Technology is enabling corporate treasurers to emerge from the backroom to play a more strategic role in organisations.
Sophisticated treasury management software and electronic payment systems mean they can spend less time on the day-to-day headaches of handling cash and instead concentrate on longer term initiatives.
Magnus Lind, chief executive of Nordic Financial Systems, which specialises in treasury consultancy, identifies two reasons why companies are taking a close interest in the previously overlooked treasury function.
“There is a stick in the shape of compliance. But there is also a carrot as businesses realise that they can release a lot of value that is locked up in disjointed paper business processes,” he says.
In Europe, the inefficiencies are particularly acute due to the fragmented national payment systems which make it much more complicated and expensive to make cross-border payments, even within the eurozone.
Charlie McCreevy, European Commissioner for the internal market, sees this problem as a significant drag on the European economy. At a recent conference, he gave the example of a customer in one EU country who makes a euro payment to a supplier in another. The payment may take five days or more to clear, while the truck-load of goods will have arrived days earlier.
“In the age of the digital economy and instant global messaging, there is surely something wrong when electronic messages arrive days behind physical goods,” he said.
The European Commission estimates the cost of not having a single market in payments at a staggering €22bn a year.
Frustrated by the banks’ failure to move faster on this issue, the EU is pushing hard for the creation of a Single European Payments Area (Sepa), which seeks to make payments throughout the eurozone as cheap and easy as domestic payments are today.
The commission wants Sepa to go live at the beginning on 2008 but many experts are doubtful that the deadline can be met, not least because the banks are balking at the estimated $10bn cost of implementing Sepa and wonder what they will get in return.
Anthony Smith, chief technology officer at ACI Worldwide, a US specialist in payments technology, describes Sepa as a “real driver for change” as it will give European businesses an efficient payments system comparable with the Automated Clearing House (ACH) system that has long existed in the US.
“Big multinationals can negotiate good service from their banks but Europe’s SMEs are really today suffering from the inefficiency of payment systems,” he says.
Nevertheless, he warns that Sepa is likely to lead to consolidation among payment providers just as ACH has done in the US. “Lots of banks in Europe will lose this high-margin payments business,” he says.
One big potential benefit of Sepa is that it will allow companies with employees scattered across the 12-country eurozone to make their monthly salary payments once through one bank. This is a great improvement on the current situation where the company has to set up separate arrangements at higher costs in 12 different banking systems.
“Today, treasury managers are taking responsibility for payments as well as cash collection but with different payroll systems in each country there is no way of getting visibility and control on your cashflow,” says Martin Boyd, executive vice president at SunGard, a vendor of treasury management systems.
This problem of fragmented local payment systems is one of the biggest headaches for treasury managers in multinationals.
Some companies, tired of managing multiple banking relationships in different countries, have embraced the concept of the in-house bank, a sort of “virtual” bank located at group HQ and in which subsidiaries hold current accounts.
The in-house bank goes beyond a centralised treasury – commonplace in large multinationals – by acting as a cash concentration centre. The aim is to pool all cash positions, rather than just major surpluses and deficits, and sweep the resulting balances to accounts held with a handful of regional banks.
The in-house bank also allows businesses to handle inter-company payments themselves rather than having to pay an external bank to do them.
SAP, the enterprise software vendor, offers an in-house cash module to allow multinationals to set up in-house banks and it claims the idea offers many advantages, such as allowing cash resources to be kept within the group, concentrating banking business with fewer banks, and controlling payments on a global and regional level.
Danisco, a Danish manufacturer of food ingredients, is an enthusiastic supporter of the in-house bank idea and has used SAP’s software to implement it. By pooling cash previously spread across many local accounts, Danisco has been able to reduce its loan portfolio and its 25 cash pools are handled by just five banks.
Danisco wanted to implement straight-through processing (STP) but before it could eliminate the paper, it had to build and test the electronic interfaces to the banks, because while there is a long-established standard for electronic payments, called Edifact, it is implemented differently by each bank.
Chris Skinner, associate director at the TowerGroup consultancy, says this problem of proprietary standards is one of the biggest challenges for treasurers seeking to automate paper processes and it has hindered the take-up of STP.
However, the advent of Sepa and the support now building around Transaction Workflow Innovation Standards Team (Twist), a new open standard for corporate treasury automation, provide hope for the future.
“Companies are trying very hard to standardise their financial supply chain processes with standards like Twist,” he says.
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