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The extinction of corporate treasury?

Geri Westphal, Founding Partner, LeanUp, LLC

The evolution of treasury has been an important topic for quite some time.  While doing my research, I  found information on the very same topic dating back to 2006.  So, is the evolution of treasury still newsworthy, or is it “old news”?  If Treasury has been “evolving” for twelve years, shouldn’t we be almost done by now?  That’s the newsworthy part…. We are nowhere near the finish line.    

Over the past twelve years, it’s true that treasury has changed significantly. The role has gone from what used to be the pure interest rate, FX risk and cash management, to a much more strategic decision-making role and in most cases, a true “seat at the table”.  

Why the change?  Many believe it began with the financial crisis in 2008 when the search for liquidity intensified and cash became king.  As a treasury practitioner during that time, I can attest to the sudden increase in the popularity of cash managers. Senior Executives wanted to know exactly where the cash was and precisely how quickly could we get it home. The answers “I don’t know” and “I’m not sure” were not acceptable.  The importance of cash was forever changed. 

Regulatory changes soon followed with an added boost to the treasurer’s role in having to comply with and monitor many more details not previously considered urgent or important. Remember when SOX was first introduced?  That seemed like such a big deal.  Now, it’s a distant memory on a list of much more complicated compliance requirements. 

And then came technology.  When I ran global treasury operations at Oracle my team’s mantra was “simplify, standardize and automate.”  Those three goals remain top priorities for treasury teams even today. The difference today is in the volume and the speed of technological advancements.  Fintech, Regtech, AI, machine learning….there is so much more to understand and adapt.   

So yes, the evolution of today’s corporate treasurer is still a compelling story, not because it’s a new topic, but because it’s a continuous story of how a very important role has evolved to become an even more important and strategic part of our business landscape.  There’s no turning back.  Strategic Treasury is here to stay.  

Let’s take a peek into what the next five years are likely to bring.  

Cash and liquidity management will continue to be a core activity 

The combination of regulatory developments and the emergence of innovative banking and technology solutions will continue to challenge treasurers to rethink their cash operations and liquidity decision-making.

Centralization has always been a good idea, but with new Basel III constraints, some corporations are experiencing negative interest rates due to exceeding a bank’s acceptable level of operational balances. So, it’s not so simple anymore.  The “good idea” to consolidate both the number of banks and number of bank accounts used to manage global cash has now cost the corporation extra money by the loss of interest, or worse, the application of a negative interest rate.  What’s the lesson for the future?  The lesson is that logic may not always lead you in the right direction.  Treasury teams will have to think beyond today and anticipate what’s down the road.  They will have to be more careful and proactive at managing their global cash balances.  

Real-time and instant payment schemes are also proliferating around the globe. While these schemes enable corporations to manage time-sensitive outgoing payments more precisely, the bigger impact for many treasurers is on collections.  A company could see incoming flows credited to their account on a 24/7 basis, and this will create a very different liquidity dynamic, one that we have not experienced before.  Treasury teams will need to be far more dynamic and flexible as information flows within the business to achieve real-time status. 

Treasury and tax will still need to be best buddies

In most organizations, treasury and tax have always spent a good deal of time together.  In the future, that won’t change.  Treasurers and tax specialists will need to consider the individual tax rules and also collectively decide how the overall corporation is impacted.  

For example, the recent (BEAT)5 tax reforms that address base erosion and anti-abuse tax, adds further complexity to an organization’s intercompany lending program, as many companies have aimed to reduce their tax liability to zero as a result of interest payments, and royalties. This may no longer be feasible, which means the entire structure needs review and potential restructure.  

Rules on beneficial ownership also need to be considered. A new OECD single master treaty was finalized in December 2017, which means there are more stringent tests that will be applied to certain types of payment to determine whether they qualify for reduced rates of withholding taxes. If authorities determine a primary reason that an organization is located in a particular jurisdiction is for the purpose of seeking a reduced withholding tax rate, the reduced rate will no longer apply.  This could be a game changer for some organizations. 

Digitalization, machine learning and all that techie stuff

Digitalization is a topic that dominates treasury conferences and bank advisory groups. It covers a myriad of technologies that can be used to optimize existing processes and services, including the use of APIs, machine learning, distributed ledger technology, chatbots for credit and collections, and digital wallets for payment processing, to name a few.    

The challenge for today’s treasurer is to embrace these new technologies and evaluate the value of digitalization and decide if they have the appetite to harness it.  The role of the treasurer is becoming more forward-looking with the added bonus of allowing them the ability to perform more sophisticated analytics with the adoption of these new technologies.  Digitalization plays a major role by leveraging machine power to carry out tasks with greater speed and volumes of data than humans could do.

Blockchain is also an example of a digitalization game changer for treasurers. Fueled by the hype over cryptocurrencies, blockchain, (distributed ledger technology), has been cited as a revolutionary technology to transform today’s transaction processes. Many organizations, including banks, are already using DLT-based applications for some elements of their business, either individually or in partnership with others. Two great examples of how blockchain could add value to treasury departments include; corporate trade finance and KYC.  

From a corporate treasury standpoint, the obligation is not to become an expert in Distributed Ledger Technology, but to keep up to date with new solutions that may leverage this technology to enhance the user experience or create additional value.

Cybersecurity will get harder not easier

Historically, treasury departments may have relied on IT to combat cyber attacks, but now that is no longer an effective strategy.  As we have seen in the headlines over the past few years, financial cyber-attacks can take a huge toll on an organization, and treasury needs to be at the forefront of the cybersecurity initiative.  Treasury has an important role to play given the large financial value of transactions it processes and the sensitivity of the data it holds. While defending data and financial assets involves the use of specialist technology, issues such as processes, operational controls and business culture are equally important.  

Impersonation fraud is, unfortunately, becoming more familiar to most treasury organizations. Phishing emails are more widespread than ever before. These emails appear to come from a known company or individual coaxing the user to reveal sensitive information, perform a task or download an attachment.    Impersonation of senior executives, often the CEO or CFO, that insist that secret urgent payments are made, or sensitive information transferred, or fake vendor scams are also among the most common forms of cyber-attack for today’s treasury departments.  Great diligence will be required to prevent these kinds of fake requests from being fulfilled.  

Treasury relies heavily on banking systems, treasury management systems (TMS) and enterprise resource planning (ERP).  Keeping unauthorized users out of these systems is getting more difficult as hackers continue to access these platforms.  It is not necessarily the definition of user profiles that are in question, but how access to the system is secured in the first place. Hacking techniques are becoming more sophisticated and treasury teams will need to take a more active role in the oversight and maintenance of system accesses. It is not just financial and business continuity issues that treasurers need to consider, but it is also important to defend the organization’s reputation. No one wants to end up in the news with any type of cyber attack headline or with the news that fraud was detected.    

Artificial intelligence will rule the world

On a recent 60-minutes episode, Kai-Fu Lee, an artificial intelligence expert, predicted that 40% of the world’s jobs will be replaced by robots capable of automating tasks. He said that both blue-collar and white-collar professionals would be affected.  That number is staggering, especially if you consider those jobs are likely to never come back.  What will 40% of our population do to make a living?  That’s for another article, but for now, we will focus on the anticipated impact on treasury teams in the future.

Traditional treasury departments have had staff who performed tactical processes of collecting and compiling bank balances in order to consolidate to a global position and either invest or sell that position into the market so that they could minimize the amount of idle cash and earn the highest yield.  Today, that entire process is most likely automated.  The human intervention probably still occurs at the final step of deciding the market positions, but with machine learning and trading portals, it is reasonable to predict that even that final step soon be fully automated. It is no longer necessary to speak to a human during any part of this process.  

Intercompany management is another area most likely impacted by automation.  It used to be a labour-intensive task to track balances and allocate appropriate interest income or expense on a daily, weekly or monthly basis. Today, TMS systems and third-party providers are quickly bringing automation and efficiency to these processes, which in turn, is eliminating the need for human intervention.  Another job lost. 

So, when you compare a treasury department’s staff twelve years ago to one of today, you are likely to find a significantly reduced headcount. It’s not extraordinary to say that the future will further compress staffing to a much smaller number of treasury professionals who are there to monitor the automation and handle exceptions.  That’s it, just monitor the machine.  No full-time employment required.  That common and historically painful phrase “do more with less” will be less of a painful dictate and more of a driver to automate.

It’s all about the strategy

So, by now you may be feeling a bit pessimistic about the future of treasury.  Should you pick another field? Maybe go take a few courses at your local community college?  Don’t panic.  Where there is change, comes great opportunity.  

Remember the “seat at the table” I talked about earlier? This is where it gets fun.  It’s time to reinvent treasury.  It’s time to reinvent yourself.  With the reduction in time spent on tactical oversight, today’s treasury professional will have the opportunity to get into the strategic aspects of treasury and really add value to the organization.  

We can see that the world around us has become more complex and as a result, how we do business is more challenging.  In order to be challenged going forward, treasury professionals will need to move from behind their screens and engage with and understand, the full picture of the wider business.  They will need to get out of their cubicles and start talking to internal colleagues to learn from them and help them learn from you.  Treasury is essential for the company’s future, and now is the time to make sure everyone knows that.  Go out and make a difference.   

This is and will continue to be, the real evolution of treasury.  It’s important to get ahead of the game and get yourself prepared to play in the world of strategic treasury.  It’s going to be a lot more challenging and a lot more fun!

This item appears in the following sections:
Cash & Liquidity Management
Fraud Prevention

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