Treasury Management Solutions at European Banks
Banks use treasury management systems to manage liquidity, capture and process money market and foreign exchange deals, and increase operational efficiency. Treasury solutions are generally classified according to front-, middle-, and back-office capabilities, each of which has its own functions and users. These systems are used by a wide range of financial institutions including central banks, treasury departments of investment banks, commercial banks, asset managers, pension funds, co-operatives and regional banks, credit card companies, and hedge funds.
For some time, European banks have used systems to automate certain treasury management functions, including trade booking and risk management. However, the current market environment has forced banks to consider outsourcing these solutions in order to increase operational efficiency and meet market demand. These technologies also now incorporate a broader spectrum of functionalities into one system, allowing banks to meet new regulatory standards.
Treasury management solutions are used by a wide range of financial institutions including central banks, treasury departments of investment banks, commercial banks, asset managers, pension funds, co-operatives and regional banks, credit card companies, and hedge funds. Front-, middle-, and back-office staff use these systems for distinct functions. Users include traders, salespeople, risk managers, treasurers, assistant treasurers, cash managers, dealers, financial controllers, operations support staff, and staff from finance and IT.
Who ultimately decides to purchase a treasury management solution? Both the technology and business sides are involved in the process. The IT or compliance department of the bank also exert a strong influence. In the end, everything about the decision depends on the bank’s focus. For instance, is the bank replacing or implementing a new system to meet with regulatory standards? Or does it aim to cut costs throughout the organization, or allow more self-service tools to corporate customers? Despite the difficult economic conditions that have slowed IT spending at many banks, there is increasing interest in adopting treasury management systems. A number of factors motivate financial institutions to invest in new treasury management systems or replace older technology. These factors concern the various components of treasury solutions in the front, middle, and back office. Some of the major adoption drivers include:
Cost reduction: Banks are constantly trying to reduce costs by improving IT infrastructure and allocating betterpersonnel. Most current systems rely on old technology and are not designed in a modular fashion. Banks are seeking all-in-one systems and centralizing operations at fewer locations. To do this, some banks will leverage solutions built in-house while others will replace their systems with a vendor provided solution.
Compliance: Compliance has been an important driver during the past year. The need to comply with new accounting standards, such as the IAS 39 and Basel II, has forced banks to review their treasury management applications. Technological innovations will allow banks to address regulatory changes and risk management processes.
Straight-Through Processing: The need to increase process efficiency by using straight-through processing and decreasing operational delays will encourage the replacement of several systems with one integrated solution as well as the adoption of modular systems that allow users to add functionalities as necessary.
Scalability: Trading volumes have increased in the past few years. Current technology cannot handle the hundreds of thousands of trades exchanged today by banks. While banks use multiple systems to support various instruments such as foreign exchange or money markets, many lack support for more advanced products such as equities or derivatives. This has led banks to either upgrade current systems or replace them completely.
Competition: Across the globe, banks are competing to provide the best service to their customers. To increase profits, larger firms have expanded into new geographic regions or through acquisition or merger. These expansions have in turn intensified the need for flexible systems. In addition, banks are facing demand from their corporate clients to extend treasury support via the Internet, so the market will have to adjust to these requirements.
Banks have had systems to automate certain treasury management functions for some time, including trade booking or risk management. However, banks need a system that provides them with complete position management. In most cases, banks have outsourced these functions to external vendors, but keeping costs down has been difficult.
Most architectures for treasury management systems are client-server. However, these architectures are getting thinner, meaning there is not much software and that small servers are required. The outcome of this development will of course depend on network constraints at the bank. Small and mid-size banks are interested in having remote access to back-office systems; we will see vendors working to add this capability. Large banks are interested in providing ASP services to corporates, especially for small to mid-size firms. Doing so will entail managed services/or business process outsourcing by the bank. Extension of treasury systems to corporate clients is not very common, but Internet access to these systems to view positions and manage transactions is becoming attractive.
Increased technology adoption: During the past year, there has been an increase in demand from banks to adopt treasury management systems. Banks have had to implement workflow changes, so most manual processes are moving to automated systems and real-time transactions. Banks are also interested in securing their customer bases by providing new, more accessible and more transparent services. Typically smaller banks have been keen to implement comprehensive treasury solutions while larger banks have been eager to add one component at a time. However, this difference is disappearing as large banks evaluate their entire treasury management systems in an effort to reduce costs and comply with regulatory demands.
Dominance of replacements: While most banks in Europe have some type of treasury management solution, or at least part of one, the market for large and mid-size banks is becoming a replacement market. Banks either have older technologies that need to be upgraded or they do not have a complete front-to-back-office system. In the past, banks purchased different systems to accommodate multiple business areas. Today banks want to centralize operations on one system. If the system is not performing, or if the investment was made more than seven years ago, the bank might consider replacing it with a new solution. Sometimes banks are less interested in replacing legacy solutions than in increasing their speed of response and client delivery. Our research has shown that about 50 per cent of banks evaluating treasury management systems want to replace the entire solution whereas only about a third are looking for front-office functionalities only (front office deal capture or a Web application).
Internally built vs. outsourced deployment: Most treasury management systems at banks today have some components built in-house. More and more banks are considering outsourcing these solutions from external vendors to increase operational efficiency. We expect 45 per cent of treasury management systems to be licensed from external vendors by 2006.
Integration of systems: There is a trend to integrate separate bank systems into one platform. This integration will enable the bank to achieve straight-through processing and reduce costs. Firms are moving to centralize financial reporting, operations, and technology. Banks will therefore be looking for systems that are open and flexible enough to add other functionality as needed.
More sophisticated functionalities: Banks are requesting more advanced functionalities so fewer systems need to be deployed and so manual intervention is minimized. Some of these more sophisticated capabilities include greater support for instruments (derivatives and structured products), additional developments in the front office such as performance management and reporting, thinner architecture, and the ability to extend the solution to corporate customers.
Extension to corporate clients: Banks are interested in extending their front-office treasury functions to their corporate clientele via the Internet. Some of the services that are being offered to corporate customers include the ability to monitor activity and positions, execute trades, conduct payment and transfers, add additional users and establish user access, and service trades (add instructions for settlement, rollovers, etc.). Corporate customers benefit from this trend in as much as they are able to manage their activity with the bank autonomously. The bank also benefits because it is able to increase its straight through processing rate.
There are no major differences in demand from the various European countries, although regulatory issues can differ widely. In general, there is still a lot of manual intervention at banks. When implementing treasury management solutions, banks switch off a good number of systems (such as reconciliation systems or back-office systems), so efficient migration to these new systems is key. Germany represents a strong market for vendors, followed by the UK and France. There has also been activity in Scandinavia, Italy, and Poland. Many of the treasury management providers are focusing on emerging markets such as the Middle East, Africa, and others. Vendors have established local partners for Southern European countries and are working with local players in emerging markets.
The European market for vendor-provided treasury management solutions is evolving as banks face pressure to control costs and meet new regulatory requirements. Going forward, it will be necessary for banks to consider outsourcing treasury management technology in order to maintain their strategic focus, and to provide the new and more transparent services that will secure their customer bases. Our analysis suggests vendors should consider the following:
Flexibility and open architecture: Banks will choose a vendor-provided solution if they are able to expand the solution’s functionality as needed and integrate the solution with internal systems. Banks are also interested in collaborating with vendors to design and build new features. Covering all treasury functions on an integrated platform will continue to be the holy grail, for such a platform will reduce operational errors, improve risk management and enable the bank to deal with more instruments in larger volumes.
Expanded product coverage: As banks upgrade treasury management systems they will want to cover a broader set of instruments, particularly equities, derivatives and structured products. Vendors’ front-to-back-end systems will need to be more scalable and provide greater functionality across a wider range of instruments.
Compliance with local requirements: One of the main reasons banks are turning their attention to treasury management solutions is to meet new regulatory standards. Vendor systems should work towards meeting these requirements, with an emphasis on risk management, workflow management, and reporting.
Support for Web-based deployment: Extending the treasury management system to corporate clients via the Web is becoming an important capability for vendors to consider. In addition, these treasury management systems will slowly migrate from client-server architectures to thinner, Web-based environments as there is a move toward global processing hubs and systems that can support the new organization.
Ongoing support: Banks are sometimes concerned with getting the ongoing support they expect from a vendor-provided solution. Maintenance, upgrades, and ongoing collaboration are important for banks.
Strategic partnerships: To increase their sales opportunities, vendors should consider partnering with local players in each market, especially in markets where they do not have a physical presence. In particular, partners will be helpful in emerging markets such as the Middle East and Eastern Europe.
Competition among technology players will continue to characterize the European market for treasury management systems. Although systems developed in-house are still dominant, the demand for replacement and upgrade of existing technology with vendor-provided solutions will be inevitable if banks want to increase time to market, improve efficiency, and meet market demands.