How Should Corporates Tackle the Credit Crunch?
Throughout the last 18 months, businesses have endured the most tumultuous market conditions in recent history. In fact, the latest figures from the British Chamber of Commerce reveal that UK firms are currently facing their worst cash flow situation since records began in the early 1990s.
Poor consumer sales and an increasingly weak domestic market, along with rocketing fuel and food prices, have even raised the spectre of recession. In the last few months alone, we have witnessed substantial lay-offs across the City, worrying downturns in key industries and profit warnings and financial losses from even the most traditionally robust firms.
Put simply, the credit crunch is starting to bite, and with the economic decline showing no signs of abating, corporates are under significant pressure to achieve more with less. This is by no means an easy challenge. However, there are several simple things that corporate treasurers can do to remove complexity, reduce risk, and perhaps most importantly, save time and money.
Market consolidation and regulatory drivers such as SEPA have afforded corporates new economies of scale. They have also allowed banks to offer their corporate customers more cash management products and services to automate the financial supply chain. But are corporates actually getting more from their banks? I suspect not.
Corporates have a real opportunity to streamline processes and reduce operational costs and shouldn’t wait for their banks to take the initiative. Instead, corporates must do more to engage with their banks in order to determine how serious they are about payment processing. Now, more than ever, corporates should sit down with their various bank partners and have a frank conversation about their needs, in order to ensure that they are getting the best products and services on offer.
In fact, in this time of economic unrest, truly savvy corporates won’t be asking for added value and better functionality from their banks, they’ll be demanding it. They’ll seek out the banks that can offer strategic services, such as discount management, to help streamline their business operations. They won’t think twice about moving their business if clear benefits are on offer elsewhere. Corporates should not be afraid to ‘shop around’ for the best banking relationships and lowest charges. Banking is an increasingly competitive industry and the upcoming Payments Services Directive (PSD) looks set to shake things up even further with new market entrants expected to put significant downward pressure on charges across the board.
With multiple banking relationships, connectivity protocols, file formats and back office systems to manage, any difficulty in processing payments as a result of information errors can cause significant and extremely costly delays. Not surprisingly then, corporations are increasingly focused on improving efficiency and achieving payment straight-through processing (STP). However, many corporates are still paying substantial repair fees as a result of processing transactions with incorrect payment information or non-STP compliant messages. In some cases, repair fees can cost upwards of £6 per rejected payment. Furthermore, corporates may also be faced with additional interest costs if the beneficiary does not receive their funds on time.
With businesses across the UK, and indeed the world, tightening their purse strings, these fees are simply unacceptable. Corporate treasurers have a serious responsibility to reduce these unnecessary costs. To do so, corporates need access to accurate information at the point of payment origination – information that can be researched and validated before it is issued to the bank. Collecting all of the necessary information such as SWIFT/BICs, Local Clearing Codes, CHIPS UIDs from multiple sources all around the world is a formidable task in which corporates continue to invest significant time and financial resource.
Given the challenge of collecting and maintaining this vast array of information, it’s not surprising that corporates frequently issue payments with incorrect or incomplete data instructions. However, there are solutions available to corporations that provide all the necessary global bank data to facilitate the routing of both domestic and global payment transactions. By deploying these high quality, integrated payment solutions within their ERP systems corporates can save considerable costs; not only by reducing errors and repair fees but also by removing the hefty burden of excess processing and manual transaction handling.
As external pressures from the credit crunch increase, and compliance and governance requirements necessitate better internal controls, treasurers need greater cash management visibility as well as insight into cash positions and forecasts. This can only be achieved when corporates have access to the appropriate technology and when that technology is used effectively.
The payments and cash management tools within most businesses are based on legacy systems that have evolved in an ad-hoc, piecemeal fashion in response to changing business needs and emerging regulatory demands. As a result, many treasurers are now working with unintegrated and unnecessarily complex transactional and financial management solutions, which increase operational costs. Therefore, corporates should also consider reviewing their existing systems and procedures to ensure that they are getting the most value out of their existing technology, in order to get a good return on investment.
Many financial services technology providers will offer consulting and audit services to assess the ‘health’ of corporate systems and processes, and provide recommendations on how businesses can make easy, yet marked, improvements. Reputable vendors will offer this service on an agnostic basis, rather than just to their existing customers. By allowing external experts to access their current systems and processes, corporates can improve workflow efficiency, customer due diligence, risk mitigation and STP – all necessary if companies are to successfully manage the impact of the credit crunch.
In many cases, corporates already have the required technology in place but are not utilising it in the most effective manner to drive down operational costs and maximise their investments. By undertaking a health check, corporates can be alerted to the, often simple, changes that can be made to rectify the situation. As well as offering regular ‘health checks’, many technology partners will also provide comprehensive training and support for treasurers, in compliance regulations, technology and payment processes.
Some corporates look to their banks for this type of service. However, as banks continue to focus on their own challenges presented by increased regulation and the credit crunch, it is not always possible for them to assist their corporate customers in this way. Corporate treasurers know better than anyone that you can’t wait for something to go wrong before making changes. It is critical to have clear visibility into your business at all times in order to be able to respond immediately to any threats. The same is true of technology, which is why corporates should seriously consider bringing in the experts to review their systems on a regular basis to ensure that their houses are in order.
With consumer confidence now at an all-time low, inflation fears continuing to intensify and costs rising, corporate treasurers are under more pressure than ever to drive down costs, remove complexities and reduce risk. This can be achieved, at least in part, if corporates are prepared to demand the best from their banks, their technology and their processes. While the immediate future might seem bleak, with the right approach I am confident that corporates can position themselves to successfully overcome the challenges ahead.