BankingFrom Cash Management to Information Services – The Future of Transaction Banking

From Cash Management to Information Services - The Future of Transaction Banking

Businesses are critically dependent on steady flow of information and cash
to run smoothly. They need an efficient forecasting, planning and replenishment
system for their manufacturing operations, and likewise, they also need a very
efficient banking system that integrates and supports the entire business process.
They have been able to achieve operational efficiencies, to some extent, through
ERP and SCM tools, but lack acutely in the area of banking services to support
the financial leg.

Transaction banking is an important source of fee income, banks are paying
more attention to their cash, trade and treasury businesses. Success in transaction
services is key to the future success of banking.

All these are fundamentally changing the way transaction services like, cash
management, trade finance, and treasury, are viewed by the businesses and banks.
This paper attempts to identify and analyse these changes – what is the
new role of a treasurer and what role will a bank need to play in the future.
The paper also explores the emerging IT solution that banks can employ to meet
the needs of the businesses of tomorrow.

Background

Companies are under constant pressure to increase their return on capital through
higher margins. There is a continuous focus on increasing sales and reducing
costs by more efficient use of existing resources. This is being achieved through
effective use of information, information on market demand and efficient production
goods and services through a well informed supply chain.

ERP and Supply Chain Management (SCM) tools like collaborative forecasting,
planning and replenishment (CFPR) are being successfully employed to facilitate
information collection and dissemination across the supply chain. More accurate
and real time information is helping to predict demand, produce just-in-time
what is needed, reduce distribution delays and stock-out losses, and lower costs
of inventory and purchases.

But these ERP and SCM tools do not complete the business cycle as they do not
facilitate exchange of financial information between the channel partners. The
existing transaction banking services acutely lack these capabilities as well.

Companies Expect more from Finance

Companies today, look at their treasurers not just to facilitate efficient
management of funds but also to help link up and facilitate the exchange of
financial information between all the channel partners in their supply chain.

Treasurers are now not only expected to help reduce cost of funds for the company,
but also for their channel partners. They are expected to promote sale and purchase
through innovative financing of suppliers and customers.

Greater Role for a Corporate Treasurer

To be able to deliver on these new responsibilities, a corporate treasurer
can not work in isolation. He/She needs to be the part of entire business process
and has to work with all the other departments in the organization.

The treasurer needs to work collaboratively with various departments within
the company. For example, he needs to work with the sale and purchase departments
during formulation and budgeting for customer strategy, with the credit and
receivable department for management of credit limits and customer and supplier
outstandings. A detailed list of various activities and role of the treasurer
in given in the table below.

Table: New roles of a Treasurer

Activities in Business Cycle Role to be performed by Treasurer
Customer/Supplier strategy Treasurer to partner with the sale/purchase team on its plans on identifying,
developing and maintaining customers/vendors
Sales/Purchase Management Decide on the budgets and funding requirements based on demand forecasting,
sales strategy and actual management of sales to end customers
Risk Management Help manage the risk of exposure to customers
Contract Management Help in clearly documenting the responsibilities of the parties involved
Order processing Coordinate actual management of receipt of orders and communication
of information
Credit Management Based on the risk profiles of the customer, sets the limit of credit
exposure that the company will take on its customer
Order fulfillment Coordinate on actual dispatch and receipt of material
Billing – Invoicing Bill and Invoice handling for sale and purchase
Pre-collection activity Acceptance of the terms of the billing
Receipts/Remittances Transfer of funds
Reconciliation Identification of receipt with the billed amount
Cash Management Concentration of receivables from various accounts
Liquidity Management and Investments Planning the investments and short term borrowing based on the inflows
and outflows of funds

As the role becomes larger, the task of a treasurer has become much more difficult.

Difficulties with Banking Services

Naturally, the treasurer also expects much more from his bankers than mere
funds transfer. But, he faces many difficulties with the existing services offered
through transaction banking.

Banks have various departments and different systems to service the transaction
processing needs of corporates. For routine payments, a treasurer is required
to interface with the payment services, for all domestic sale and purchase financing,
with the channel finance department, for overseas import and export with the
trade services department and for management of funds with the treasury. Similarly
for factoring, working capital loans, purchase cards, equipment leasing, inventory
finance and other similar activities, the treasurer works with many different
people and offices within a bank.

This becomes more painful if there is an error, or the information needs to
be shared with others in the supply chain.

Banks to provide Financial Information Integration

This silos based approach to banking services does not meet the demanding requirements
of today’s businesses. Companies look for a complete solution, where the
bank services are closely integrated with the supply chain, and provides complete
and up to date information of each transaction to all the parties involved with
the transaction. Depending on the requirement, the same transaction could be
serviced by any or all of the departments like cash for payments, channel for
funding or trade for the export.

Diagram 1. Need for Information integration by Banks

The ideal solution will provide integrated information of a financial transaction,
whether it involved any credit, receivable management or payment, and will be
accessible to any member of the supply chain at any time.

Alternatives for Banks

Banks have been trying for Information integration through various means. Various
alternatives that have evolved over the years are –

1. Relationship Approach – A common interface, banks
provide a single contact point for the clients to be able to meet all their
requirements. A relationship manager (RM) normally interacts with various units
and extracts the information as required by the client.

Issue – Process is manual and time consuming. RM needs to interface
with multiple departments and often lacks the complete understanding of all
the requirements of the clients or the services on offer by the bank.

2. Unified Customer View – Customer Relationship Management
(CRM) tools provide another source of collating data at one place and provide
Information Integration for the relationship managers and clients.

Issue – Most CRM systems take historic data and do data integration
as per specified rules set up. Many are limited in terms of real time information,
period of information and speed of data retrieval.

3. Modular and Workflow based Systems – Banks need to
develop systems that are modular and based on workflows required for different
business processes. The systems will process the documents separately depending
on the activities required and route them to different work stations and departments.
This would help integrate the various activities that are performed in cash
management, trade finance, channel finance and treasury.

Issue – Difficult to implement and does not focus on external
interfaces with the client systems.

4. Web Services for Information Integration – Web services
offer the flexibility of developing different systems to support different departments
and at the same time provide for information integration through dynamic integration
of these systems.

Web Services enables system development in the form of a service, which closely
resemble the transaction banking model. Services like cash management, trade
finance, treasury and channel finance can be very effectively integrated based
on this new technology. This would enable the banks to offer multiple service
against a transaction, say payment for a client, and supplier financing for
the seller against the same transaction. As these services are based on standard
protocols and can be accessed over the internet, these can be easily integrated
with the ERP and SCM systems of the clients.

Issue – Emerging technology and the standards have not been
fully established yet.

Conclusion

Business need a solution from the banks that provide complete integration with
their supply chain. They need the flexibility to use any or all the services
of a bank for a particular transaction and also the ability to share specific
information across their supply chain.

The banks would need to necessarily become information service providers than
mere transaction facilitators, to achieve this. Existing silos based services
can not meet the business requirements of the future. Therefore, complete integration
of cash management, trade finance, channel finance and treasury services is
the way to the future.

Emerging technology like Web Services offer unique flexibility of integrating
information within the banks and outside with their clients and their supply
chain partners.

Reference: Transaction Banking to Information Services : Future of Corporate
Banking, December 2003, Rajat Tyagi (Infosys Internal).

Comments are closed.

Subscribe to get your daily business insights

Whitepapers & Resources

2021 Transaction Banking Services Survey
Banking

2021 Transaction Banking Services Survey

2y
CGI Transaction Banking Survey 2020

CGI Transaction Banking Survey 2020

4y
TIS Sanction Screening Survey Report
Payments

TIS Sanction Screening Survey Report

5y
Enhancing your strategic position: Digitalization in Treasury
Payments

Enhancing your strategic position: Digitalization in Treasury

5y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

5y