Corporate treasury journey – From automation of payables and receivables to in-house banks

Being able to automate common daily treasury operations frees up treasury time allowing staff to spend more time on adding unique value to the organisation. Corporate size, location, and industry determine the functioning of treasury departments. Every treasury works differently, but most would agree that efficiency is key to its success. Becoming more efficient requires examination of existing manual processes with a view to automate and improve. Banks can and should partner up with treasuries to enable them to meet their efficiency goals, not least by providing sophisticated automation and reporting tools. Exploring how digitisation may enhance treasury processes and seeking their bank’s assistance can help corporates on this journey.

As companies are pushed harder to do more with less, treasuries often take the lead in demonstrating the power of the latest technology and partnering with their lead banks.

Companies around the world are faced with economic uncertainty and a heightened volatile market. In response, corporates are seeking to centralise core treasury activities, to aggregate the transaction flows and to reduce risks associated with operating companies. Moving from a de-centralised to a centralised (in-house bank, (IHB)) treasury organisation may become the aspiration of large and smaller companies alike.

IHB concentrate treasury activities, thereby reducing the volumes of external FX and cash transactions, as well as the number of bank accounts and relationships. This not only optimises treasury operations but also leads to lower costs for the corporate.

In fact, a recent market study shows that 45% of companies globally have implemented an in-house bank. Main motivators behind the decision have been reduced cost and bank independence, reduced operational risk by avoiding unnecessary movements of cash and enhanced liquidity management.

FIGURE 1

Figure 1 above is an example of an approach treasuries might take in moving from a de-centralized (step 1) to a fully centralized (step 4) structure. Not all these transformational activities are relevant for every company, but on balance the principle is true. Often companies consider a phased approached to centralisation, starting with those areas where they get the greatest rewards such as account visibility, centralised payments, funding, and investments. Using technology to achieve this will always be at the heart of the project hence, working with external treasury systems providers and banks becomes increasingly important. The choice of which treasury system or systems to use is often made at the beginning of the project and the planned implementation is synchronised in line with the phases to ensure that by the end there is a single centralized system.

Using tools such as Virtual Account Management (VAM), banks can provide the digital power to drive the move from a de-centralised structure to a centralised one.

Virtual accounts enable companies to achieve centralisation by simplifying, streamlining, and consolidating treasury flows. This leads to an improvement in visibility of cash. In addition to tackling the challenge of account rationalisation, virtual accounts can play a pivotal role in any payables on behalf of (POBO) or receivables on behalf of (ROBO) structures. If a treasury centre makes or receives payments on behalf of a subsidiary, that transaction will refer to the subsidiary’s virtual account number. This will reflect simultaneously in that virtual account and post to the physical account associated with it.

The corporate VAM journey can be a multi-phased one starting with the most pressing need by identifying the treasury and ending with managing various inter-company scenarios including in-house bank solution as indicated in figure 2 below.

FIGURE 2

Not every corporate will choose the option of full centralisation but by understanding the benefits of what can be achieved, a corporate treasury can pick those areas where it makes sense to strategically digitise.

Indeed, some banks are looking to offer the concept of IHB as a service to clients recognising that setting up an IHB from scratch can be a costly, complex, and time-consuming exercise.

By partnering with their banks to implement these capabilities, corporates can take advantage of the banks’ services thereby increasing the likelihood of success in a cost-effective manner. One of the biggest challenge treasuries need to deal with when considering a change in structure is the internal technology. Treasury data is often held/stored in many places and systems and banks can also help here. Through their previous experience with other clients or their links to Fintech companies who have developed application program interfaces (APIs) to facilitate integration, banks can become corporate treasury partners for change.