BankingCorporate to Bank RelationshipsOperational Risk and Efficiency: Two Sides of the Same Coin

Operational Risk and Efficiency: Two Sides of the Same Coin

From an operational risk point of view, the communication needs of the corporate treasurer have rarely been properly looked at from the side of the corporate treasurers themselves. Traditionally, a bank will go to a corporate business and dictate the ways in which the two organisations will communicate with each other. The corporate treasurer will bend to these demands to ensure a good business relationship between the two parties, as the bank will usually present an ultimatum of “work my way or not at all”.

If you then take a normal, sizable corporate that has multiple bank relationships, a great deal of technology ends up being adopted by the corporate to meet the specific demands of their banks, but that technology doesn’t have anything to do with the day-to-day running of the corporate’s business. When multiple bank relationships exist, and therefore multiple communications infrastructures are being used, this adds complexity to the corporate infrastructure that results in increased risk and cost. Various different banking/treasury solutions also increase risk and cost, as does the fact that many banks are still not using industry standards to communicate with their corporate clients. All of this added complexity increases the potential of systems to fail, which increases operational risk.

On the operational risk side, there is also then a question about whether a corporate can actually carry out its necessary bank-related transactions and at the same time manage the infrastructure that supports those transactions being made.

In the past, the whole issue of operational risk and operational efficiency in the bank-to-corporate relationship hadn’t been considered to be that important because the treasury management role was a different beast. Traditionally treasury managers had not been as actively involved in managing corporate money internationally and certainly didn’t need to be as well versed in issues such as foreign exchange (FX) trading, derivatives strategies, etc. In some cases, the treasury function of a business would be quite happy to receive a fortnightly report indicating financial exposures or surpluses, and the planning of how to use the organisation’s money would be managed elsewhere – often by the corporate’s banks.

Regulatory change is also causing the treasury function within corporates to evolve. New regulations, such as the Payment Services Directive (PSD), speed up the process of payments and increase competition across the payments sector. This means that corporates can take greater advantage of changes in interest and FX rates, as well as more cost effective and flexible payment services. They can move their money in an increasingly agile manner and manage it more effectively overall primarily for their own benefit and not their banks’. As a result, it is increasingly important for corporate treasury operations to have the appropriate technology solutions in place to facilitate the quick, easy and guaranteed ability to take advantage of this new competitive environment. Reliability is, of course, a key factor. This guarantee of reliability is important from an operational risk point of view, as an organisation needs to know that it is going to be able to make transactions happen as and when it needs to.

Connectivity

Starting with the connectivity part of the process, there are typically three ways in which a bank would consider communicating with a corporate today:

  1. Via the Internet.
  2. Through SWIFT.
  3. Through a bank’s own system/private network.

All three of these communication channels have pros and cons, however.

Internet

While the Internet is cheaper, as a public network, one issue is security; another is that there is no guaranteed service level and therefore no guaranteed reliability. While technology firms can overlay security onto that Internet infrastructure, corporate treasurers do not automatically feel comfortable with the use of a public network. The ability to trust in your technology is a key issue for corporates, as it is in all aspects of business.

The majority of us as retail customers are satisfied to use a secured Internet infrastructure for retail transactions because the amounts of money being transferred are small and we don’t want to pay for making payments through our bank. Corporate customers would also prefer not to pay for making payments, but because the amounts of money in question are a lot larger means that the whole aspect of risk, security and reliability becomes a much larger issue, too. This is why a bank will sometimes tell a corporate to use a messaging services provider such as SWIFT.

SWIFT

The approach of using SWIFT, however, has proven to be expensive for banks’ corporate clients – only some 300 corporates have been attracted to use SWIFT’s messaging services directly – but this does not take away from the fact that the security and reliable delivery of transaction messages is a key factor for corporates and for their banks.

A bank’s private network

On the corporate side, there is also a question of trust when looking at the ability of banks themselves to provide the most secure solutions for corporate-to-bank transactions. In the eyes of a corporate treasurer, a bank that develops its own messaging solution does not automatically have the necessary credentials for providing communication security because, unlike a provider of secure messaging services such as BT or SWIFT, providing leading-edge secure communications technology is not their core business.

When looking at the needs of the corporate treasurer from the side of the corporate treasury function, which is how this article began, it is unlikely that a corporate treasurer would opt for a different communications infrastructure for each banking relationship that has to be managed. The preference would be for a single window, an overall view of all of the corporate’s banking relationships, with a single infrastructure behind that window that provides communication to all of the banks that the corporate deals with.

Operational Efficiency and Risk Management

Corporates would love to realise this level of operational efficiency, but this needs to be balanced with the issue of operational risk. Depending solely on one infrastructure provides little leeway for things to go wrong with that infrastructure. If an organisation becomes over-efficient then it takes on additional risks: if a company streamlines things down to be extremely lean and efficient then what happens if a key communications system breaks down? Business continuity and operational efficiency are two sides of the same coin. In some sectors, including the users and providers of financial services, there is typically a heavier weighting applied to the risk management side than the operational efficiency side of that coin.

The solutions that tend to get presented to a corporate treasurer to achieve this single-window view are usually aggregations of software packages that integrate the corporate’s banking relationships by interpreting between all of the different banking systems, different formats and different protocols that the corporate is forced to use. The problem, however, is that behind this window is still a great deal of complexity and complication within the technology itself, so that a situation arises whereby what is physically seen happening is nice and simple but behind the window the complexity remains and the risk has not been eliminated.

The complexity of this then goes further when looking at the direction in which banks and more advanced corporates would like to go in terms of inter-linking their enterprise resource planning (ERP) systems to exploit their mutual relationship, as well as the multiple corporate relationships that each of the parties has. The relationship between a major corporate and a bank is just one relationship out of the hundreds and thousands of commercial relationships that the corporate maintains. Ideally a bank would like to be embedded in the corporate’s business to enable the bank to look at more ways to serve the corporate client in order to increase the bank’s revenues – but also, because the corporate gets a better overall service from its banking partners, this increases the levels of operational efficiency for the corporate. As we have seen already, however, when corporates begin to inter-link with other corporates and banks to increase operational efficiency, then they also increase the operational risk as each of the parties becomes much more dependant on the other.

Conclusion

Corporate treasurers will increasingly have to look to use service providers that can offer a range of solutions to suit their own specific and changing needs, from broader operational solutions that manage their IT and infrastructure systems and increase the flexibility across their business, to more specific solutions that can create efficiencies while maintaining appropriate levels of risk management.

This is not going to be achieved, however, through one central network, one central computer and one technology provider – it will come from federating all of these different environments. The corporate is one element of the federation, the bank is another element, and each supplier and customer represents another element – each of them has its own systems and complexities. True integration across these corporate and bank relationships lends itself completely to an internet protocol (IP) environment by plugging networks together and making them work with minimum risk, maximum security and optimal operational efficiency.

Within the corporate treasury function, the business need is for consolidation of multiple network IT systems to improve treasury operations, reduce the resources needed to manage IT overheads, and improve operational efficiency through standardisation and improved service levels. On the banks’ side, an IP environment allows them to extend their reach quickly to existing and new corporate clients, to federate their systems more easily with those of their clients, and to increase their interaction with their corporate clients to generate new business opportunities.

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