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Digitalization in Finance

Digitalization in Finance

Hype, Affirmation or Real Trend?

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Digitalization and automation seem to rule every conversation, not stopping at companies’ Treasury departments. Over the last few months, KPMG has repeatedly delved into this topic in various studies, position papers and event talks, where it grappled specifically with the following questions:

  • So what does digitalization actually mean for the company’s Finance department, both in regard to applications and people?
  • Do managers perceive their companies to be equipped to master these challenges?
  • What kinds of measures are being implemented?

Whilst “automation” describes the transfer of process functions from humans to artificial systems, “digitalization” means the transfer from analog information or procedures to digital formats in order for processing them using IT systems. Therefore, the two concepts are somewhat interconnected and closely related to the use of progressive technologies.

In the KPMG study “Digitalization in Accounting” (2018), the most important technology trends mentioned are as follow:

  • Artificial Intelligence:
    Artificial intelligence aims to enable machines to perform human activities. In doing so, it imitates the human brain’s learning abilities and development.
  • Big Data:
    Big Data is characterized by the volume of data to be analyzed, which may be structured or unstructured, and also by the ability to analyze not only static data but (almost) real time data as well.
  • Blockchain technology:
    A blockchain is a decentralized data structure which stores transactions in a transparent, connected and unalterable manner in a network and uses cryptographic mechanisms to verify the data across the network.
  • In-memory databases:
    In-memory databases primarily manage data in a main repository on one or several servers. This greatly improves data maintenance and analysis.
  • Machine learning:
    Learning systems recognize patterns in available data based on commonalities.
  • Rule-based systems:
    Robotic Process Automation (RPA) is the robot-based process automation: bots take over the roles and duties of users, and interact with other systems.
  • Self-service reports:
    Here a reporting environment is provided that allows managers and departments to intuitively access reports without having to involve the IT department and to independently analyze significant corporate data.
  • Virtual reality:
    This denotes the presentation and the perception of reality and its characteristics in a computer-generated, virtual and interactive landscape.

However, what is striking is that the technologies mentioned above and the technology-based solutions have so far only been put to use in a rather limited fashion. However, the prerequisites are present in many cases already today. 

Already in 2015, KPMG’s Finance & Treasury Management unit took the term “Industry 4.0”, which is essentially concerned with the computerization of production lanes and coined the term “Treasury 4.0” in a position paper. The reason for this was that if IT was going to be such a significant factor for so many companies, then this would also be true for “Treasury 4.0”. Three trends underpin this theory already today:

  1. The complex management options using so-called high-end treasury systems, i.e. integrated system solutions of individual providers that map all of Treasury’s core functions and which allow a high degree of individualized configuration. The accompanying concept of “management by exception” represents the highest degree of automation;
  2. The sometimes very inexpensive reproduction of core functions of Treasury using SaaS solutions;
  3. The creation of the heterogeneous best-of-breed system platforms; in plain speak: solutions from different providers covering Treasury core functions with an integrated approach, by connecting various third-party applications to leverage the system.

This development is also mirrored in a paper by the Foundation of VDT Engineering & Service entitled “Minimum requirements in corporate treasury for operational and financial risk management”, revised in 2016, where the principle and description for a process-efficient Treasury department is defined as follows: “Optimizing or standardizing processes, structures and methods and implementing ideal IT enables an efficient management of finances and financial risks, reducing the efforts and costs for purely transaction-related tasks.”

Currently available systems and the system landscapes that can be configured with these allow a very high degree of automation of Treasury processes (“true straight-through processing”). This greatly reduces manual activities and makes work much more efficient. Simultaneously, the focus of Treasury activities is shifting to more analytical tasks. However, this makes an internal control system even more important.

The question now is how companies react to these obvious options. The KPMG study “Digital Finance“, where we presented the results from an empirical investigation on the digitalization of Finance departments in 2017 together with the Fraunhofer Institute, found out that very often, companies lacked specific projects and strategies to properly realign their department. Although 96% of the respondents understood the potential in digitalization and 59% expected digitalization to be a challenge, 3 in 4 companies had not implemented a digitalization strategy in their finance departments.

The results of another KPMG study, entitled “Digitalization in Accounting” put together in 2018 can be summarized as follows:

  • Homogenization and standardization remain focus topics for companies when it comes to digitalization:
    The respondents give precedence to projects that are prerequisites for further steps in digitalization. In so doing, a main topic is the homogenization of basic systems used, the standardization of workflows as well as the quality of master data.
  • There is conspicuous restraint when it comes to new technologies:
    Big data tools, self-service reporting or in-memory databases are currently used almost exclusively in pilot projects or are just being planned. First experiences have been made with bots (RPA) and a handful of companies are experimenting with machine learning.
  • The use of cloud computing is not yet pervasive:
    Both private and public clouds are used only to a small extent and are not foreseen by most.

Both studies mentioned above epitomize one of the most important challenges, which could be a good explanation for the low degree of implementation: new roles and new knowhow are just crystallizing in Finance departments everywhere (just as in all of the other core functions) and new abilities are becoming increasingly important.

At a key note speech at a KPMG Digital Treasury Summit recently held in Frankfurt, Germany, Martin Bellin stated that many of the reservations that employees had towards new technologies were caused by the fact that these often develop faster than we can understand them. Moreover, digital natives (i.e. those under 30) are slowly outnumbering digital immigrants, i.e. those above 40.

Younger employees often expect more changes and are more open towards these. Moreover, younger employees have a higher affinity towards technology and have a good grasp of the issues that arise when finance and IT meet. More experienced employees, on the other hand, react to changes with more aplomb and can better estimate their long-term impact. They are characterized by financial knowledge that they have acquired over many years and a better understanding of the resulting interfaces and dependencies. The success of a department lies in identifying the different abilities of the various employee cohorts and to combine these in different ways to the benefit of the cause at hand. 

The tasks in the finance department will continue to change. On the one hand, the job specifications are changing because more analytical thinking will be required. On the other hand, fewer employees will be necessary for repetitive and standardized tasks. In consideration of these circumstances, companies should rethink their HR strategy in regard to continuous professional development (CPD) but also in regard to their hiring policies.

In conclusion, the success of automation strategies and the entry into a digital era depend very much on human factors: the individual employees and a holistic HR strategy.

Source: KPMG Corporate Treasury News, Edition 86, November 2018

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