In modern times, technology has proved itself the enabler for transforming the economics of the treasury department. For many years, the central question of any plan to develop treasury from a cost center to a profit center was whether it was feasible. The question was answered as the advent of the treasury management system made that challenge less daunting. Treasury has been able to integrate with other divisions within the organization, and increasingly sophisticated technology means the question is not "if" it can be met, but "how" it can be made profitable.
Bringing the process in-house
Treasury management systems have provided the momentum for the emergence of payment hubs, also known as payment factories. These have developed as a key driver for centralizing treasury activity and reducing expenses. While some treasury departments utilize banking services for their payment factory, others leverage the capabilities of their treasury management system to gain further savings by bringing the process in-house.
Yet despite this progress, the task of eliminating unnecessary costs is too often still hampered by basic inefficiencies. While fintech offers new ideas and capabilities, treasury departments too often continue to rely on spreadsheets and emails for workflows. This creates the potential for errors, security breaches and data of questionable quality. Many departments have yet to automate manual processes such as bank reconciliation, or they lack scenario analysis tools to gauge the impact of possible future events. They may also be without any enterprise view of their currency and commodity risks, rendering them unable to reduce hedging costs. Treasuries with on-premise installations miss out on the cost advantages of the pay-as-you-go financial structure of cloud-hosted solutions.
A single source of truth
There are a host of other efficiencies that the savviest treasuries can achieve from having a single source of truth in an enterprise-wide combined treasury and risk management system. Delays caused while data migrates from one system to another are eliminated, so treasurers benefit from having an accurate snapshot of the company's cash position and liquidity at any specific moment. Gaining maximum visibility of the company's lines of credit enables them to be distributed in the most cost-effective way. The advantages of timely data extend to accounting, which can use the latest valuations and transaction data in their hedging activities while comfortably meeting reporting deadlines.
A treasury management system also offers cost savings from consolidation. Expensive interfaces between cash management, risk management, foreign exchange (FX) trading, accounting and commodities procurement are eliminated when the features can all be leveraged from one system. Other costs, such as obtaining licensed software, systems upgrades and handling a variety of different databases and systems, are all reduced.
By centralizing FX trading, treasury can achieve lower spreads through higher volumes, while the improved routing of payments via in-country accounts can eliminate the need for paying foreign currency transaction fees to suppliers outside of that country. The setting up of an in-house bank results in lower payment processing costs as the in-house bank can be used for the netting of payments between subsidiaries.
Still to come
Treasury management systems haven't been the only enabler. Regulatory authorities' growing scrutiny of tax havens and the practice of global transfer pricing is also a driver in helping treasury cast off its reputation as a cost center. The in-house bank becomes an attractive proposition when it can provide services for the company and be compensated for them. Transfer pricing's arm's length policies limit the charges to somewhat below market rates, but a central treasury platform also offers benefits for treasury in terms of tax optimization, helping profit and loss and assisting intercompany transfers to reduce exposure to tax.
Looking to the future, expect solid analytics to firmly be a major part of treasury's toolkit in taking control of banking fees, pricing and spreads, as well as identifying areas where they can demand improvement. Investment is needed in bank fee anaylsis if fees are to be controlled. System providers are already working on using analytics to provide traders with the lowest-cost method of trade execution through scenarios that assess the optimal combination of broker, exchange and clearing house. This is arrived at by assessing physical costs and the impact of the trade on initial margin calculations.
In the years ahead, the potential of emerging technologies from blockchain, artificial intelligence (AI) and robotic analysis will augment treasury management systems in further developing treasury as a profit center. Blockchain could prove to be the most transformational, but a number of technical and operational challenges must first be resolved. Inevitably, there will be other promising concepts that fail to take wing. It's likely that AI will deliver solutions that impact mainly on automating redundant and repetitive tasks, detecting payment and trading anomalies and finding patterns of behavior that better predict future forecasting assumptions. AI also has the advantage of being self-correcting, using the relative successes and failures resulting from earlier decisions.
In the near term, the journey from cost center to profit center is most likely to be speeded by open application programming interfaces (APIs) that leverage real-time information, GPI providing views into payment routing and cloud-based solutions transforming the nature of IT departments. Yet it will also depend on senior management recognizing the profit potential that has already been tapped by treasury management systems — and to provide the investment and resources for the journey to continue.
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