoxically, when CFO’s would like to have a longer-term vision, the market volatility has never been so high, with the impact of the inextricable geopolitics. The role of CFO’s evolves from tactical towards strategic. Therefore he/she logically looks for partnerships. Treasury, after the Global Financial Crisis, has gained ground and is in a much better position to take a (more) strategic role, providing he/she is equipped for. To take this new role, treasurers must have access to information that no one else get. There we need more forward-looking analysis, based on solid data analytics. I would like to list two interesting examples: cash-flow forecasting based on algorithms and predictive analysis on one hand and capital allocation and optimized working capital on the other. Often, we noticed that CFO’s are aware of the potential of treasurers, but not necessarily convinced on paper of their expertise. The treasurer should start working on convincing skills to make sure the CFO is aware and got the trust in his/her (hidden) potential. Vis-à-vis the affiliates, the treasurer can also bring value for example on new e-payments to bring value to operations, by using virtual accounts and SWIFT gpi to increase reconciliations. There are two hurdles to consider: (1) the treasury communication towards outside world must be improved and (2) KPI’s and dashboard to evidence what they defend.

Enabling treasury to grow as a strategic partner

By stepping up their risk management practices, treasurers can play a more strategic role. To do more, you need to save time somewhere and to save time in automation and STPization of processes, you need resources and money. A vicious circle, isn’t it? However, it is the approach we should adopt. It is tricky to demonstrate his/her potential without investing in time-saver tools. To free up resources, the only way is to invest in robotization, automation, STP processing and AI. Treasurers should be convincing in “selling” these investments to their boss. Personally, I don’t think outsourcing treasury operations is the best solution. Although some groups have decided to opt for that route. I always have preferred to keep control of my operations. The best news, automation and even more robots can save money too (e.g. less resources, less risks, less errors, less stress, …). The objective is to re-organize the resources to better allocate them to added-value and valorizing tasks. Treasurers are still struggling to work out on how to deliver this brave new future. ROI’s are a way to demonstrate value generated. For example, automation of bank fees controls (via BSB messaging) through a dedicated tool is easy to quantify, fully automated production of reports can be valued in man days and therefore in EUR. The digitalization of treasury is a pre-requirement for reaching an evolved strategic role. More centralization is also a pre-requirement. There is a need to pool expertise in a single location and to build treasury functions that are greater than the sum of their parts. The fast-paced state of flux and the search for speed is key (e.g. gpi, instant payments, …). To prepare this transformation, treasury needs to hire other talents, more IT oriented than before.

Technology & Automation, the 2 drivers…

The shift of function from predominantly technical towards strategic business partner is not a secret for all of us. However, the path to reach that level remains mysterious. Group Treasury has become a center for excellence in regulations, compliance and technology. But regarding technology, we could reach a higher level with the 24-hour processing and instant-focused approaches. Technics enable to work remotely more easily but in the meanwhile, millennial treasurers expect less static at work hours. The internal controls need to be reinforced because of hacking and IT piracy. These evolutions require different skills at hiring and more tech or data experts. Treasurers should become sort of internal consultants. The head of the department will have to upskill his/her workforces with change management, AI and robotic developed knowledge’s. Treasurers will be real-time risk managers and the speed element will become crucial. The stake will be the access to data and the capacity to understand how to re-unite isolated pools of data distributed across the group, to drive treasury efficiency and reach better decision-taking processes. The ability to generate value will be the key driver. It is difficult to play the oracles and the Pythia to prejudge what our future would be. However, our forecasts do not seem illusory or fanciful. The future is also what we want to do.

Digital Transformation – “From – To”

Digitization or digitalization?

The “digitalization” is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities. The “digitization” is the process of changing from analog to digital form. Digitization means automation of a process by digitizing information and injecting technology for automation. These terms are often mixed up and there is a real confusion between both. At the end of the day, we all know what they mean when used. At least it is useful to know the differences in terminology to better understand what cover. Next time you will read it, you will consider the meaning more carefully. Nevertheless, the important element is not the meaning but the objective targeted. Open banking and fintech’s will help changing our business models. The Berlin group is working on defining a common API standard (the so-called NextGenPSD2), which help moving a step forward. The speed will be the driver for these changes. We need faster processes, like new e-payment methods faster or completely new to respond to retail-users’ expectations. The digital agenda of treasurers is aimed at simplifying, removing complexity where they can, improve transparency and traceability, free up resources to “do more with less” and to secure further processes.

How to successfully transform your treasury?

Once you have recognized and identified your challenges, acknowledged the need for partnership to deliver better risk management (e.g. via predictive tools, revisited policies, …) and offered new solutions to affiliates (e.g. new e-payment methods), it will be time to raise your voice and explain your added-value potential. One of the key success factor resides in the co-creation and cooperation with affiliates. What can you bring them? If you answer these questions, you will find your way on the road to transformation. The future treasury will be maybe smaller, smarter and more responsive. They will be more effective, proactive with real-time information and decision-making tools, with predictive features (e.g. on cash-flow, FX risks, working capital optimization recommendations, etc…). By acceding to more data, treasurers will be able to make more accurate recommendations. Repetitive tasks will become trivial. Treasurers will focus less on processes and more on analysis, simulations and investigation on exceptions. He or she will become technology-driven strategic advisor to leadership. Their pieces of advice, if good and documented, will place them in front within the finance department. Technology will be user centric, integrated and developed faster. The PSD2 has opened a new era of collaboration and is promising. Nevertheless, a further degree of standardization is prerequired. Treasurers are often facing “chicken and egg” situations and need sometime to on-board solutions even if not fully on-boarded by all sell-side. Don’t wait for the final solution, be part of its construction!

This treasury revolution could be compared to the one faced by the automotive sector. We all want everything to change quickly and well. Alas, things do not always go as fast and easily as technology can. It is impossible to convert in a day every car into full electric ones and to have recharge stations across Europe, at every corner. We cannot go faster than the music. Changes take also some time. We should never neglect human resistance to changes and be prepared to fight it. On top of that, we are highly dependent on computer and IT legacy and the complete revamping is not always feasible at once, even if we see some groups daring to tackle it. Future looks promising. The most difficult thing with this necessary journey is the question of where to start. Our future will be digital.

François Masquelier, Chairman of ATEL                              

No one can deny the difficulty of getting on-boarded by a bank. This is even more true when you are a fund (whatever the type of fund). Due to increased caution, fear of reputational risk, the need to be hyper-selective to prevent huge fines, more stringent KYC and AML rules, and unmet profitability on fund customers and especially Private Equity Funds, banks are becoming obstacles to the alternative funds and the funds administrator’s business, at the risk of paralyzing an industry that is lagging behind in terms of digitization.

Technology is vital to improve data sharing efficiency, accuracy and reliability

In a recent excellent article by Shanu Sherwani, who encouraged private equity funds to move quickly on the path of digitalization, we understood that it was high time to wake up the consciousness. Paradoxically, we have the impression that private equity funds are investing in high technology without being digitalized themselves. Yet I can only corroborate this alert (see article AGEFI November 2021 – Luxembourg). The wake-up call could be painful if we don’t want to change anything. Yet no one can argue with the benefits of technology in terms of efficiency, security, internal controls, productivity, and reliability. Isn’t it obvious? Investing in the digitization of processes is beneficial and virtuous.

Fight against money laundering

It is obvious and no one will dispute it that the fight against fraud and money laundering remains a priority which has obliged the regulators to reinforce the regulatory arsenal, of which the KYC requirements (i.e., “Know Your Customers”) are only the most familiar part for the treasurers of companies or (alternative) funds. These rules, which aim at prudence and the fight against the danger of fraud (i.e., KYC and AML), have been added to time and time again, at the risk of becoming extremely burdensome for any banker, costly and a source of fines in case of non-compliance. This explains why banks, especially the so-called “systemic” banks, are so cautious. Paradoxically, some rules can hinder or prevent doing business. It can become counterproductive. Banks have therefore reviewed their strategies for on-boarding clients, sometimes to the detriment of certain categories, such as hedge funds. The second reason for this more restrictive selection is the objective of concentrating on clients with the highest potential (and lowest reputational risk), and therefore often the biggest fish. The third reason is related to the second one: the low degree of automation (and the high manual nature of transactions and payments) increases the cost for the banks and at the same time increases the risks (operational and fraud). The last two reasons are independent of KYC and therefore are two factors that the customer can influence. I think it is therefore possible to at least act to increase one’s chances of being on-boarded by a bank. The selection by the bank is strict and requires the client to be stricter in the choice of his banking partners and to define a clear and appropriate strategy. We believe that these KYC/AML rules will only get stronger. The EU has announced a review of these rules in the near future.

How to facilitate bank on-boarding?

It is precisely by automating operations with the bank, by establishing a banking connectivity through a secure channel, such as SWIFT, that we will facilitate the execution of payments and the repatriation of bank statements, to automate the accounting reconciliation. It sounds magical and yet so simple. Corporate treasurers are used to this approach. In addition, a company always adopts a banking relationship strategy to avoid dispersion and concentrate the flow of transactions with its bankers. The problem with hedge, private equity or alternative funds is the relatively low deal flow (compared to a corporate), which reduces the profitability opportunity for the bank. This brings us back to the crucial question of the client’s profitability in relation to the risks and energy the bank devotes to it. The paradox is that alternative funds investing in high technology are also resistant to treasury financial technology. The final element is to hire a treasurer (even part-time) to reinforce and professionalize the banking relationship. They are used to this type of relationship and know how to optimize it. The recipe is therefore far from being complicated or magical. It is also virtuous in that it considerably reduces the risks on both sides, to the banker’s great delight. Setting up a “bank single gateway” makes it possible to secure flows and automated reconciliation reduces risks and time spent. More dynamic cash management becomes possible and, on top of that, reporting is improved. This is made easier by the fact that native SaaS technology exists (e.g., FENNECH, STP, A352, Hazeltree,…) and that alternative funds can outsource to treasury professionals without disrupting their IT systems or incurring implementation costs. Testing a specialist and doing a pilot is the best advice I can give. The result is guaranteed, and your banker will see you in a completely different light. Treasury should not be entrusted and left to accountants, with all due respect to this profession. The solution exists and only needs to be tested.

To believe that it is all about more fees is wrong

Some alternative funds naively think that the solution will come from simply paying more fees to bankers. This is obviously not true. The industry with its “super returns” has forgotten the basics: a bank account must be profitable for a banker. Negative interest rates are starting to hurt. Currency volatility is also becoming an important element, not a secondary one, as margins erode. The industry continues to perform well, and this hides the problems that are wrongly considered as secondary. The tree hides the forest. But the problem is there. Some fund administrators have decided to become banks or similar, believing this will solve all their problems. We will see that it is obviously much more complicated than that and that there are common sense solutions and a more coherent and focused banking strategy that allow to be more efficient. You must select your partners more efficiently and strategically. The mistake would be to not approach treasury and the banking relationship carefully. Digitizing the treasury function would fill many gaps and prevent many on-boarding problems.

François Masquelier, CEO of Simply Treasury

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

Tough or impossible return to the office…

The covid has changed our lives, no one can deny it. The way we work has changed radically and suddenly. We have gone from all “on-site” and physical presence to all “home working” and no physical presence. The middle ground and the future of work, we are told, will be hybrid and a mix of telework and on-site presence. But one perverse effect of these forced confinements is that many employees have become complacent. They get up in the morning and take the time to have breakfast with their children, drive them to school or to the gym, have lunch at home, play sports more pleasantly than running into the exhaust of cars in a city center, etc. So, this new comfort, without more “communting”, without traffic jams, at home, in the garden, without car traffic, train delays, stress and travel fatigue, pleases many. They have “daddyfied” themselves. They are well at home, safe and work with a new and pleasant flexibility of schedule. The return to work stresses them, anguishes them and disturbs them so much they appreciated this new life. They have become sedentary and are asked to become work nomads again. This is a new syndrome, the confinement syndrome. It is perverse because if everyone would like to work more from home, a 100% is not possible or sometimes not possible (case of workers from abroad) for social security or tax reasons.

A different working world…

So, the world will become hard and cruel and there will be bore-outs, nervous depressions and other problems, related to the return to normal, even if it is different. The world has changed and the return to the way things were before must be gradual to be successful. Salespeople in any organization will tell you that virtual meetings are usually easy to get. However, we find that physical meetings on site are much more complicated to get. The new life must be rethought to avoid clashes back at the office. These executives have become “grandaddyfied,” so to speak. We do not think that they work less or less well but differently and that taking away what was, for many, royal will hurt a lot. We fear great danger and discomfort in the teams, and we must be prepared for this. However, simply adjusting schedules and hybrid work will not be enough. They have developed bad habits that will be difficult to correct. Everyone now dreams of working from the country house in Normandy, the vacation home in southern Italy, being close to a beach, the mountains, and their loved ones. But the harsh reality of the working world is different and does not allow it or will not allow it anymore. The shock of returning to the office will be hard and will leave its mark on everyone. Some don’t think about it and don’t prepare themselves for it.

Virtual networking and asocialisation

For the social aspect of the job, the same principle applies. I will virtually follow conferences say the most pro-active, I will no longer go to networking events say the laziest and this essential aspect of professional life will isolate them, stigmatize them, weaken them and make them very vulnerable. We can fear a lack that will be fatal when changing position, company, job, … Life is a choice and we will have to make it but wanting as the popular French adage says: “the butter, the money of the butter … and the smile of the creamer” is perhaps utopian. The world of before was not so bad as that and adapted slightly can prove to be beneficial and more effective. The world of the covid is no longer and can no longer be. Some people forget it at the risk of having a painful and fatal awakening, sooner or later.

Be prepared to come back to work

We must be prepared for it, not dread it, and find the right balance to satisfy employees and employers. A virtual workshop can be efficient, good, and satisfying. But nothing will replace a good old-fashioned meeting in the presence of colleagues where ideas are exchanged, and where we understand each other better. The effectiveness of a face-to-face brainstorming session cannot be challenged by a ZOOM or TEAM conference call, without body language, sometimes using voice alone and with the weaknesses of technology to boot. In a world of perpetual and rapid change, we must adapt and the post-covid will force us to reinvent ourselves as long as we put water in our wine and forget the special parenthesis of lockdowns.

Business as usual?

It is a situation for which there is no playbook. We therefore need to adapt as best as possible. Of course, there are people looking forward to being back to work, because of lack of social networking, too small apartments, inconveniences of kids at home, etc… and there are many. They are also afraid of missing out. Especially young people need to network by spending time in the offices, learn through informal exchanges and get a peripheral vision which is harder to do in a GOOOGLEMEET or WEBCONFERENCING lands. But the others who enjoy covid lockdowns would love to stay at home for working. These employees have appetite to missing out. Coming back to workplaces may be in many cases a change, to be managed properly. We are not yet at a point where we can say there is one approach that is working well. It’s about being prepared to innovate and try different things. There are many considerations, cultural, regulatory, and contextual matters to contemplate, which make choices difficult for management. Refusing to face a guaranteed problem as this would be foolish and risky.

François Masquelier, CEO of Simply Treasury Luxembourg.

Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).