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Digitalisation in Treasury

Digitalisation in Treasury

Cash management: what will become of the cash manager?

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In the last Newsletter, we dealt with the fundamental question of what digitalisation really means in treasury. Today we focus on one of treasury's core areas, cash management.

Irrespective of the wide range of conceptual definitions of cash management, a new thematic category has arisen thanks to system and (especially) process integration driven by technical developments. Cash management is today the Cash & Banking Hub, consisting of five elements:

  1. Bank account management
  2. Cash positioning, i.e. traditional managing of cash
  3. Cash concentration, i.e. all measures to manage liquidity in and between individual accounts
  4. Cash forecasting, i.e. the necessary liquidity forecast for managing accounts, cash concentration and short-term borrowing and investing of funds
  5. Payment transactions

In the context of digitalisation, all five of these elements are seen under the three central objectives (process efficiency, effective use of liquidity and compliance) and the related actions (creating transparency concerning bank accounts, balances or lead times, standardising processes, formats and communication channels, and maximum automation). New structures accompanied by new target operating models have come into existence and define the interplay between treasury, shared service centre, IT and subsidiaries.

And then there's the question of the new technologies like artificial intelligence, blockchain or predictive analytics, to name just a few.

But which of the new technologies are really relevant now? What should treasury be concerned with? Which of these developments are still in such an early phase that there is a big question mark over their implementation, and thus investing any time in them appears unnecessary?

Let's look at two dimensions of this issue, the potential utility for treasury and the maturity of the technology:

1. A high degree of maturity coupled with high utility calls for action, as this means that there are both initial concrete examples of it being applied and also successful first application. This includes issues such as

  • Treasury robotics: Robotics Process Automation (RPA) is the deployment of software ('bots'), using which manual, repetitive tasks of employees are automated. In cash management, for example, they can be used where interfaces have not (yet) been automated or data has to be retrieved and processed manually. Bots are optimisation assistants for times of comprehensive (technical) transformation that involve time and budget restrictions.
  • Automated reporting: Modern reporting software allows the three reporting types, work reports, management reports and compliance reports, to be automated to the fullest extent and lends dynamism to the process. In each case this is not dependent on the underlying system landscape.
  • End-to-end accounting: All transactions in cash management can today already be mapped in the accounts in a fully automated fashion, across their entire life cycle, including the respective period-end closing entries.
  • Fraud prevention in payment transactions: Attack scenarios are becoming ever more complex and unpredictable. To identify anomalies in payment transactions, machine learning applications are now being deployed. They differ from conventional search algorithms in that there are no search instructions, because the search result is unknown.

2. A medium to high level of maturity with average high utility requires closer investigation of the matter. This includes

  • Predictive Analytics: Cash forecasting is an ideal use case for predictive analytics. The objective is to simultaneously reduce the amount of work and improve forecast quality. It is often forgotten that doing this requires foundations in the form of detailed historical data, and so preliminary work must be carried out.

3. A still lower level of maturity that offers high utility means that the technical development should be continuously monitored. This relates to a series of issues that may be being discussed extensively but are still not relevant in terms of implementation, and includes

  • eBAM: With eBAM, all parties involved are dependent on the banks, who have not yet decided in large enough numbers to offer eBAM or with large enough coverage. It remains to be seen if the banks are waiting for Distributed Ledger Technology (see KYC).
  • KI Cash Reconciliation: Artificial intelligence (AI) is set to further optimise the automatic clearing rate. Here it remains to be seen how the business case adds up, given today's often very high clearing rate of >95%.
  • Prescriptive Simulations: Forecast procedures to create and explain projections may become an extra level beyond predictive analytics. Its optimising potential is still unclear, particularly how much it may be able to optimise account management.
  • Smart Contracts: Even though the term and technology come from the 1990s, the development of bitcoin, representing a special case of a register, has breathed new life into the concept of efficient contract management concerning financial transactions. Similar to the issue of blockchain or distributed ledger, the simultaneous increase in security and high efficiency results from a high number of participants and thus nodes. 1:1 relationships can be mapped more simply and more cost-effectively with conventional techniques.

4. Low utility coupled with a low level of technical maturity means that the issue can be ignored at this time. The examples will surprise you, yet these are things that everyone seems to be talking about currently:

  • Distributed Ledger for the KYC Process: On the search for the holy grail ... the uniqueness and accuracy of relevant information for the KYC process are doubtless a key advantage of this technology, but only when the whole system required for all information has this feature.
  • Payments with cryptocurrencies: If your business model (or the business model changing in the future, e.g. on-the-fly booking of additional functions in the car or invoicing between machines) does not compel you to make or accept payments in cryptocurrencies, leave it be.

As you can see, the new domains that treasury should be tackling from the angle of further digitalisation of cash management can be summed up relatively easily. But, as noted in the original article, the basis must be right, i.e. the foundations must be laid to deploy new technologies. This comes at a time when user cases based on disruptive technologies are more the exception than the rule, and thus when we are witnessing an evolutionary change, granted one moving with considerably more speed.

These foundations include:

1. Bank Account Management (BAM):

  • Optimising the bank account structure and banking partners
  • Introducing a BAM system with the option of using eBAM
  • Replacing bank accounts with virtual accounts and in-house bank accounts
  • Implementing bank fee management

2. Cash positioning:

  • Linking processes with bank account management and cash forecasting
  • Full automation of account statement processing
  • Implementing a rules-based, automated cash positioning process with optimised exception processes

3. Cash concentration:

  • Optimised cash concentration structure covering all currencies, countries and timezones and taking into account a suitable in-house bank – this then includes a sub-section of 'bank relation strategy'
  • Introducing RPA (Robotics Process Automation) to obtain information and automate processes where current systems and external service providers have gaps in automation
  • Monitoring implications for tax and adjusting structures appropriately and promptly

4. Cash forecasting:

  • Implementing a company-wide automated calculation of current figures
  • Creating a liquidity driver model taking into account relevant data from operating activities
  • Deploying forecast tools that allow data transformation and algorithms

5. Payment transactions:

  • Preparing a central payment transactions platform
  • Standardising the internal and external payment transactions processes
  • Harmonising the payment transactions formats

As regards transforming cash management to a cash & banking hub, it will obviously be interesting to see how it develops in terms of timeline. In this regard, it is crucial to understand where the essential dependencies lie.

There is a strong dependency between bank account management and cash concentration. Thus, it makes little sense to introduce a bank account management solution if the account and cash concentration structure has not first been optimised. On the other hand, as there is fundamental system proximity between cash concentration and cash positioning, there is also close technical dependency. Cash forecasting and payment transactions as a project are very resource-intensive and thus can be implemented in parallel to the other operations only to a limited extent.

There are many sides to digitalisation in cash management, therefore. Traditional areas undergoing evolutionary change are interspersed with disruptive new technologies. Cash management in the traditional sense, involving cash managers who also manage a number of accounts on a daily basis using their many years of experience, is giving way to an optimised cash & banking structure in which, as far as possible, every manual activity is automated. Continuous optimisation of the structure, including using new technologies, will be the focal activity of the future. How this shift is achieved on the part of employees will be looked at in one of the following parts of this series.

Source: KPMG Corporate Treasury News, Edition 75, January 2018
Author: Carsten Jäkel, Partner, Finance Advisory, cjaekel@kpmg.com 

© 2018 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative (“KPMG International”), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten.

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