The B2T Opportunity for Banks

At over 80% of all major corporates, the reporting function between operating units and treasury, such as cash flow and exposure forecasting, is handled using spreadsheets. Similarly, internal transactions such as currency hedges, guarantees and loans are performed using the phone or e-mail. These methods do not comply with the current regulatory climate or management requirements around timeliness, reliability and auditing of such information. As a result, most corporates will have to implement an auditable and transparent business-to-treasury (B2T) process in the near future.

What is B2T?

B2T refers to the processes and transmission of data between business units and treasury where treasury provides tools and guidelines for business units in order for them to:

• Manage their treasury related risks according to corporate policy.
• Report about cash forecasts and exposures in a timely and accurate manner.
• Execute the internal treasury transactions effectively.

B2T is a new approach to conventional treasury solutions and is built on providing simple tools for subsidiaries to effectively manage and automate their interface with the treasury centre. The underlying principle is to ensure that the data that enters the treasury workbench is accurate, up-to-date, reliable and visibly linked to underlying business transactions, and is also transparent with complete audit trail features to meet the requirements of Sarbanes-Oxley (SOX), IAS 39 and FAS 133. A B2T approach provides the tools for business units to apply corporate risk policies against their business related exposures, and thus reflects a higher quality of top level forecasting and reporting.

While some companies have solved – or are planning to solve – the challenge of improving communication between business units and treasury by implementing a systems project with their TMS or ERP vendor, many corporates want to avoid intensive system projects and are seeking more cost-effective and time efficient solutions. This gives banks the opportunity to reduce churn and increase customer loyalty by providing cash and treasury management solutions that includes a B2T application. In addition to a broader and deeper customer relationship, banks can benefit from new revenue streams, such as integrating the corporate FX solution into the bank’s e-dealing platform.

A B2T application is a tool that business units can use to manage their own treasury exposures and report them to treasury. The application also enables business units to carry out intra-company transactions, such as currency hedging and guarantees through an automated process. Staff who work at the business unit level are rarely treasury professionals and so the B2T application must provide clarity and a simple interface to treasury processes. This enables easy and time-efficient handling of treasury-related responsibilities.

B2T Challenges

Manual processing and Excel-based reporting create the following problems:

• The lack of transparency and audit trail makes it very difficult to meet the requirements of SOX and hedge accounting.
• Unreliable and out-of-date forecasts result in ineffective liquidity management and surprise open currency positions.
• Manual processes tie treasury staff to daily operations and there is no time for more value-added work, such as consulting and training the operating units in treasury management.
• Error prone processes create more manual work.

Based on the survey Exidio conducted together with gtnews in November 2006 (Survey Reveals High Levels of Inefficiency Within Internal Treasury Operations):

• 94% of corporations are not able to create fully automated real-time/on-demand reports about cash held and forecasted.
• 91% of corporations have manual or partially automated systems to report and communicate between headquarters and subsidiaries.
• 88% of corporations are not satisfied with their current cash forecasting.

The following section highlights the main reasons behind these B2T challenges.

Lack of single ERP: Few corporations have a centralised system that provides treasury with all necessary information concerning business-related exposures. In a vast majority of corporations, the information is manually collected from various isolated systems and reported to treasury using a variety of methods with only partial accuracy.

Lack of suitable tools: The absence of a system to support B2T processes is mostly due to the fact that traditional treasury applications (i.e. TMS) do not yield to the demands of B2T process management. As a result, corporations have been forced to find alternative, often excel-based tools for this purpose and the problem with these solutions is that they tend to be based on the needs of treasury alone. Spreadsheets and TMS web interfaces don’t meet the needs of treasury but offer subsidiaries a complicated interface for handling simple tasks.

Lack of clear instructions: The rules and regulations concerning treasury activities are encapsulated in the corporation’s treasury policy. This document will no doubt be comprehensive from the point of view of risk management but it can also be extremely complicated – not just for staff working within subsidiaries but even to the people who wrote it!

How Does a B2T Application Differ from Traditional Treasury Applications?

A B2T application focuses on the management of treasury risks that arise from the corporation’s operational business transactions. The basic idea behind such applications is to provide easy-to-use tools for people who are close to the source of those risks and who possess the best knowledge about them: the business units. The goal of the B2T tool is to help business units manage their treasury-interfacing tasks and better understand treasury processes and risks. On the other hand, a traditional treasury application provides tools to treasury to control financial instruments. In traditional treasury applications, it is assumed that the exposures are gathered separately via spreadsheets, for example, or that the application includes an additional interface designed for business unit reporting. The B2T area as such is usually not a part of the core expertise of such application providers.

Banks as B2T Application Providers

Why would a bank provide a B2T application?

Banks must compete for customers in a market where they can rarely differentiate themselves from others in terms of solutions. In order to be different, banks needs to expand the customer relationship by supporting the corporate treasury operation as a whole with an approach that is not commonly used in the industry.

A bank that helps the corporation solve critical B2T challenges positions itself as a trusted partner. It is important to note that a solution that is in use throughout all operational units within the organisation becomes a fixed part of the corporation’s internal daily processes and is therefore extremely difficult to replace. By providing added value on top of the conventional banking sector services, banks can gain customer lock-in as well as visibility into the internal processes of the corporation, and also create new ways to cement the customer relationship even further.

Why would a corporate choose a B2T solution from a bank?

The role of corporate treasury has traditionally been that of a business support function. When making investment decisions, business-related development is typically regarded as having a better return and is thus given a higher priority leading to low allocation of funds for treasury-related systems development. This being the case in most corporations, treasury has typically accrued very little experience of systems projects and certainly has no available human resources to allocate to such an occasional project.

The reputation and reliability of the solution vendor, and the same for the solution itself, are among the top criteria for treasury when selecting tools for their core processes. Treasury never plans for a short or intermediate timeline – it seeks a long-term partnership with as little management overhead as possible. The software industry is fiercely competitive and is going through a significant phase of consolidation, which in some cases results in the discontinuation of a solution’s maintenance. Corporate buyers are thus more suspicious about the continuity of the planned partnership, as any changes affect the corporation globally. Also, most large corporations have issued a strict vendor policy that rules out many software vendors due to their small size or financial instability, and enforces the principle of minimising the number of different vendors used.

Against this backdrop, banks are in a favourable position. As an existing partner, the bank is already an accepted vendor and enjoys a high level of trust in relation to the corporate customer’s financial and treasury processes. Most of the concerns that arise from vendor selection have already been solved, and the barriers to buying additional services from banks are minimal. This means banks can focus on providing the best added value for its key customers.

B2T application options

Banks can select from three alternative ways to provide a B2T solution to their customers:

1. In-house development – By building the solution in-house, the bank will no doubt have full and unlimited control of the end result. One should ask, however, whether the bank possesses the required knowledge of the internal treasury processes of their corporate customers. Of course, the bank can involve a selection of key customers in the specification work, but that would mean that the outcome is steered towards the existing processes of a few corporations – not generic best practice. The solution must support best practice in order to be broadly applicable and useful for as large a user base as possible. Furthermore, in-house solutions are costly because they must be supported, developed and maintained. And how long can you afford to wait for it to be available? This leads to the second alternative.
2. Outsourced (tailored) development – By involving an external organisation, banks can achieve a broadly applicable solution without directly engaging in software development business. The project still takes a lot of time, and cost is likely to be even higher than when building in-house, but maintenance responsibilities can be agreed separately. The solution will be unique and will only be further developed by a specific request and funding from the bank.
3. Purchasing a standard product or service – The third alternative provides banks with the means to rapidly claim a leading role in providing B2T services to the most wanted corporate customer sector. By partnering with a B2T solution vendor, banks can provide a solution that has been developed through best practice and supported by co-operation with corporate treasuries. Such solutions are normally sold directly to corporate customers, but providing them through a trusted bank channel is cost-efficient and expands the potential of the market.

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