How the Digital Age Accelerates the Evolution of Treasury
In the world of finance, the role of the treasury has seen big changes, especially from the 1990s to the present. It used to focus mainly on big-picture issues like managing cash and dealing with the wider financial market. But today, it’s much more involved in the day-to-day financial operations, making quick decisions based on the latest data.
Kevin Grant, the CRO of Corporate Solutions at Bottomline Technologies, has closely observed this shift. He points out that treasurers and CFOs work together, integrating treasury tasks directly into the company’s financial strategy.
In this article, through Kevin’s lens, we will understand how the evolution of treasury has happened, blending traditional duties with modern demands. We’ll see how the treasury has moved from a separate entity to a central part of finance, driven by the need for real-time data and closer teamwork.
We will explore the new roles of treasurers, how technology has reshaped their work, and the factors pushing these changes, such as new regulations and the impact of financial crises. We will understand why today’s treasury is more vital than ever to a company’s success. We’ll also learn the critical role of technology and teamwork in making treasury operations more effective and aligned with business goals.
Evolution of the Relationship Between CFOs and Treasurers
Kevin Grant highlighted the shift in the role and perception of treasury within organizations from the 1990s to the present day. Initially, the treasury function operated as a macro entity, distinct from financial operations, focusing on macro risks, cash availability, capital markets, and long-term financial planning.
This perspective has evolved, and treasury is now integrated into mainstream finance operations, emphasizing real-time data consumption for daily decision-making on cash management.
Key Changes in Treasury’s Role
- Integration into Mainstream Finance: Treasury has merged with the finance operations, taking on responsibilities like receivables, payables, and working capital management. This shift indicates a closer connection with daily financial activities rather than only long-term financial strategy.
- Data-Driven Decision-Making: The treasury function now prioritizes real-time data consumption, facilitating more immediate decision-making processes. This change underscores the move towards a more agile and responsive approach to treasury management.
- Organizational Structure and Role of CFO: The organizational hierarchy affects the alignment of the treasury function. In large enterprises, treasurers may have a seat on the board, indicating a distinct function parallel to the CFO. Conversely, treasurers typically report to the CFO in smaller organizations, highlighting a more integrated approach to finance and treasury operations.
Factors Driving Evolution of Treasury
Several factors have contributed to the evolution of treasury, including:
- Regulation and Standards: External regulations and accounting standards, like IFRS 9, necessitate more transparent and detailed financial reporting. These requirements drove the need for sophisticated treasury operations capable of handling complex financial instruments and risk management practices.
- Risk Management and Financial Crisis Insights: The financial crisis underscored the importance of foundational treasury practices, such as bank counterparty risk assessment. It also highlighted the risks associated with complex, illiquid financial derivatives, leading to a more cautious approach to treasury management.
- Technology and the Internet of Things: Advances in technology and the global reach facilitated by the Internet have introduced new challenges and opportunities for treasury operations, including foreign exchange risk management and diversified customer bases.
In summary, the treasury function has transitioned from a separate macro-oriented entity to an integral part of finance operations, driven by regulatory changes, technological advancements, and lessons learned from financial crises.
This evolution has fostered a closer relationship between CFOs and treasurers, aligning treasury activities closely with organizational strategies and financial goals.
Evolution of Treasury and Financial Complexities
The increased integration within finance operations has influenced the evolution of the treasury function, the growing complexity of financial products, and a deepened understanding of risks, particularly following the 2008 financial crisis.
This period marked a shift in perception, with financial assets once deemed safe being reevaluated due to their underlying risks.
The Impact of Regulation and Market Dynamics
Regulations, such as Dodd-Frank in the US, mandated a higher level of accountability and knowledge at the board level regarding financial derivatives. This change aimed to eliminate ignorance and ensure responsible management of derivative transactions.
Banks, driven by capital adequacy requirements under Basel agreements, became more selective in offering credit, pushing corporations towards more complex financial arrangements to manage risk.
Treasury’s Expanding Focus
Treasury’s responsibilities have broadened to include risk management in a more central role, emphasizing the importance of governance and due diligence. This expansion reflects the need for:
- Understanding and managing the implications of currency fluctuations on operations and investments.
- Integrating treasury activities with strategic finance decisions, such as foreign investments, requires close collaboration between treasury and finance to ensure currency needs align with business objectives.
- Emphasizes cash management as a critical function, focusing on working capital management, which involves managing current assets and liabilities to maintain the company’s operational efficiency.
The Role of Technology
Technological advancements have played a crucial role in managing the increased complexity within treasury and finance. Systems designed to handle treasury management facilitate complex hedge accounting and risk management strategies, distinguishing them from cash management solutions focusing on daily financial operations.
These tools help manage the vast amounts of data required for informed decision-making, highlighting the importance of clean, real-time data.
Confirmation of Payee and Operational Resilience in Financial Transactions
Confirmation of Payee is a process designed to enhance the security of payment transactions. It allows for the real-time verification of the payee’s details, such as name, address, and bank account information, before a payment is processed.
This system, powered by open banking, significantly reduces the risk of fraud in payment processes, ensuring that payments are made to the intended recipient. It’s particularly useful in direct debit transactions, giving businesses more confidence that their collections will succeed without issues.
Benefits for Corporate Treasurers
Corporate treasurers, responsible for managing payment processes, stand to gain substantially from implementing CoP and similar security measures:
- Fraud Prevention: CoP is a barrier against push payment frauds, ensuring that payments are directed to the legitimate party.
- Reduction in Failed Payments: By verifying payee details upfront, businesses can significantly reduce failed collections, improving operational efficiency.
Role of Technology Providers
Technology providers, such as Bottom Line, play a crucial role in implementing these security measures. They offer solutions that integrate checks like CoP into the payment process, acting as a guardian to ensure secure transactions.
This technology is not limited to domestic payments but extends to international transactions, protecting payments to sanctioned entities or individuals.
Impact of SS 1/21 on Operational Resilience
The SS 1/21 regulation, issued by the Bank of England, focuses on enhancing operational resilience within the financial services sector, including banks, financial institutions, and insurance companies.
This regulation mandates these entities to establish business continuity measures to mitigate risks associated with system failures or breakdowns in payment infrastructures like Bacs.
For treasurers, this means ensuring that there are alternative means to process payments if the primary system fails, ensuring continuous operation and compliance with the regulation’s requirements.
Operational Benefits for Treasurers
For treasurers, adopting technologies and processes that comply with SS 1/21 and utilize CoP provides several key benefits:
- Enhanced Security: Protects against fraud and ensures payments to the correct recipients.
- Operational Continuity: Ensures payments, such as pensions, can still be processed in case of a system or network failure.
- Compliance: Helps organizations meet regulatory requirements for operational resilience.
Evolution of Treasury Management Through Technology
The role of treasurers is evolving to necessitate a deeper engagement with technology. This shift demands treasurers to expand their technical knowledge, particularly around the technology providers they collaborate with. They must oversee service level agreements (SLAs) meticulously, ensuring the uptime and availability of these services.
Furthermore, compliance with new regulations requires investment in business continuity planning, including establishing primary and secondary service providers for payment processes.
Addressing Budget Constraints
Treasurers often face challenges in securing adequate budget allocation. However, framing the expenditure as an investment in reducing operational risks and enhancing credibility can facilitate budget approval. The focus should be on:
- Preventing reputational damage
- Mitigating fraudulent activities
- Ensuring compliance with regulatory standards
The Role of Bottom Line in Treasury Management
Bottom Line Technologies is pivotal in digitizing business payments, serving a wide spectrum of corporate customers. Their solutions facilitate B2B and B2C payments, adapting to country-specific formats and regulatory requirements.
Services offered include:
- Direct Debit Collections: Assisting in efficiently collecting payments across different sectors.
- Supplier Invoice Payments: Streamlining the process of paying supplier invoices, promoting the transition from paper checks to digital payments, especially in North America.
- Global Payment Hub: Offering a secure platform for processing collections and payments globally.
- Cash Management Tools: Providing treasurers with comprehensive solutions for managing working capital, excluding hedge accounting and complex risk management.
Bottom Line’s Comprehensive Solutions
Bottom Line emphasizes digitizing the world of business payments, focusing on removing inefficiencies such as printed checks in North America.
Their solutions support a broad range of treasury management functions, including but not limited to:
- Supply Chain Finance
- Supplier Invoice Payments
- Collections and Payments Processing
- Cash Management
By leveraging Bottom Line’s technology, treasurers can manage payments and collections more effectively, ensuring operational efficiency and compliance with regulatory standards.
This holistic approach enables businesses to steer through the complexities of modern treasury management, bolstering their operational resilience and strategic financial planning.
Conclusion
In conclusion, the evolution of treasury demonstrates a dynamic shift towards a more integrated and technologically advanced approach. We’ve learned that the relationship between CFOs and treasurers has deepened, mirroring the broader integration of treasury into everyday finance operations.
This change reflects a collective move towards agility, emphasizing real-time data for decision-making and a proactive stance on risk management. Moreover, technological advancements and regulatory pressures have underscored the importance of operational resilience and security in financial transactions, pushing treasurers to adopt innovative solutions and comply with stringent standards.
As treasurers continue to manage the complexities of modern financial landscapes, their role remains crucial in aligning treasury activities with the strategic objectives of their organizations. This evolution not only enhances operational efficiency but also fortifies the foundational role of treasury in achieving long-term financial stability and growth.
FAQs
What impact has the evolution of treasury had on corporate strategy?
The evolution of treasury has integrated it more deeply into corporate strategy. This allows businesses to optimize their financial operations, improve liquidity management, and align treasury activities closely with overall business goals.
How do advancements in financial technology influence the evolution of treasury?
Advancements in financial technology, such as automated trading systems and digital payment platforms, have streamlined treasury operations. They have also enhanced efficiency and enabled more sophisticated risk management and forecasting techniques.
What role does data analytics play in the evolution of treasury?
Data analytics plays a crucial role in the evolution of treasury. It provides insights into cash flow, liquidity, and financial risks, enabling treasurers to make data-driven decisions and improve financial strategies.
How has the regulatory environment influenced the evolution of treasury?
The regulatory environment has driven the evolution of treasury by imposing stricter compliance requirements, enhancing the focus on risk management, and prompting treasurers to adopt more sophisticated financial instruments and strategies.
What future trends are anticipated in the evolution of treasury?
Future trends in the evolution of treasury entail increased automation. Additionally, there’s a greater emphasis on AI and machine learning for predictive analytics. Moreover, deeper integration of sustainability into financial strategies is becoming prevalent, alongside more proactive roles in corporate governance and strategy.
