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Michael Versace
Michael Versace
Commentary
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Innovation & the Treasury Risk Landscape

The corporate treasury risk environment is continuously evolving.

The number and complexity of treasury risks have increased almost in lockstep with a decrease in risk tolerance in business following the recessionary period of the recent past. Financial markets' volatility -- including the dawn of negative interest rates from the ECB, the increased use of derivatives, regulatory pressures in the banking sector, and the complexity of financial products -- are among the factors that have contributed to this atmosphere of change.

To navigate these risks and other external market forces, there is a significant need for simple and easy access to transaction banking tools, effective decision-making analytics and mobile, customer-friendly applications. In addition, as a result of growing pressure from regulators, risk awareness has intensi­fied among boards of directors, who are now subject to increased responsibility and accountability for conduct across risk and treasury disciplines.

Pressures to use cash and liquidity efficiently and to deploy transaction banking and deal-hedging capabilities at key points in the corporate supply chain are a significant part of this dynamic. These capabilities are now more commonly found in a CFO's treasury-management software toolbox.

The treasury software market for financial technology is a sub-market of the larger market for financial accounting, which includes almost 150 solution providers and $17.1 billion in software investment annually worldwide. Fintech treasury software provides a set of licensed components (on premises or, more commonly, in the cloud) that provide cash management, liquidity management (including B2B EBPP), and financial risk management to CFOs, treasurers, and accounting groups.

This software improves decision-making, control, and security in corporate treasury and accounting operations. It typically covers receivables and payables management; cash forecasting, trade, and settlement transaction processing; liquidity risk management; workflow; visibility of cash positions; and exposures. 

Treasury software and fintech trends, by the numbers
Before taking a more in-depth look at leading treasury trends, let’s point out some salient facts about the fintech treasury software market:

  • Worldwide revenue for the treasury and risk software application market was $2.1 billion in 2013, representing growth of 4.2% over the $2.0 billion reported in 2012.
  • The treasury and risk applications market is forecast to increase to a total of $2.7 billion by 2018, representing an accelerating 4.8% compound annual growth rate (CAGR) for the 2013-2018 period.
  • In addition, banks worldwide will be spending almost $2.7 billion on fintech trade and treasury processing software by 2018 -- a figure with a CAGR of 6.8%, according to our most recent forecasts.
  • Based on worldwide revenue, the top five non-bank software vendors in 2013 collectively accounted for 48.6% of the market total.
  • The top five non-bank vendors in 2013, based on revenue growth, were primarily best-in-class treasury management vendors (as opposed to broader ERP providers).
  • Cloud-only, non-bank vendors report the highest (double digits) CAGR projections through 2018.

Treasury management innovation
Using innovation to gain efficiency, find new markets, and sustain a competitive advantage is important to most if not all companies. In addition, almost 60% of organizations responding to a 2013 APF Survey said innovation and IT spending in treasury systems is being driven as a direct response to increased exposure to credit, market, and operational risks. To assist in that search for treasury innovation, CFO should look for eight important innovation themes in next-generation fintech treasury management solutions:

Theme 1: Analytics as core to the architecture. Beyond the simple transaction of the past that included cash management automation, deal automation, and compliance reporting, treasurers should set expectations high and seek out cash platforms that combine powerful, proactive analytic and multi-currency transacting capabilities with cross-bank decision tools, ERP-enabled analytics, and visualizations to optimize cash, to manage credit and market risk, and to maximize finance performance.

Also, look for data analytics and social collaboration to become an increasingly important differentiating factor as providers seek to surround CFOs, treasurers, and accountants with useful decision-making information for receivables, payables, FX options, exposure management, and a host of transaction-banking-based interactions.

Theme 2: Improved customer engagement. As treasury offerings mature and become increasingly commoditized, customer experience and services support will become a more important differentiator. Treasurers should look for solution providers that are invested in customer-centric functions such as seamless on-boarding, single sign-on, and mobility. This set of tools serves as a counterpart to the user-friendliness used in retail channels today. Furthermore, to help improve operational turnaround, treasurers should also look for market data and workflow tools that seamlessly integrate with enterprise platforms and mobile devices.

Theme 3: Financial data aggregation. The complexity of the financial performance management for account valuations and performance reporting is fueled by the challenge of capturing and preserving data at the most fine-grained level from multiple sources. To meet this challenge, treasurers should strive to eliminate the inefficiencies of manual data gathering, cleansing, and processing. Consequently, they should look for solutions that simplify the ability to acquire data from internal systems and external providers (including banks), as well as for software that provides aggregated data in a consistent, normalized industry format for loading into internal databases and other applications (e.g., financial and regulatory reporting systems).

Theme 4: Information centralization. In transaction banking areas, look for banks and solution providers that have enhanced their treasury tools across national and international payments schemes, collections, liquidity management, clearing, and settlement. One common characteristic of such enhancements is the ability to centralize information seamlessly -- through consolidated account balances across multiple institutions to aid in cash forecasting, trade financing, escrow management, currency trading, and other liquidity risk functions.

Theme 5: Global and regional hubs. Many large corporations have seen substantial benefits when centralizing their payments operations into regional centers. These payment factories reduce operating costs and provide customers with the buying power to negotiate better terms with their banks. Look for TMS providers that have expanded payment factories to include a broader set of treasury functions, including intercompany netting and virtual accounts, to exploit liquidity and reduce treasury risk across operating units.

Theme 6: Corporate connectivity. After more than a decade of stated demand, corporate connectivity continues to make steady progress regionally, using a business-process-integration approach to optimize the multistep process of service integration for payment instructions and entity collaboration. It is therefore wise to investigate corporate-to-bank integration closely. It's a potential game changer, because it serves as a platform for corporations to link directly with liquidity providers (and vice versa), extending and automating many steps in financial workflows.

Theme 7: Trusted, seamless high-security. Cybercrime has spread and shifted from consumer to B2B interactions, identity and access management, user and transaction authentication, and digital signatures. Therefore, end-to-end data protection (including encryption and key management) must be delivered seamlessly as a personalized convenience to corporate users that covers all transactions, collaborations, and data interactions. Treasurers must take steps to ensure that these "trusted" environments can adapt to changes in risk profiles and appetites.

Theme 8: Mobility and the cloud. The third platform of IT will continue to disrupt legacy transaction platforms offered to treasurers. For example, corporate treasurers can now go to the cloud for complete, SaaS-based TMS solutions that offer complete ERP and bank-functions connectivity. At the other end of the spectrum, banks are expanding on their ability to provide bank-agnostic offerings to untapped customer segments through cloud-based billing, preparation, and data aggregation. Bankers therefore have to extend their services and to reach new business relationships through mobile devices and third party relationships.

Parting thoughts
When you think about innovation, think first about what corporate treasurers and risk managers share as common needs -- to gain greater visibility and strategic control over their cash, to reduce risk, and to strengthen internal controls. Treasury and risk have been forever transformed from a transactional operation to a strategic corporate function across all vertical markets and in businesses of all sizes, thanks in part to innovation. And innovation -- in the form of best-in-class treasury management solutions delivered through the financial technology ecosystem and banking counterparts -- will continue to be the most critical enabler of the next era of treasury management.

Michael Versace is a Global Research Director at IDC Financial Insights, responsible for the risk technology and infrastructure marketplaces worldwide. He provides prospective on how leaders in the industry are leveraging third-platform technologies and strategies to better ... View Full Bio

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Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
10/27/2014 | 9:17:49 PM
Re: Treasury mgmt innovation
That dissatisfaction that you mention Mike keeps showing up in survey after survey. Given the profitability of treasury services, it's definitely about time that those customers' needs get addressed.
anon7655627703
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anon7655627703,
User Rank: Apprentice
10/27/2014 | 1:36:23 PM
Re: Treasury mgmt innovation
Yes, indeed it is.  We're seeing a fairly significant race to the white space in the treasury market.  The last major refresh of these systems was 10+ years ago.  Since then, a lot has changed in terms of customer needs and solutions in the market.  And there's a generous feeling a disatisfaction with what can be described as tradition treasury services, like payments and transaction banking.  Thanks for your comments.

Michael Versace

IDC Global Research Director 
Byurcan
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Byurcan,
User Rank: Author
10/27/2014 | 8:56:18 AM
Treasury mgmt innovation
Interesting post, Michael. It does seem that innovation from a treasury management perspective has not been such a high priority for fianncial institutions as other parts of the business, but perhaps that's starting to change.
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