Accelerating change puts a premium on resilience and agility in corporate treasury

September 2024  |  SPECIAL REPORT: DIGITAL TRANSFORMATION

Financier Worldwide Magazine

September 2024 Issue

Geopolitical and economic pressures have increased volatility and risk for corporate treasury operations across the globe. Ongoing unrest in Ukraine and the Middle East has added complexity to a world already dealing with the economic repercussions of the coronavirus (COVID-19) pandemic, fallout from Brexit and a slowdown in China.

The political climate across Europe and the US is fractious, driven in part by global inflationary pressures and the higher interest rates adopted in response to those pressures. Global supply chains continue to reconfigure following the pandemic. Collectively, these forces expand the breadth of liquidity and risk management challenges faced by corporate treasury departments.

In this environment, the ability to control working capital, improve the visibility of cash flows and manage risks related to foreign currency, interest rates and other exposures has become increasingly important. Fortunately, for corporate treasury departments, new and emerging technologies bring enhanced capabilities to respond to volatility more quickly and effectively than ever before. The challenge lies in identifying these technologies and integrating them into existing systems.

To keep pace, corporate treasury departments must be able to harness emerging technology effectively so that they can use it in concert with strategic intelligence from the economists and experts who understand the nuances of changing markets throughout the globe. This journey requires treasury personnel to acquire new skills, ensuring they are equipped to navigate the digital transformation landscape.

Digital transformation is not a one-time process. As the pace of change accelerates, treasury departments must remain flexible and responsive, maintaining a clear visibility of liquidity and risk positions. This dynamic environment demands a technology strategy that capitalises on both existing and emerging tools. Regularly reevaluating technology strategy and vendor partnerships will empower organisations to proactively manage risk and seize opportunities to optimise cash flows that sustain their business.

Challenges for corporate treasury departments

After a long period of low, stable interest rates, post-COVID-19 inflation has produced higher borrowing costs. This increased cost changes the risk calculation related to cash flows and liquidity, with particularly high risk for companies that do business in geographies with slow or restrictive payment systems. Interest rate volatility can also increase the attractiveness of geographies that have adopted modern digital payment infrastructures. Businesses able to track and respond to changes in interest rates and payment capabilities across geographies stand to manage these risks more effectively.

Rising geopolitical instability further complicates matters. Wars and shifting international policies disrupt operations in affected geographies, emphasising the need for treasury to continuously evaluate and respond to potential liquidity and risk impacts.

Post-pandemic supply chain reconfigurations have also pushed businesses to operate in new and more varied geographies. What used to be predominantly a path from China to the West has increasingly become multiple sources of supply from India, Mexico and other parts of the world. Near-shoring has also become more prevalent, particularly for US-based companies looking to reduce the risk of long transport times. These changes can affect cash flows, pricing and competitive posture – all critical elements of corporate treasury’s operations.

Operating in a larger and more varied set of geographies creates additional risks for corporations. Counterparty risk management becomes particularly important as organisations tap new banks, customers, suppliers and governments to support their expansion into new regions. Geopolitical changes have a ripple effect here, as financial partners and suppliers exit and enter geographies as part of their own risk management strategies or in response to regulatory restrictions.

Under these conditions, corporations may need to expand their partnerships in certain markets to ensure they have recourse if their primary financial partner runs into issues or decides to exit the region. Having only one bank in a given country could be risky under these circumstances. On the other hand, consolidation of payment systems across geographies could leave companies with more financial partners in a region than necessary.

Under those circumstances, they may find opportunities to rationalise their accounts, making operations more efficient. We are seeing a material number of corporates start projects to establish secondary banks in core markets while also looking to rationalise their bank relationships and accounts across the board.

Digital transformation efforts

Real-time capabilities are the key to maximising agility. Access to real-time payments and information enables treasury departments to respond swiftly to changing environments. Mature markets with well-integrated real-time payments technology offer a smoother navigation path, allowing companies to maintain cash flow, manage counterparty risk and mitigate fraud efficiently.

To take advantage of this speed in new geographies, corporations must ensure their banks and financial partners are plugged into real-time payment systems wherever they are available, and that they can integrate seamlessly with treasury’s existing platform.

Treasury platforms capable of supporting real-time reporting are another important part of the equation. Having visibility into counterparty risk and liquidity at all times makes it easier to respond to potential issues before they become major problems. Cloud-based systems can be advantageous in this area, as they offer benefits such as scalability and accessibility. Making data available to the entire system either through a consolidated core or a set of application programme interfaces (APIs) can help overcome issues related to data silos and improve real-time visibility across systems.

APIs can work especially well in countries that have that implemented instant payment systems. In India, for example, we have seen an explosion of API usage where companies have leveraged instant payment systems as a way to gain competitive advantage while also mitigating fraud.

Real-time data access also lays the groundwork for real-time data analysis capabilities that can drive strategic decision making and ultimately make organisations more agile. Emerging artificial intelligence (AI) technologies can help identify potential changes and model a range of solutions so that treasury can respond quickly and efficiently to risks and opportunities as they arise. Sophisticated data analysis tools can also help accommodate supply chain and interest rate changes more quickly, guide responses to emerging crises or regulatory shifts, anticipate areas of rising risk, and help mitigate fraud.

Closing the technology gap

Adopting digital transformation to enhance treasury operations can be quite challenging, particularly when it comes to closing the skills gap among corporate treasury staff. Organisations should assess the skills present within their team and then focus on refining their hiring and training processes to ensure they have talent that understands how to leverage existing technology and are also capable of embracing emerging technologies as they evolve.

These efforts must advance along two tracks. First, the team needs to have comprehensive insight into the best treasury practices. This involves staying updated with industry trends by networking with banks (especially those that can connect with local teams in dynamic markets), making the most of educational opportunities such as conferences, keeping an eye on trade publications, and engaging with vendors and consultants.

Second, the team must make use of this continually updated knowledge to reevaluate the tools currently available and adjust their technology strategy frequently. Once every two years is no longer good enough. In today’s era of change, organisations must understand what the market is doing, what tools are available and how they can put those tools to use.

Banking partners can provide valuable support in these efforts. They have visibility into what is happening across their footprint, have relationships with regulators and interact with many organisations across those geographies. These connections expose them to the types of vendors, FinTech companies and technologies that are available, as well as their effectiveness across a range of specific use cases. Banks understand how clients are using tools to connect with financial partners and suppliers as they optimise their treasury setups. Banks are also investing in technologies themselves, which may provide additional insight on how to speed up digital transformation efforts. And as a third party, banks can provide unencumbered advice when it comes to treasury tools.

Best practices for managing risk in volatile times

The re-evaluation process organisations undertake to guide their digital transformation strategy should cover two key areas, as outlined below.

First, organisations should evaluate their counterparties against their growth markets to ensure they have the right banking relationships in place to manage geopolitical risks and leverage real-time payment capabilities where available. They should also review their banking structure globally to optimise the number of banking partners in each region.

Second, organisations should assess their technology setup at least once a year, and more frequently as circumstances – and technology releases – require. Teams should prioritise agility and continuously upgrade their technology to quickly adopt new tools and processes. These tools include AI-powered forecasting or automation technologies, APIs that leverage instant payment systems or other capabilities, robotic process automation, advanced analytics, data mining tools or finance services that leverage emerging distributed ledger technology or blockchain payment solutions. This evaluation should include a full examination of the current technology stack, considering the advantages and disadvantages of new technologies in the specific context of the organisation.

Taking these steps can help improve competitiveness, reduce risk and unlock additional sources of liquidity, creating a stronger, more adaptable treasury function.

 

Tarek El-Yafi is regional head of cash management sales at Standard Chartered.

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BY

Tarek El-Yafi

Standard Chartered

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