Current and Future Trends in Treasury Automation Systems
Over the past two to three years, just about all corporates that required specialized applications to support their treasury operations have implemented such systems and are unlikely to change their technology infrastructure – unless a practical advantage from a business point of view can be achieved. There are two such benefits that are attracting the attention of decision makers from a treasury perspective: (1) global visibility of funds and (2) new efficiencies in multi-banking relationships, which have become possible due to two current trends: enterprise application integration (EAI) and standardisation. In addition, these trends have been accelerated by a convergence of the system provider (treasury and banking and ERP) market.
Treasury departments have increasingly been moving toward the centre of the financial supply chain. Corporates rely on their treasurers to make informed decisions with regard to working capital management and risk exposure. Due to the almost ubiquitous availability of treasury and ERP systems, the trend of increased EAI is beginning to deliver benefits to the business by integrating information that was always available in the treasury management system (TMS) with figures from the accounts payable (A/P) and accounts receivable (A/R) data.
The current trend is for treasury system providers to deliver more value to their client base by allowing ready-made integration with products from their indirect competitors (i.e. ERP system providers). Extended functionality is less critical now and the key need is the ability to integrate all necessary systems from the financial supply chain into one treasury system that provides treasurers with a complete overview.
From a business perspective, this trend enables a treasury department – be it a global shared service centre or one that is decentralised on a national level – to have a detailed overview of all positions that impact its working capital management and other liquidity positions.
Most treasuries need to maintain more than one banking relationship. This results in multiple bank connections, which usually require unique communication, security and format, making the set-up and maintenance expensive. Another important trend is global harmonisation and standardisation of these three aspects of a bank connection.
With regard to communication and security there are promising options already available in the market: First, and most prominently, is SWIFTNet in conjunction with a Member Administrated Closed User Groups (MA-CUGs) and the usage of FileAct as a SWIFT service. Most system providers (treasury, ERP and others) are working on providing off-the-shelf solutions for SWIFTNet connectivity. Reduced connectivity and set-up costs are a result of these efforts, which make it a viable option for treasury departments to connect to all their banks with the same technology. For direct access to multiple banks one MA-CUG agreement with each bank is necessary.
Once the SWIFTNet option is available as a standard feature with the vast majority of system providers and the anticipated extension of the provider’s client base in the mid-cap market segment has materialised, one can expect a higher penetration of SWIFTNet amongst the medium-size corporate treasuries. Previously, this proposition was considered too expensive.
Second, there are other options in the market, which offer an alternative if the treasury departments use the network provider’s product, and if their desired banks have entered into this private network as well. This is a closed network and the complexity of connecting to multiple banks is hidden by a conversion and routing engine in the middle of the network.
Third, there are other providers in the market which do not yet follow either of these options but work with multiple banks to pre-agree and test connectivity, facilitating the implementation of multiple bank connections for the corporate. This collaborative approach usually is an intermediary step before eventual standardisation.
As a consequence of this trend, a corporate treasurer will be in a position to purely focus during the bank selection process on the value that a bank adds to the business (i.e. instruments offered, global reach, customer service, accurate and timely information). Technical connectivity, which previously had played an important role when selecting a bank, is becoming standard and thus, a less important factor. There is, however, one remaining missing piece for a bank connection – global consistency of the format.
In the past, corporates may have hoped that their treasury and other system providers would have listened closely to their customers and supported them with tighter and easier integration of multiple systems. However this has not benn the case – their main suppliers’ focus was still the technical integration of disparate systems from an IT point of view. This allowed a group of specialised EAI providers to emerge.
Today ERP or TMS providers can no longer compete on better or extended functionality to win new mandates as the market is increasingly saturated. Therefore, system providers can only strengthen their position by improving their business value amongst their existing, installed client base. This is why both ERP and TMS providers are heavily moving into the integration business and now compete with specialised providers who emerged only a few years ago when this space was left unoccupied.
While one could argue whether or not this is a trend or merely a commercial necessity, it certainly accelerates the change into the direction where the treasury business would like to be – global visibility of funds and easy-to-maintain (and switch) banking relationships. The way system providers are evolving, the next two years are likely to be very active with regard to increased efficiency of corporate treasury departments.
Currently, bilaterally agreed formats (such as SWIFT FIN messages, EDIFACT or bespoke formats) dominate the landscape and no standard with regard to global payment initiation has been implemented across all providers in the market. We expect a single, global standard for payment initiation, status and feedback messages as well as account information to emerge by 2007. The XML payment kernel (published under ISO and SWIFT) has a good chance of fulfilling this role. A key aspect of this development is also which standard the European Commission will accept for the Single European Payments Area and the EBA Step 2 clearing.
There are different reasons why the players in the market are keen on implementing such a standard. From a corporate point of view the motive is clearly cost savings – for A/P for payment initiation and for A/R to reduce the labour intensive reconciliation by receiving the relevant data for reconciliation always in the same place. Last but not least, from a treasury point of view to increase the accuracy of A/P and A/R, which will enable a more accurate working capital management.
From a bank viewpoint, the main driver is to satisfy clients’ (i.e. treasury) demands and provide the functionality that will be required in future requests for proposals. In addition to this very basic rationale, the ease of an implementation – which will be supported by a global transaction initiation standard – improves the chances of winning new mandates. Quickly implementing new deals or enhancements is important in order to shorten the sales-to-revenue cycles.
From a system provider point of view this is one of the few opportunities to enlarge their share of the wallet with their clients or at least justify the substantial investments their clients made in the past. In summary, treasury departments can look forward to further increasing their efficiencies, internally and externally towards the banks, by capitalizing on the above trends.