Corporate treasury has experienced a transformation over the past decade. Traditionally, this group has been largely focused on task-based activities, and was often limited by manual processes. In recent years, however, technology and automation has empowered treasury to expand responsibility, increase its importance, and become the strategic centre for many financial decisions in the current market environment.
Liquidity management has been a key element of corporate treasury for many years, and is often a treasurer’s greatest challenge. With technology such as online banking, multi-bank reporting, treasury workstations, enterprise resource planning (ERP) solutions, and other tools that enhance visibility into liquidity positions, corporate treasurers are able to drive more value from liquidity than ever before. This places them in a better position to increase their importance and strategic responsibilities within the organisation.
Risk management is another area that has been central to corporate treasury’s evolution. For treasury, the risks are many. Liquidity risk, counterparty risk, and foreign exchange risk each requires attention. Beyond liquidity and risk management, treasury’s reach has expanded into areas such as working capital management as its responsibilities have increased. Treasury’s responsibility for working capital management includes payables and receivables management, with treasury playing a strategic role in the order-to-cash cycle and days sales outstanding (DSO).
Treasury is also commonly involved in payments decisioning, including identifying which types of payment vehicles are best suited for specific transactions. Treasury’s reach has grown internationally as well. As technology capabilities have grown, more and more treasury groups find themselves with increasing influence and control over international banking services. Accompanying this is a centralisation of many international treasury decisions and a push toward centrally managing international banking relationships.
Challenging Times Strengthen Banks’ Treasury Services
The current financial crisis brings with it a need to get back to basics. Banks must somehow regain the trust of their customers, while at the same time writing off toxic assets and bringing stability back to their balance sheets. For the better part of the last year, the financial services community has been hammered with crippling write-offs, poor capital ratios, bank failures, and a significant loss of trust from customers. Bank lending and brokerage businesses have been hit the hardest, but bank treasury services groups seem to be well positioned for success.
If properly leveraged, bank treasury services’ ability to grow deposits – coupled with product mixes that show little fluctuation – promises to bring some stability to the market. Banks recognise this, as evidenced by a recent Aite Group survey of 23 treasury professionals representing 22 of the 100 largest North American banks. Of the treasury professionals surveyed, 96% indicated that treasury services are increasing in importance to their banks (Figure 1).
Figure 1: Treasury Services Have Become More Important to Banks as a Result of the Current Economic Environment
Q. Which of the following best describes the impact of the financial crisis on the importance of commercial treasury customers at your bank? (n=23)
Source: Aite Group’s Survey of Treasury Professionals at the Top 100 North American Banks, January 2009
Banks’ Responses to the Evolution of Corporate Treasury
Banks are service providers to the corporate treasury community, and must therefore respond as it evolves. Unfortunately, their product and service offerings often fail to meet the more demanding and strategic needs of corporate treasurers. As a result, banks risk falling victim to disintermediation and being viewed simply as providers of information.
Banks appear to have an insight into some of the ways corporate treasury is changing, despite slowly evolving bank product offerings. When asked how their customers are changing, banks most often indicated an increased focus on liquidity management (Figure 2).
2: Corporate Treasurer Changes
Source:
Aite Group’s Survey of Treasury Management Professionals at the Top 100 North American Banks, January 2009
While many corporate treasurers view bank offerings as increasingly commoditised and stale, many banks think they are responding to the evolving needs of their treasury customers. The most common way banks are responding is through the development of new products to align offerings with treasury’s expanding responsibilities. Working capital management solutions were cited by many respondents as the product set receiving the most attention to-date in supporting treasury’s expanding role.
Banks are also responding to treasury’s liquidity management focus and increased concern about risk. Respondents are focusing on providing treasury with greater visibility into liquidity positions, both domestically and globally. This allows treasury to quickly locate and mobilise idle funds and, from a risk management perspective, identify ‘trapped’ liquidity.
Some banks are also leveraging treasury’s emphasis on risk management to attract new customers by increasing customer-facing time and bragging about having healthy balance sheets and strong capital ratios. Furthermore, and even more exciting for banks, is the opportunity provided by the limited risk appetite treasury groups have for short-term investment vehicles.
Not only are banks trying to grow on-balance sheet deposits, but these deposits also provide treasury services groups with the highest spread revenues of any liquidity vehicle. By meeting the needs of treasury customers in this challenging market environment, treasury services groups stand to benefit significantly.
Bank Treasury Services Priorities for 2009
Not surprisingly, these opportunities are driving treasury services group priorities for 2009. Figure 3 lists the top five priorities for treasury services groups at the 100 largest North American banks for 2009. Leading their list is a focus on deposit and liquidity services, which will enable them to grow on-balance sheet deposits. In essence, banks are shifting back to more traditional practices and away from less traditional sources of funding (such as the sale of bundled securitised loans placed in trust accounts), which are largely blamed for the current financial crisis.
Source:
Aite Group’s Survey of Treasury Professionals at the Top 100 North American Banks, January 2009
Banks are also seeking to deepen customer relationships and cross-sell across the bank. Those banks that have strong balance sheets and available credit see effective cross selling as an especially large opportunity. Many of those institutions fortunate enough to be in such a position have begun stepping up their marketing and sales efforts to broadcast their financial stability. In an effort to deepen relationships, healthy banks are specifically targeting existing customers who have known relationships with struggling competitors. As new sales strategies are implemented, greater support will also be provided to banks’ largest and most profitable customers.
Many banks will also be focusing internally during 2009. Banks will continue to enhance online offerings (especially electronic payments and international capabilities), while at the same time focusing greater attention on health care, commercial cards, and new product innovation that will help them better differentiate themselves.
They will also pay increased attention to cost cutting, which will be achieved in several ways, including consolidating platforms, streamlining processes, and outsourcing. Costs will also be cut through tighter product and process integration.
Finally, broader industry struggles resulted in several high-profile large-bank mergers and acquisitions during 2008. These activities create process redundancies and place new pressures on banks for integration. It is therefore not surprising that slightly more than 20% of the banks participating in Aite Group’s survey indicated that integrating platforms, processes and staffs with a new partner would be a top priority during 2009.
Key Products Driving Treasury Services Revenues
In this financial crisis, banks indicated the financial stability of banking partners has quickly become a critical element of risk management. Not only is the provider important, but the security and stability of investment vehicles are also of paramount concern. As a result, banks are experiencing an unprecedented ‘flight to quality’, with treasury groups of all sizes placing an emphasis on banks with strong balance sheets and low-risk liquidity vehicles, such as demand depository account (DDA) services and commercial time deposits.
‘Treasury services’ is a broad term that can encompass many different products and services, depending on the bank. More traditional products and services include lockbox and cheque-clearing services, wire transfers and ACH payments, and DDA services. Recently, however, the treasury product umbrella has begun to expand, and now often includes products that support treasury customers in automating payables and receivables processes and managing the supply chain, commercial cards, new liquidity management vehicles, and foreign exchange.
Despite the broader product portfolio, the two primary products driving banks’ treasury services revenues have changed little over the years. Electronic payments – specifically automated clearing houses (ACH) and wire transfers – and depository services continue to be the bread and butter of treasury services.
This shouldn’t be much of a surprise, as banks generally serve treasury customers by providing funds transfer services and vehicles to store excess cash. Information reporting is also a large contributor to banks’ treasury revenues, and has been for many years. The delivery channel for this information has changed to a more efficient online platform in recent years, however. Rather than sending customers a completely impersonal data file containing the information treasury clients require to set their daily cash positions and perform other responsibilities, online banking offers a user-friendly interface, flexibility, and an additional channel for customer interaction. Further, online platforms offer personalised viewing screens, analysis tools, online customer service, and the freedom to gather information from anywhere the Internet is accessible.
The survey also revealed that the largest North American banks are now finding that some less traditional products are becoming more important contributors to the treasury services line of business. Specifically, commercial cards and working capital solutions are proving to be key sources of revenue.
Commercial cards continue to experience double-digit growth rates year-on-year, and their convenience, controls and reporting capabilities are likely to continue to drive their growth in years to come. Working capital solutions, such as integrated payables and receivables products, have also developed into key revenue generators. Working capital products not only drive revenues, but also support treasury customers as treasury’s responsibilities over the cash conversion cycle continue to expand.
When asked about how treasury services revenue drivers will change in the next two years, banks responded that working capital solutions, more than any other product set, will become central to treasury services revenues. They also expect information reporting and online banking services to exceed electronic payments services in importance as potential revenue generators. Other treasury products making the top 10 list include lockbox, remote deposit, trade finance, health care and foreign exchange.
International services is another product set that is a growing contributor to treasury services. As the economy becomes more global and businesses expand internationally in workforce and trading partners, banks are increasingly being tasked with supporting the international banking needs of their customers. Although only the largest banks offer truly robust international treasury services capabilities on a global scale, 76% of survey respondents indicated that international services are becoming a more important component of their bank’s treasury services strategies, and will continue to grow in importance over the next two years.
Many of the survey participants that see a growing need for more international capabilities are affiliated with banks beyond the top 10 in North America (ranked by total assets), and serve smaller customers than their larger bank counterparts. It is clear, however, that the need for international capabilities is continuing to move further down-market. Today, many North American middle-market companies do business overseas and have global trading partners. Unlike the largest banks, which can support the treasury needs of customers across the globe, banks outside the top 10 are likely to offer less sophisticated international capabilities such as international payments, basic trade finance services and foreign exchange.
Recommended Bank Actions
In order to fully unleash the potential of bank treasury services, banks must first make some critical changes to their strategies, product offerings and methods of customer interaction over the next several months. Many bank treasury services departments are being held back by siloed structures, and their treasury products and services offerings have failed to evolve alongside the role of the corporate treasurer. In the minds of corporate treasurers who now focus on more strategic issues, this causes banks’ offerings to look stale, creates a commoditised market, and distances bank treasury products and services groups further from their customers.
As this happens, the relationship between banks and corporate treasurers becomes less strategic. In addition, many bank treasury services groups have failed to move beyond transaction-based selling despite broadening product portfolios. Although many have a number of the necessary tools on hand, most under-utilise them, or don’t even know they exist.
Aite Group recommends six key strategies that bank treasury services departments should adopt over the coming year to ensure greater fee generation, client retention, deposit growth and higher levels of overall success. Some banks have already begun to move in the right direction, but faster, more widespread adoption is needed. The recommendations include:
- Greater focus on growing on-balance sheet deposits.
- Increased emphasis on international capabilities.
- Creation of differentiators to ‘un-commoditise’ the business.
- Switching from a product focus to a client-relationship focus.
- Leveraging technology partners to support sales, analytics, and improved customer service.
- Streamlining systemic interfaces between the bank and its commercial customers.
Today, treasury is a far more integral and strategic support for companies’ financial supply chain than in the past, with increasing responsibility for working capital management. As a result, treasury needs greater support and insight from its banking relationships.
Fortunately for banks, a closer client relationship translates into client retention and the opportunity for greater profits. To succeed in enhancing client relationships, banks need to move beyond a focus on transaction processing and overcome their siloed organisational structures. Technology solutions are available to support banks in accomplishing these goals.
Banks are the repository for a lot of client data that should be mined for internal uses as well as analysed to assist clients. Knowing more about clients, both as individuals and segmented groups, will allow banks to target solutions effectively, as well as cross-sell and up-sell products and services. Data analysis combined with banks’ financial and global expertise will allow them to become trusted advisors for clients.
2009 is a good year to start building stronger client relationships. There is a ‘flight to quality’ among commercial customers. Banks that demonstrate their quality can position themselves to lead for years to come, providing actionable and valued services for their corporate treasury clients.