ACTS & Azzana Consulting - Treasury Mini Series
ACTS & Azzana Consulting - Treasury Mini Series
In our first partnership with Azzana consulting, we will be joint publishing a mini series of articles on current and key topics in Treasury via TFA Geeks.
The topics are,
- How will the new technologies define the future of Treasury?
- Sustainable Supply Chain Finance
- Non-Banking Institutions Outlook in 2018/19
- Moving to a Treasury Business Intelligence Center
We will be publishing one article every two weeks, for the first article – we will discuss about the impact of technology on Treasury, how new technologies will define the future. We encourage our members and readers to comment and share their opinions online.
In line with the technology driven and crowdsourcing economy, we will take in our members’ and readers’ opinions via online or email feedbacks for the topics to be published in the subsequent articles. If there are other topics that our members or readers feel strongly that these burning topics warrant immediate attention - we will replace our planned articles with the top ranked suggestion.
We aim to make this an interactive, two-way journalistic experience in comparison to the usual you-read-what-we-post. It is our hope that you share your feedback and comments, and trust that we will react accordingly.
Tell us and be heard.
How will the new technologies define the future of Treasury?
Smartphones, universal translation, drones and self-driving cars are no longer the stuff of science fiction, but in a world of ever-accelerating technological advancements, have become part of our everyday lives. This trend can also be seen in the context of corporate treasury, and technologies such as robotic process automation (RPA), artificial intelligence (AI), machine learning, Application Program Interfaces (APIs), and Blockchain are well beyond their “proof of concept” stages, and are creating value for treasuries that are willing to embrace their potential.
Robotic Process Automation (RPA)
The vast majority of treasury departments still handle low complexity processes that require manual input of high-volume data such as payments, reconciliation, supply chain finance and trade finance processes. Robot Process Automation (RPA) can take over these tasks and alleviate the treasury department’s workload, so that the Treasury professionals can focus more on value adding activities such as corporate planning, supporting deal structuring, and working capital management.
Since their early beginnings, RPA solutions have come a long way. By simulating a user’s actions, RPAs are capable of directly interfacing with multiple existing applications and systems that would otherwise be difficult to integrate, all without disrupting the company’s regular course of business.
The main challenge for a successful RPA framework is correct and complete implementation. This depends on the level of standardisation of internal processes and the company’s data and information communication structure. The landscape of RPA providers is widely dispersed, from mature vendors to promising fintech startups. That is why a detailed scope of your processes is key to select the right solution provider. Treasuries are often trailblazers of implementing RPA within a company, as they operate in a process-driven environment where robotization can lead to significant returns on investment if they focus on specific treasury areas:
- Cash positioning and cash forecasting: collecting the AP/AR and actuals from multiple systems and parties, controlling its consistency, scheduling automated reporting, consolidating cash positions and risk exposures to achieve better decision making for the stakeholders.
- Payments: triggering payment instructions based on invoice information, ensuring security over the vendors and beneficiary information relying on a robust audit trail.
- Supply chain finance: collecting and processing invoices from SCF suppliers, monitoring the counterparty limits through dynamic credit risk assessment.
- Trade finance: preparing the necessary files or templates for the application of trade instruments with partner banks (purchase orders, invoices, bills of lading, etc.)
Artificial Intelligence (AI) & Machine Learning
Machine learning is the most widely employed form of Artificial Intelligence (AI). The difference between machine learning and RPA is that where RPA relies on being taught (somewhat) linear processes, artificial intelligence thrives in ambiguity. Throw a bunch of historical data at a machine learning algorithm, and without having to “teach” the machine anything, it will be able to use that data to create complex models capable of predicting future outcomes; and suggesting strategies to optimize those outcomes. It lends itself excellently to cash forecasting and risk management.
Different from common misconception, the impact of Machine Learning will be that of enhancing the skills and capabilities of the Treasurers than that of replacing the current Treasury professionals. The main applications of Machine Learning are Cash Forecasting and Risk Management.
Cash flow forecasting is the first step in building a consistent cash position, required to make decisions about liquidity management and risk management, and machine learning is an excellent tool to optimize its accuracy. For Risk Management, machine learning leverages all the available information regarding the company’s natural exposures and other external factors in order to recommend an optimal hedging strategy.
Research firm Gartner has suggested that interest in Blockchain technology is waning, and in its latest “Hype Cycle for Emerging Technologies” Blockchain was placed in the “trough of disillusionment.”
Blockchain has been the buzzword of choice for many banks, solutions providers and large corporates, who have experimented with the technology for countless applications. Due to ambiguity in the legal framework surrounding the adoption of blockchain technology, as well as the difficulty in creating a significant network effect for the initiatives, the full implementation of Blockchain have been slow in taking off. However, the technology is showing some slivers of true promises in areas of trade finance and cross-border payments solutions.
In global trade, corporates are facing a wide audience of participants (exporters, importers, banks, insurers, logistic companies) that still use paper-based processes. Blockchain technology has the capacity to connect all the stakeholder on a global platform. The current challenge is creating proper governance for these global platforms. How should new members be enrolled to the platform? Will it use a voting model or a central administration? If it’s a central administration, who will be responsible for enrolling the new members and how can a robust due diligence be maintained with the agreement of all members on the platform?
Rather than seeing a single solution, we observe a handful of initiatives from a pool of corporates and banks that share interests in restricted trade finance corridors. The results of these initiatives are quite impressive as they achieved time reduction, fraud risk detection and timely document delivery, hence, eliminating fees for late document presentation due to discrepancies. In terms of performance we see a 5-day processing period for a Standby Letter of Credit (SBLC) being cut down to 10 minutes at 0% error rate. Time will tell which of these initiatives takes the upper hand and establishes itself as the global norm in trade finance.
In the space of cross-border payments there is a similar trend of multiple initiatives aimed at reducing friction in international payments. Largely due to the lack of a clear regulatory framework, these tech solution providers and the incumbents (like banks) have been coexisting without a clear winner. Banks are experimenting with Blockchain technology in order to clear and settle transactions between each other at lower cost, higher speed, and with pre-validation of the transaction parameters. Furthermore, Central Banks are looking at the technology with keen interest: their adoption of the technology will be the true key to performing finalized payments, without the need to settle off-ledger. Other Fintechs are experimenting with the ability to use Blockchain’s immutability in order to transmit auditable data and documents alongside a transaction, in order to reduce issues with reconciliation and compliance.
Application Programming Interface (API)
Open banking is with us today, spurred on by the European Union’s Payment Service Directive II (PSD2), banks are starting to invest in APIs as a true channel for payment initiation and account information. Rather than having to wait for batch processes (for example, only receiving an MT942 once an hour), corporates can communicate with their banks in real time. Banks are looking to differentiate their APIs, and will start to provide wider range of services through them: payment status reporting (including rich payment tracking enabled by SWIFT’s gpi initiative), upfront and real-time quotes for fees and FX spreads, pre-payment transaction validation, stop & recall services, etc. The emergence of e-Commerce promising faster, safe and instant payments has strengthened the importance of real-time information for reconciliation and cash position monitoring purposes.
The ever-advancing march of technology can be overwhelming, but some of the technologies that were recently reserved to whitepapers by researchers and tech journals can create true value for your treasury organisation today. We must also acknowledge that the role of the treasury department will change, perhaps faster than we may expect, from an operational role to a strategic one, backed by solid data science and analytics.
The role of the Treasurer will never disappear: technology will do the groundwork, but a company will always require a Treasurer at the helm to steer the company in the right direction.
About Azzana Consulting
Azzana is a consulting firm specialising in Corporate Treasury and Transaction Banking providing business advisory and system integration services to both Corporates and Financial Institutions.
It was established in 2011 and is a relatively young company, but with many years of experience on board.
The team consists of seasoned experts with backgrounds in Payments, Cash Management and Corporate Treasury, and who have been active in the Banking industry and Corporate scene.