Treasury managers continue to face challenging market conditions.
Elevated geopolitical tensions, the current interest rate environment, and the recent banking crisis, together with the rapid digitalisation of treasury services and the dramatic growth of treasury related financial technology (FinTech) companies, are all transforming the landscape for treasury operations and practices.
Paul Fosse, Group Head of Banking and Treasury at JTC Group, sat down with leading treasury experts to discuss these trends in more depth.
Treasurers change course
Initially thought to be transitory phenomenon, the recent higher inflation and interest rate environments, – are starting to feel more like longer term factors for corporate treasurers to manage.
As interest rates increased, treasurers began to examine ways to extract a higher return from their cash holdings. Treasury professionals returned to actively managing bank deposits utilising call accounts, fixed term deposit, notice accounts and money market funds.
“When interest rates were ultra-low, treasury managers did not see attractive returns on offer from banks, resulting in funds staying in low-interest bearing accounts., This changed in 2022 and 2023 as UK interest rates increased 14 times in succession to the current level of 5.25%. Asset allocation to cash increased as a result clients now have the choice to hold cash as an asset class, rather than take the risk of investing into equities in a low growth environment.
“Asset allocation may well change again when interest rates start to fall, but the current rates on offer are certainly attractive to risk-averse investors.” said Jeremiah O’Keeffe, Managing Director at JCAP, a treasury and investment specialist, based in Jersey.
The focus on risk management is heightened
Fifteen years after the 2008 financial crisis, fragilities in the banking system were once again exposed in March 2023.
In the wake of events including inadequate corporate governance, over exposure to particular products, and lack of sufficient product diversification, three US banks – Silicon Valley Bank, Signature Bank, and First Republic Bank – faced a downfall. These circumstances were further compounded by a failure to respond in a timely manner to the Federal Deposit Insurance Corporation (FDIC) recommendations, inciting a flurry of deposit withdrawals. Meanwhile concerns about Credit Suisse’s health also saw a run on its bank deposits and triggered a shotgun marriage to Swiss rival UBS.
This latest banking crisis has prompted treasurers to think more carefully about their counterparty risk.
Depositor risk is the risk that a depositor takes when they place unsecured funds with a bank.
Professional treasury management should mitigate against depositor risk by conducting regular checks on their banking counterparties.”
Early warning indicators, such as an adverse share price movement or an elevated level of credit default swap can alert a treasurer to do a deeper dive onto whether the issues identified will lead to increased depositor risk.
“In certain circumstances it is the Macro risks facing an economy that can be of concern, and treasurers need to understand how macro risks may also impact depositor risk.” added O’ Keeffe.
Crucially, organisations need to monitor their exposures to all of their banking partners.
“A lot of people do not monitor the extent of their exposures to banking counterparties and may unwittingly be exposed to concentration risk.”
“Modern treasury management system is designed to provide reports on where the client’s money is being held’ and whether, as a treasury manager, you are managing concentration risk through diversification’” continued O’Keeffe.
Although Fosse said institutions are monitoring the credit default swap (CDS) spreads at banks more diligently, others argue improvements are still needed.
“I speak to many providers in the Channel Islands, and not many clients are close to the CDS spreads of their banking partners. This is one of the important tools to gauge the financial stability & risk profile of their counterparties. If you have money at a bank, you need to know what the CDS spreads are,” said Savio Pinto, Senior Sales Manager, Global Payments Solutions, HSBC.
Digital transformation in banking
At a time when costs are rising for clients, banks are doubling down on digitalising their core services, including treasury solutions, a development which has also been accelerated by the pandemic. “Improving customer experiences by making processes more efficient and streamlined has been an area of focus for firms over the last few years,” said Matilda Malmgren, Principal, Elixirr.
But what exactly are banks doing?
Virtual bank accounts
The industry-wide push towards virtual bank accounts, namely online bank accounts, will help rationalise the account opening process further, partly because the Know-your-Customer (KYC) provisions are streamlined than when opening a physical account.
Opening physical accounts can be notoriously manual and complex, mainly because of the extensive KYC and anti-money laundering (AML) checks that are required beforehand, deficiencies which have elicited a lot of criticism from treasurers.
“More of our institutional, regulated clients are starting to see the benefits of virtual accounts. Relative to physical accounts, opening virtual accounts is a far simpler process for clients and in some cases can be done without approaching the bank,” according to Kidus Yared, Head of Receivables Products (Europe), Global Payment Solutions at HSBC.
Proponents of virtual bank accounts argue that they are not just easy to set up, but also provide better transparency, encourage the centralisation of critical treasury activities, facilitate automation, support compliance, strengthen security and promote sustainability by reducing the use of paper forms and the frequency at which people need to visit their physical bank branches.
“ESG will increasingly influence the decisions clients are making, and they will be looking for banks who can provide expertise to navigate this space,” said Bilkees Grewal, Senior Liquidity Commercialisation Manager, Global Payments Solutions at HSBC.
Enhancing the payment experience
The industry is also working on ways to reduce friction in payment processes.
“Cross-border payments have historically been saddled with inefficiencies (e.g. slow speeds, high costs),” said Will Cameron, Managing Director – Fund & Corporate Services, JTC Group, a problem which is often compounded by treasurers having limited visibility into what is actually happening across the payment chain.
Efforts are being made to remedy this problem though.
According to Pinto, Swift is playing a critical role in transforming cross-border payments through its gpi Tracker tool. Swift gpi gives treasurers access to a real-time view of their cross-border payment flows, allowing them to improve their cash forecasting and liquidity management. [i]
The solution also enables banks to send treasurers a confirmation notice alerting them that cash has reached the recipient’s account, reducing the need for investigations, speeding up invoice reconciliations and improving supplier relationships.
Leveraging Application Programming Interfaces (APIs)
While APIs have been around for a long time, their impact on treasury operations has been significant.
APIs can support treasurers in a variety of ways by, for example, enabling better connectivity with their banking partners, simplifying payment processes, and supporting cash management and reporting.
“APIs have been an effective tool and allow us to send real time information to clients instead of on a batch end of day basis or periodically. This can help treasurers obtain visibility into their cash balances and make payments. APIs are an increasing conversation point around digital transformation & future-proofing their treasury solutions,” commented Yared.
Working with FinTechs
In order to deliver high-calibre treasury solutions, banks are increasingly partnering with FinTechs.
While banks have plenty of strengths (i.e. deep-rooted subject matter expertise, strong risk management credentials, robust balance sheets, regulated status, etc.), FinTechs are more agile, meaning they are less constrained when it comes to innovation.
Collaboration between banks and fin-techs is the best of both worlds here.
A number of experts highlight that FinTechs have helped banks make small, but meaningful improvements to their service offerings. “FinTech companies have had the most success in prioritising solving small but impactful pain-points for banks,” said Malmgren.
Banks have also engaged with FinTechs to build cash forecasting tool within their internet banking platforms. “These solutions help clients to obtain efficiencies when carrying out cash forecasting, which is critical given we are operating in a high cost and high interest rate environment. Having banking partners with the tools needed to successfully navigate the current evolving macro environment is key. Clients want a banking partner that can provide solutions as an integrated service within the wider cash management eco system.
“These solutions have many advantages, especially as clients want more control and they want self-service tools. They want to do things themselves very quickly, mirroring their client experience from other industries” she added.
Looking to the future
With so many critical elections taking place in 2024, geopolitical risk will remain especially elevated this year, commented O’Keeffe, but having navigated a tumultuous four years – which included a pandemic, two major land wars and a banking crisis, treasurers are under no illusion that challenging times lie ahead.
Amid the volatility, treasurers will need to manage risk effectively, by closely monitoring counterparties and having excellent visibility over where their cash is held. In this difficult cost environment, organisations must ensure that their operations are efficient as possible, something that can be achieved through digitalisation.
[i] Swift – Swift GPI for corporates
