FinTechSystemsSelecting the Right Treasury System – Part 1: So Little Time, So Many Choices

Selecting the Right Treasury System - Part 1: So Little Time, So Many Choices

Aggregate industry surveys suggest that 40% of US Fortune 1000 companies do not own a treasury system. In today’s hyper-regulated environment, this leads to a very interesting question: “how can a major multi-national or global organization manage a treasury without a treasury management system?”

Treasury management, like most of the financial operations of a corporation, can be viewed as a set of services and / or processes. Processes such as finding out how much cash is in the bank accounts, consolidating cash among subsidiaries, and netting-off internal domestic and international invoices are some of the many tasks in a treasury manager’s job. In multi-entity corporations these processes can be complex and time consuming, and they are strong candidates for automation.

Each of the three basic treasury processes mentioned above – consolidated balance and transaction reporting, cash pooling, and FX netting can be handled in a variety of ways – all of which offer differing degrees of cost, convenience, and automation.

This series of articles will detail three generic solution levels for each process and their related costs.

  1. Do nothing approach:
    • Highly convenient
    • Costs are very high
    • Cost visibility is very low
  2. Ask your bank to do it for you:
    • Very convenient
    • Costs are relatively high
    • Cost visibility is relatively low
  3. Buy a treasury system and run the process in house:
    • Convenient
    • Costs are relatively low
    • Cost visibility is very high.

In these articles, examples will be based on composites of real companies. These are real examples from specific companies (names withheld to protect the innocent). These examples are used in a generalized way in order to illustrate issues for a wider group. Each generic company is based in the American Mid-West, has total sales in the $3 – $10 billion range, and has 30-40% of their sales coming from outside the US (primarily in Europe). Each uses a mix of solutions, but with differing emphasis. For example:

  • Bank Service Users – Rely heavily on their banks for treasury services, but have little specialized treasury technology.
  • Cash Management System Users – Rely on their treasury system for domestic cash operations, but take a ‘Do Nothing Approach’ internationally.
  • Cash and International Treasury System Users – Full use of technology.

Consolidated Balance and Transaction Reporting

One of the most fundamental treasury processes is balance and transaction reporting. It is also, theoretically, the easiest process to manage. The critical outcome of this process is the answer to the following question: “What are the corporation’s balances in each of its bank accounts, and what activity has taken place over the last 24 hours?”

Simple. Right? This process is, in fact, the one that launched the treasury workstation industry. Communicate with your bank, or banks, ask for the balance / transaction information, parse it, G/L code it, and the job is done. Some treasury departments care only about the few accounts that they use for treasury purposes. Others reconcile several thousand accounts every day.

Three Solution Levels

Do Nothing Approach

All of the treasury people do at least some daily gathering of account information, the majority; however, do nothing when it comes to monitoring their non-US accounts. There are a large number of companies that have hundreds of bank accounts outside the US but have zero visibility or control over these foreign accounts. Sarbanes-Oxley seems to be creating a demand for greater visibility of all accounts.

The “Do Nothing” Costs

There are many costs of not knowing what is in your bank accounts. Here are three:

    1. Bank Charges for underused or unused bank accounts.

Account charges vary greatly, but range from $100 per account to several hundred dollars per month per account.

This cost is real and theoretically visible, but since the vast majority of budgets are set based on last year’s budget number plus a small increase, it is essentially hidden in plain sight. Additionally, the cost is frequently bundled into ‘bank fees’ and ‘offset’ by an earnings credit.

    1. Idle Cash.

If you don’t know how much you have, you can’t put it to use. This can easily run into the hundreds of thousands, and in some cases, millions of dollars per year.

As the classic opportunity cost, this cost is hidden. One example illustrates this best. A company had recently acquired another smaller company that now operated as subsidiary. The subsidiary would report and offer only half the cash in its account to the corporate cash pool. The rest, an annual average of $10 million, they would keep ‘just in case’. The cost to the corporation of not seeing or using this ‘just in case’ money to pay down borrowing lines: $300,000 per year. That was just one account out of 130.

    1. Misuse of Funds.

Some call it fraud. If you can’t answer the basic question of how much is in an account, what hope do you have of properly controlling it? Cost? Variable, potentially high, and possibly embarrassing.

Ask Your Bank To Do It For You

All of the big global banks such as Citibank, JP Morgan Chase, Bank of America, ABN, etc. offer bank account consolidation services. These banks generally use the SWIFT network to communicate with all of your other banks and then use their own systems to forward it on to the corporation. Operationally, you give them the right to gather the data for you and they pass it on to you. This is most commonly done for prior day balances. It is also often a convenient add-on service for your main cash management bank.

The “Ask Your Bank To Do It For You” Costs

There are two primary costs involved in asking your bank to act as your consolidator:

    1. High Per Account Per Month Charge

This charge varies with the number of accounts, the location of the accounts, and the amount of other business that you are giving the bank. Some banks charge flat rates, and some have wildly varying charges for similar clients.

There doesn’t seem to be an easy way to generalize the charges. $30 per month per account for balances, plus $30 per month per account for transactions, plus a per transaction charge is about where the market in the US seems to be. (Some charge lower per account, but have other annual fixed costs.)

    1. (Reducing) Bank Dependence

As most corporations depend on banks for at least some credit, reducing this dependence may seem an impossible objective. Banks provide many valuable services that only banks can provide. Bank accounts and credit lines being the most obvious. However, there are several other areas that can be serviced by non-banks and consolidated bank account reporting is one of them.

Simply giving the account consolidation business to your main bank has costs. One example is a bank that quoted a customer $30 per month per account for balance reporting on 200 accounts. The same bank quoted another company $10 per month per account for the same number of accounts. That’s a 300% difference for the same service from the same bank to two different companies. If that difference sounds dramatic, there are other examples of companies that were quoted $60 for 300 accounts by their respective cash management banks!

What is the business rational for a 600% differential in price for what is basically a commodity service? The answer could well be the banks’ own profitability models. According to a recent AFP survey, 50% of corporations have been denied credit at one time or another for not spending enough on other bank services. In other words, if the client is not profitable enough on their borrowing line or lockbox processing, then the client is expected to make it up with another service, or risk losing the bank as a supplier.

Buy A Treasury System, And Do It Yourself

This article started with the fact that 40% of the Fortune 1000 does not own a treasury system. Obviously, that means that 60% do own one. However, among those that do, relatively few utilize their system to full effect. In the case of balance and transaction reporting, it is easy to see why. In the early days, cash managers used modems to dial their key banks and manage their key accounts. Time passes and businesses grow. Account structures are now often very complicated, global, and spread across many banks. This makes direct dial up connections to more than 5 or 6 banks impractical

Once a corporation is dealing with more than 5 banks, it begins to make sense to look to a data aggregation service to collect and check the data. Often corporations just ask their bank to provide the aggregation services. Those corporations that focus heavily on process efficiency turn to independent technology suppliers to get the job done.

The “Buy Technology And Do It Yourself” Costs

This tends to be the ‘least cost’ solution, but it is also the ‘most difficult to get budget for’ solution. Software purchases and installations are long-term in nature, and therefore, IT costs get a correspondingly large amount of profile and attention. As such, technology driven projects typically require a special capital expenditure budget and are almost always subject to the scrutiny of the purchasing department. There are three categories of cost in this approach:

(Please note that bidding a treasury process out to a bank is no picnic either. However, the nature of the product and the cost structure usually means a much lower level of scrutiny. (How often do data aggregation bids go through the rigors of cap-ex budgeting and purchasing departments?)

    1. Technology Related– Software, Hardware, and Maintenance

Technology related costs for a direct connection, either modem or through a private network such as eTX, usually run between $1,000 and $2,000 per year per bank. This cost is a flat charge, per bank, and does not usually have a variable charge element associated with it. This is a particularly inexpensive option if the corporations have at least 10 accounts with each bank that they intend to connect to.

    1. Employee Related

People are needed to operate systems. However, there is rarely an incremental position required, regardless of the platform that is used. (Unless, of course, you are planning to phone and collect all the data manually.) In fact, most software ROI’s include a reduction in staffing component.

    1. Service Related – FIDES, Data Flow

Independent data aggregators compete well with bank aggregation services on a few fronts. First, they are bank neutral. This means that the prices they charge vary only according to the number of accounts and access type (i.e. electronic versus fax). Secondly, for those banks that are part of the SWIFT network, services such as FIDES’s are usually much less expensive than the same service provided by a bank. Finally, services, such as data flow will deliver bank data electronically for those banks that are not part of an electronic network. In this sense, the corporation is outsourcing the manual collection of account data from so called ‘mom and pop’ banks.

In Summary

For most treasury processes there is a diverse, competitive set of vendors and solutions. When setting up an operating environment for treasury, it is important to recognize that every process has multiple solutions. Each one brings a unique set of trade-offs of cost and convenience, control and culture. The table below gives a very brief guide to some of those trade-offs. Happy shopping.

Control Convenience Cost Visibility Cost Actual
Do Nothing Approach None Very High Very Low Very High
Ask Banks Approach Good Initially Moderate, Then High Low to Moderate Moderate to High
Technology Approach Very Good Initially Low, Then High Very High Low to Moderate


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