While SWIFT, Ripple and others battle it out in one region of RTGS space, treasurers can ask their banks for a different payments mechanism, one also being transformed by FinTech and the blockchain. If cost is an issue, or if your digital business creates a high volume of low-value payments, what about ACH? By Simon Brady.

Automated Clearing Houses (ACHs) provide domestic clearing at exceptionally low cost and with very high transparency and service levels. Because clearing is critically important to the efficient operation and integrity of the financial system, ACHs are typically classified as ‘SIPs’ or systemically important payments systems and so they are to an extent future-proofed: they will be maintained and their activities are monitored by a governing body, usually the national central bank. 

Most banks do not provide individual businesses with the option to send money using the country’s local ACH systems but it has long been clear that a ‘global ACH’, a consolidation of the local ACHs into some kind of network, could create a powerful alternative cross-border payment system.

However, with no global ACH standard, and over 26,000 rules that govern bank routing in all the different countries, plus ever-increasing compliance requirements, attempts to create such a network in the past have failed to make progress. 

PayCommerce

To turn cross-border ACH into a relatively seamless and easy-to-use service, banks needed to be able to join a network with a single commercial agreement that uses technology to do the heavy lifting for them. PayCommerce is one: founded in 2006 it is a global ACH payment network provider which provides wholesale FX services and a local ACH solution across borders. PayCommerce says it can save users up to 80% on the cost of a payment.

“There is a new generation of tech businesses that are very global and have a lot of payment needs, whether collections or settlements, so our focus in the next few years is on this new generation of companies and large corporates. We provide a single platform for enterprise-wide payment needs, whether outgoing or collecting payments. There is a lot of cost saving when you streamline the platform and provide an enterprise-wide solution,” said Abdul Naushad, PayCommerce Founder and Executive Chairman, describing the initial ambitions of the company. 

PayCommerce has come a long way since then. In April 2017, the company announced that it had achieved a milestone of over 100 banking and financial services institutions in its consortium, spanning more than 80 countries. According to the company, “PayCommerce enterprise customers include seven of the top global banks, 11 of the top 50 US banks, 14 Global Fortune 500® firms and eight US Fortune 500® companies. Additionally, the PayCommerce platform has processed over US $400 billion, consisting of over 300 million transactions in the last 12 months.”

Earthport

Its main competitor is Earthport, which also claims to be “the leading payment network for cross-border payments” providing international ACH payment capabilities to its consortium bank partners, representing cross currency payments in more than 60 countries and 25 currencies. Like PayCommerce, Earthport effectively re-intermediates banks into a global ACH payment system and lets banks, money transfer organisations, merchant acquirers, gateways and newer global payment providers make payments globally on behalf of customers or directly to suppliers or global sub-merchants.

Tipalti

The previous two companies provide banking services to banks, which can then offer an improved service to their corporate clients. However, corporates can access global ACH more directly via a cloud-based portal such as Tipalti which is a global payment automation service that gives global ACH as one of its choices of payment channel. These portals offer a range of integrated services, including payee registration through to invoice processing, tax and regulatory compliance, remittance, payment issue resolution, fraud risk mitigation, payment reconciliation and payee reporting. The systems also check that payees are not on any international anti-terrorism, anti-drug trafficking, and anti-money laundering watch lists prior to payments being made. 

Choosing this type of system, rather than asking your banks to utilise a different channel, means integration with ERPs, accounting and performance management systems. So the choice is not simply a new, cheaper payments channel offered by your banks, it is a fully-featured automated payments and remittance system. 

Blockchain

Both PayCommerce and Earthport started out by focusing simply on the value-added parts of the transaction chain: initiation, processing, capture and customer service: they did not aspire to create real-time, instant payments in competition with other RTGS networks.

However, both companies have also announced blockchain-based initiatives to take their consortium networks to the next level, Earthport announced its gateway partnership with Ripple in August 2015, which led to the launch of the Earthport Distributed Ledger Hub for multiple ledgers, announced in January 2016. This was designed to provide connectivity to additional distributed ledgers as they emerge, all available via a single relationship with Earthport. 

The structure of transactions is not changed by the addition of blockchain, the Ripple technology simply speeds up the transaction and all counterparties reconcile to single balances on the Ripple Consensus Ledger. In other words, the addition of Ripple unites correspondent banks and market makers in the same ledger which allows all the transaction information to be shared between Earthport the banks and the FX market makers.

In April 2016, Earthport executed the first cross-border payment transaction received via distributed ledger for Santander UK, enabling it to become the first UK bank to use distributed ledger technology (DLT) for cross-border payments globally.

PayCommerce has developed a different blockchain model based on its proprietary ‘Federated Ledger’ to enable real-time, instant payments, clearing and settlement integration for its banking consortium. The Federated Ledger is a hybrid, integrating both distributed and centralised ledgers which enable faster payments across networks via its messaging platform. According to the company, this “takes the next step in instant payments by uniting disparate regional and country systems onto PayCommerce’s bank consortium model which is interoperable with other global systems and networks to maintain ledger balances across all parties.”

The Federated Ledger is a hybrid of both distributed and centralised ledgers. It acts as an integration point across different networks of the distributed ledgers. But it is still the consortium banking model that, in both cases, creates the foundation on which the global network is based. 

PayCommerce has announced the launch of the pilot programme to deliver instant payments between the US and India then extended to UK to India later in the fourth quarter. In 2017, the firm plans to roll out additional originating and receiving countries including Mexico, other GCC countries and South Africa; followed by Australia in 2018.

The first phase of testing has been completed and the firm sees 2017 as the year in which it rolls out a multi-country real-time, cross-border, account-to-account service. 

For corporates these developments mean ever simpler and cheaper access to faster, more visible payments. There is also clearly a process of convergence between the larger bank networks, and the use of blockchain technology, which will increasingly pit these consortia against each other and against incumbents such as SWIFT. For banks this will create a complicated set of choices about technology and partners. For treasurers it simply means a wider range of ever simpler, cheaper and faster payments channels.

Cross-border payments have long been the bane of treasury: too slow, too expensive and too opaque. Nimble FinTech service layers get all the hype, but the key competition is about incumbency and the fundamentals of correspondent banking. By Mark Parsley.

Ask a corporate treasurer about the pain points in payments and you’d better prepare for a rant: how long a payment takes for the beneficiary to be paid; the predictability of that time; impossibility of tracking payment status; inconsistency of data requirements by different banks; poor quality of remittance data sent with payments; costs and predictability of costs of making a payment; the time and difficulty of dealing with rejections, stopping payments and performing payment repairs.

All of these problems conflict directly with treasurers’ need to automate processes, prevent fraud, increase cash and fee visibility and optimise liquidity management. They arise partly from the archaic structure of the correspondent banking system. This turns a simple payment between two parties into a game of pass the parcel for six: payer, payer’s bank, payer’s bank’s correspondent, beneficiary bank’s correspondent, beneficiary bank, beneficiary.

These parties do not themselves act consistently: some have straight-through processing (STP); some do not; some sit on the payment longer than others; the fees charged along the way differ bank to bank, country to country. The addition of KYC/AML, OFAC and other sanctions and an inconsistent global regulatory playing field has simply thrown sand into what was already a misfiring engine.

The contrast between this process and the digital world most of us experience as individuals is extreme – as it is in other areas of treasury. And it has not gone unnoticed. Existing players, such as SWIFT, Visa and Western Union have launched new or improved B2B payments solutions based on the existing system of correspondent banks, and these compete with new players like PayCommerce and, though it is more for P2P and SMEs, TransferWise. Others claim to have abandoned the old model and developed completely new systems based on distributed ledger technology alone, Ripple being the largest and best-established. (None actually uses a true Bitcoin-style blockchain and so all rely more or less on existing payment systems, whether ACH or correspondent banking.) So which is best for corporate treasury?

Building on the past

One way to address payments’ pain points is to try to mitigate them within the current infrastructure. This is the approach taken by SWIFT with their Global Payments Innovation (GPI). This is simply the traditional SWIFT messaging and correspondent banking system plus what SWIFT calls a new set of ‘business rules’ captured in a set of multilateral service level agreements (SLAs) between participating banks.

In other words, SWIFT’s member banks – at least those committing to GPI – agree to change their behaviour, to homogenise their offerings, and to provide “same day use of funds, transparency and predictability of fees, end-to-end payments tracking and transfer of rich payment information.” Any banks that sign up to GPI agree to cut down on the opaque charging and delays from which they may previously have benefitted and they also have to ensure that all their partner banks in the transaction chain also agree.

To improve transparency, SWIFT has built an ‘observer’ system which allows GPI banks to monitor the SLA compliance of their partners across the system as well as a payment tracker, on which payments’ progress can be viewed in real time. This will be white-labelled by banks for their clients.

Clearly a key challenge for SWIFT in implementing GPI is persuading banks to sign up to something that at least in the short term appears to hurt them commercially. The demands of the SLA force them to do an existing job more quickly and transparently, and without employing the tricks of the trade from which they previously extracted additional profits. These previous wrinkles include percentage rather than flat fees, ‘lifting fees’, additional correspondent banking fees by intermediaries, float and FX spreads that should simply be a fixed spread over a real-time market rate. Why should banks give these up?

SWIFT’s answer, according to Wim Raymaekers, Programme Director, SWIFT GPI, is that “GPI is about providing a better service by enhancing the customers’ experience of making cross-border payments. As a result, banks will be able to retain and attract new customers and ultimately show leadership in global payments innovation. They will also achieve significant cost savings as a result of the network and claim management efficiencies they can achieve in correspondent banking. Moving forward with the availability of additional SLAs and innovations, additional savings will subsequently result from enhanced compliance practices, optimised intraday liquidity flows and increased straight-through-processing rates.”

These arguments seem to have been persuasive so far. According to SWIFT’s website, “over 110 leading transaction banks from Europe, Asia Pacific, Africa and the Americas are already signed up [to GPI] and more are expected to join.” These banks represent the overwhelming majority of cross-border payments on the SWIFT network.

A step in the right direction

The first iteration of GPI is not the endgame – and SWIFT itself acknowledges that. “The second phase goes one step further, enhancing the digital transformation of cross-border payments by enabling banks to offer new services such as, for example, the facility to immediately stop and recall a payment, no matter where it is in the correspondent banking chain.” 

Same-day settlement is better than the three to five days it could currently take, and it is a significant step towards real-time (which is still not a priority for most treasuries, according to a recent SWIFT/EuroFinance white paper). Similarly, with fee transparency and predictability, GPI delivers post-transaction clarity, and this can, over time enable treasurers to predict costs better. But treasurers’ ultimate wish is for accurate upfront cost information. 

And the payment tracker, critical as far as any corporate treasurer is concerned – is clearly just a step – welcome though it is – along the road to a more modern system. It functions as a central payments database, hosted at SWIFT, updated via MT199 or API with data consumption via GUI. So each bank in the chain updates the SWIFT database via MT199 producing a set of messages that can be viewed by the payer via a GUI that gives details of when each bank did what. By itself this does not provide full fee transparency or predictability and it still relies upon old technology at the banks tracking payments through their systems quickly enough to produce meaningful data.

SWIFT’s claim that GPI will feature “transfer of rich payment information” is somewhat undercut by the fact that its own documentation confirms that unaltered remittance information is limited to the 140-character standard in its messaging. While this could be used to deliver a URL to a set of documents, it’s far from delivering full remittance information via the bank. Again though, the improvements in information delivery are significant and in many cases treasurers do not need to key information via the banks.

Also, phase two of the SWIFT roadmap for 2018 expects to deliver extended payment data.

But most important, no solution of this kind addresses any of the fundamental problems inherent in the traditional infrastructure (the MT messaging standard was designed for X.25 networks in the 1970s). In particular, it makes no change to the basic counterparty structure of a traditional payment which creates the cost, delay and opacity in the first place. If you believe that new consumer demands and the digital-first companies that service them are already stretching the capabilities of the old system, and that developments like the Internet of Things (IoT) will make this worse, then the GPI may well only be a bridge to some new system of the future.

Further initiatives

SWIFT understands this. As Raymaekers says, “In addition, and more broadly, SWIFT is also engaging the FinTech community to assess available technology against customer requirements. In September we are hosting an ‘Industry Challenge’ competition for FinTechs to develop overlay services leveraging the SWIFT GPI platform. The FinTech winners will be awarded 100,000 EUR each to work with banks and SWIFT on collaborative innovation concepts that solve additional industry challenges in cross-border payments on top of SWIFT GPI.”

In addition, in January this year SWIFT’s exploration of the blockchain resulted in the launch of a proof of concept (PoC) – scoped in collaboration with leading correspondent banks – to determine if distributed ledger technology (DLT) could help banks reconcile their nostro databases in real time. Thirty SWIFT GPI member banks are participating in this PoC, set to show early results at the next Sibos meeting. Wells Fargo, Bank of New York Mellon, ANZ, BNP Paribas, DBS Bank, and RBC Royal Bank are among those participating.

As SWIFT explains on its website, “under the current correspondent banking model, banks need to monitor the funds in their overseas accounts via debit and credit updates and end-of-day statements. The maintenance and operational work involved represents a significant portion of the cost of making cross-border payments. This PoC will test whether distributed ledgers may be able to help banks reconcile those nostro accounts more efficiently and in real time, lowering costs and operational risk.”

SWIFT will deploy open-source Hyperledger technology, and combine it with key SWIFT assets to bring it in line with the financial industry’s requirements. Using a private blockchain in a closed user group environment with specific user profiles and strong data controls; user privileges and data access will be strictly governed.

The fact that SWIFT is looking at blockchain/DLT is a quiet acknowledgement that the competition is doing the same, and may well be stealing a march.

Baby steps to the future

For example, in an attempt to remove some steps in the payment chain, and to benefit from blockchain technology, Visa is working with Chain to develop Visa B2B Connect, to give financial institutions a simple, fast and secure way to process business-to-business payments globally via a new near real-time transaction system designed for the exchange of high-value international payments between participating banks on behalf of their corporate clients.

Chain, Inc. is a technology company that partners leading organisations to build, deploy, and operate blockchain networks and is author of the Chain Protocol, which powers the Chain Core blockchain platform. Its strategic partners include Capital One, Citigroup, Fiserv, Nasdaq, Orange, and Visa. 

As Visa and Chain describe it: “Visa is working with Chain to build Visa B2B Connect using Chain Core, an enterprise blockchain infrastructure that facilitates financial transactions on scalable, private blockchain networks. Building on this technology, Visa B2B Connect will facilitate a consistent process to manage settlement through Visa’s standard practices.”

In other words, this platform will cut out the majority of the correspondent banking steps in the standard payment by allowing banks and corporates to make a payment direct to one another using the Visa infrastructure as a central clearing point. A bank can pay into B2B Connect, and Visa will pass the payment onto the final counterparty, removing the need for multiple intermediary banks.

The advantages, according to the developers, are familiar from the claims of GPI: predictability and transparency – banks and their corporate clients receive near real-time notification and finality of payment; security – signed and cryptographically linked transactions are designed to ensure an immutable system of record; and all parties in the network are known participants on a permissioned private blockchain architecture that is operated by Visa.

Are these claims true? We will know when Visa rolls out the pilot and time will tell if it emerges as a real competitor to SWIFT on SWIFT’s home ground.

As an aside, Mastercard added blockchain APIs to its developer site to “facilitate new commerce opportunities for the digital transfer of value”, following Visa’s announcement that the B2B Connect pilot would start this year. MasterCard has, however acquired VocaLink, the operator of UK ACH clearing which is a partner in many immediate payments schemes worldwide, including the US, Singapore, the UK and Sweden. This is a shrewd move as VocaLink understands both ACH and card payments and has experience of corporates. While the components don’t yet fit together, watch this space. 

Making waves

But the biggest threat to SWIFT’s supremacy and the largest DLT-utilising payments initiative is still Ripple. Ripple claims to be a real-time gross settlement system (RTGS), currency exchange and remittance network that uses a sub-set of blockchain technology called Interledger Protocol (ILP).

So what happens in a Ripple transaction? (You can find out on YouTube.) Ripple still uses the idea of correspondent banking. So in a transaction between two institutions there still sits an intermediary bank. These are the key stages:

1. The originating bank sends out a request to the beneficiary bank and correspondent bank to obtain their processing fees and, if required, FX rates.
2. Pre-transaction validation: this includes compliance screening and account verification checks. Since all parties have this information, they can pre-validate the transaction to ensure STP.
3. The originating bank accepts the best quote for which they can meet the compliance requirements. The beneficiary bank can then lock the quote. At this point Ripple initiates a hold on the funds in the banks’ ledgers.
4. The ILP ledgers generate cryptographic signatures to verify that funds are committed to the transaction. The funds are simultaneously released across all the parties’ ledgers ensuring no settlement risk. 
5. Upon completion Ripple provides a confirmation message to all parties. 

All of this happens within one or two seconds – faster, cheaper and less complicated than the current process with end-to-end visibility and rich information exchange.

The benefits for treasurers are clear: settlement risk is almost completely eliminated (risk remains if banks are not operating at the same time); Ripple’s auction system assures best FX execution; counterparties in the transaction chain can be limited to those who match pre-specified compliance criteria; Ripple uses standard ISO and MT messaging (which of course means it is subject to some of the same limitations as SWIFT); there is no loss of data in the transactions – meaning higher auto-reconciliation rates and all fees and costs are known upfront.

Also, corporates using Ripple are only indirectly exposing themselves to a FinTech start-up because their banks, not they themselves, are the counterparties in the network. Treasurers are still interacting with trusted bank partners. 

Is blockchain the answer?

For Ripple to become a significant alternative to the existing infrastructure, the blockchain has to be proven suitable for the purpose. Plenty of people say that it is not. So, as explained above, SWIFT is exploring a blockchain PoC but in announcing that initiative it also says that “whilst existing DLTs are not currently mature enough for cross-border payments this technology, bolstered by some additional features from SWIFT, may be interesting for the associated account reconciliation,” says Wim Raymaekers, Head of Banking Market and SWIFT GPI at SWIFT. “This PoC gives us the opportunity to test DLT and determine if it can be applied to this particular use case.” It will initially show early results at the Sibos meeting in Toronto.

He is backed up by Stephen Grainger, Head of North America at SWIFT, who says, “there is a recognition in the industry that perhaps distributed ledger technology at this point isn’t ready for the wholesale application to manage all correspondent banking”.

The bankers on SWIFT’s GPI Vision Group also explain GPI’s reliance on traditional processes by claiming that neither banks nor their regulators are ready to risk the international payments system on an untested technology. So Tony Brady, managing director and head of global product management for BNY Mellon Treasury Services, who is a member of the SWIFT GPI Vision Group, says: “Our early view is that while blockchain and distributed ledger have a fair amount of promise, it’s a little early to try to tackle cross-border payments, particularly high-value cross-border payments where we’re putting millions of dollars at risk.”

It’s not just SWIFT, which has perhaps a vested interest in downplaying the new technology. As explored in the blockchain article (page 30), the Canadian central bank has come to the same conclusion and in May, the Bank of England, in its paper, “A blueprint for a new RTGS service for the United Kingdom”, also said “the Bank has decided not to build the renewed RTGS service on Distributed Ledger Technology, in light of its findings that the technology is not yet sufficiently mature to provide the exceptionally high levels of robustness required for RTGS settlement … Further work is required to address privacy and system scalability in particular, and these and other topics suggested by this initial work will drive the Bank’s future research programme on this technology.”

Ripple rebuts the criticism of its use of the blockchain by saying that ILP gets around the issues raised because it simply connects existing bank ledgers rather than holding the ledger itself. In effect, banks connect their core systems to the Ripple network – analogous to how they currently connect their core systems to the SWIFT network and the ILP is used to co-ordinate the payments. This addresses the fears banks have expressed about the blockchain around privacy, scaleability, regulatory approval and the issue of having to get all parties to a blockchain to agree to validate a transaction.

However, even Marcus Treacher, Global Head of Strategic Accounts, Ripple and formerly HSBC’s Global Head of Payments Innovation and a member of the Global Board of SWIFT from 2010 to 2016, admits that “a single blockchain is not viable, the future is in different currency blocks with Ripple an interconnection.” The fact that he has joined the new company, along with Marjan Delatinne, who had been leading customer engagement for SWIFT’s GPI, suggests that Ripple believes the blockchain can be part of a new global payments system in some way.

What’s not to like?

For treasurers the battle looks like a win-win. If Ripple does what it says, treasurers will benefit. If it fails but in the process forces SWIFT to improve its core offerings, then treasurers benefit. And GPI, as Raymaekers says, “is real! More than 40 global transaction banks have begun actively using or implementing the SWIFT GPI service, with another 50 in the implementation pipeline. Hundreds of thousands of GPI payments have already been sent across more than 85 country corridors.” Treasurers are already winning.

Is the current obsession with artificial intelligence in all things financial just hype, or is the technology truly at a tipping point? How will it affect treasury and what do treasurers have to know about it? By Leslie Holstrom.

Consultants, tech vendors and futurologists are in no doubt at all. Artificial intelligence (AI) is going to transform everything – including the financial services sector. The combination of limitless data storage, continued increases in processing power and the rise of distributed computing, and rapid advances in our ability to train machines in various ways, will hand large chunks of human activity to computers within the next five years. 

Whether the most aggressive predictions come true or not, it is already true that AI is being used in sectors as diverse as finance, healthcare, transportation, manufacturing, the law and customer service. For corporate treasurers, this spread has two immediate implications: first, given the alleged benefits of AI in terms of productivity and data-driven insight-generation, how can they benefit internally from this technology? Second, how will the drive to adopt AI by the financial services industry affect the relationship between companies and their providers of financial products and services?

AI in the treasury and finance function

Current AI solutions, in general, rely upon a number of basic ‘skills’: some apply fixed algorithms to large datasets and recognise patterns which humans can then interpret as useful insights; some can be ‘trained’ to replicate processes to which they are repeatedly exposed, including those that require the ability to interpret natural language; and some can adapt their responses by ‘learning’ when they are exposed to new data. 

Combining one or more of these abilities allows software to mimic customer service agents, to read and review complex documents, to match buyers to appropriate products and services and to provide sophisticated analysis of Big Data in close to real-time. In so doing, it is possible to imagine AI restructuring the entire operating model and the core processes of the finance function.

But before those more glamorous functions, AI will probably first be used to automate the mundane and repetitive.

Solving regulatory overload

Financial reporting and compliance, from KYC in trade finance and supply chain, to simply dealing with banks on a day-to-day basis, is increasingly complex, burdensome and expensive. It requires increasing numbers of staff to process huge volumes of data to generate the multitude of internal and external reports that are demanded by committees, the board, auditors, shareholders and regulators. Reporting and compliance adds little positive value to the business but a failure can create significant cost. 

The first step in solving this problem is automated reporting for the most basic, standardised and formulaic reports. These may be mundane but they still involve large numbers of people performing low-value-added tasks. Some companies have already started to use robotic process automation (RPA) – essentially software ‘bots’ – to replace humans in these processes, but they have faced the problem that while the bots can be programmed to deal with some exceptions, they still stumble when tasks require even a small amount of ‘wisdom’. Adding machine learning allows RPA to deal with much more complex tasks and gives it the ability to go beyond volume-driven aggregation to functions such as intercompany reconciliations, the quarterly ‘close’ and earnings reporting.

In the UK, Arria has developed natural language generation software (NLG) that is being used across a wide range of industries to humanise and simplify the analysis of data heavy reports. KPMG has been using innovations from McLaren Applied Technologies (MAT) in its audit processes where predictive analytics automates evidence gathering and the production of complex data reports, saving time and improving client services. Deloitte recently announced a partnership with Kira Systems to aid in contract and document reviewing, and has already rolled out a customised version for audit processes with further applications being explored for tax and advisory practices. 

And J.P. Morgan’s Contract Intelligence (COIN) system has replaced the 360,000 hours spent each year by lawyers and loan officers interpreting commercial-loan agreements and other contracts. COIN runs on a cloud-based machine learning system and as well as being many times faster than its human counterparts it has also managed to help J.P. Morgan decrease the number of loan-servicing mistakes that are, in part, driven by the need to interpret 12,000 new wholesale contracts every year. Again, it is the sheer scale of the data crunching required that will force companies to seek out this kind of solution. 

The next level

More complex compliance requires more sophisticated solutions. Even a medium-sized firm may have to evaluate hundreds of tax and legal updates a week across an international network and techniques such as natural language processing and machine learning are being used to ‘understand’ the law, map compliance needs and even analyse the costs of compliance. By treating regulations as data, software will dynamically bring compliance into the enterprise risk environment, enabling treasurers to take a genuinely risk-based view of regulatory compliance.

These drivers have spawned an entire RegTech industry that aims to replace the present combination of scattered humans and fragmented legacy technology to ensure that trades, customers and the company are compliant. 

The pace of change in global regulation and the complexity of AML/KYC and OFAC sanctions compliance are too much for existing instructional algorithms and rules-based systems. The latter flag cash transactions over a certain currency amount, block transactions to certain countries, use customer data to select accounts for additional monitoring, and categorise merchant accounts based on prior transactions. But they generate large numbers of false positives which need human intervention and they cannot cope adequately with deliberate attempts at fraud or evasion. 

An AI solution ‘learns’ to identify problem transactions by analysing every data point in the entire transaction database. It develops rules of its own based on, for example, customer location, transaction timing, social media activity and relationships with other customers.

AI in AR

The same logic is driving the application of the RPA/AI combination to accounts receivable. AI algorithms are ideally suited to resolving some of the key problems in receivables because they can learn from previous experience and behaviour patterns. This allows them to build up a picture of good and bad credits, early and late payers, fraudulent activity and even message repair and exception handling. 

One key receivables problem has always been the level of manual intervention required to cope with the mismatch between the way customers deal with billing and the way a particular treasury system would like them to. The multiple exceptions, errors and idiosyncrasies of the process defeat both the simplest systems that used optical character recognition (OCR) with templates and also more intelligent rule-based solutions.

Now however, companies like US-based HighRadius, Receivable Savvy and Germany’s collectAI are using self-learning solutions to automate AR processes to make debt collection more efficient, reduce costs, improve cash flow and increase customer retention rates.

These types of software do everything from work out the best channel on which to contact debtors to figuring out which payments relate to which invoices despite customers’ habit of using one payment to fully or partly pay multiple invoices and optimising early payment incentives to a particular customer using algorithmic invoice discounting to build intelligent supply chain finance solutions.

Others, like YayPay look at a customer’s payment habits and behaviours and uses machine learning to predict the potential day of their payment. This forecast is then used by the treasury team (or other automated solutions) to target the most significant outstanding debt.

AI in AP

In the same way, the advent of intelligent mobile bill processing technology able to execute transactions to any schedule or set of rules, will transform accounts payable. One set of solutions uses supervised machine learning to teach a software tool the key data points on a set of scanned invoices. After the training phase, the AI-enabled tool can perform the data extraction completely on its own and only brings invoices to the attention of a human where it does not recognise them.

Here, the main benefit of artificial intelligence is the ability to speed read huge volumes of invoices and to apply approvals rules to them. Almost as a by-product of those processes, these systems aggregate large volumes of data that, properly analysed, can be used by treasury, procurement or business units to ensure the supply chain is as efficient as possible. Similar solutions are available for T&E processing and monitoring.

All these developments are recognisably a linear continuation of the long-time treasury drive for process efficiency and productivity: cost cutting to you and me. As well as forming the backbone of internal treasury, these AI-based solutions will transform next-generation shared service centres.

Where AI gets more interesting is in its promise to revolutionise strategic and value-added treasury functions. 

Forecasting and ERP

What have treasurers put at or near the top of their list of challenges for the last decade? Forecasting – cash forecasting, forecasting for risk management, forecasting underlying business variables from customer orders, to supplier payments to procurement need and to inventory levels.

That treasurers struggle with forecasting is no surprise. Accurate forecasting requires the intelligent evaluation of a large number of internal and external variables, the weighting of those variables, comparison with historical patterns, the incorporation of real-time data from the business, procurement and elsewhere and a view on how good business units themselves are at understanding their situation. At even a small company, this process involves far more data points than a human, even one equipped with Excel or even a good ERP system, can accurately model. 

Treasurers ought not to feel too bad – it turns out, across hundreds of studies across a wide range of sectors, that a small number of fairly statistical algorithms, applied to past data, almost always outperform even the most qualified humans. 

The latest solution is AI-based ERP systems which promise to optimise operational models and transform business operations. So, for example, as announced in mid-February, SAP’s S/4/HANA Cloud ERP product now incorporates predictive analytics and some machine learning capabilities in its Analytics Cloud.

IBM Watson Analytics, Amazon QuickSight, Microsoft Azure and Google’s Cloud platform also incorporate AI and it seems clear that those treasuries able to centralise the required datasets will be able to choose from a wide range of providers able to intelligently crunch it and provide the forecasts they need. Most firms will simply rent these solutions from the cloud.

In addition, companies like Microsoft are making their AI capabilities, for example in language processing and face recognition, available through APIs and they are linking with the largest open source AI platforms, such as H2O.ai, allowing other developers to add AI to their products.

AI-enabled ERP solutions will combine intelligent data analytics, smart automation, smart data gathering and sensor technology with deep learning, natural language processing and the technology to respond appropriately to changing situations in real-time. We are only at the beginning of this process, but companies like SAP are already deploying these technologies and corporates will need to re-organise all IT- and data-reliant processes to incorporate the changes. The impact on staff and organisational structure is hard to overstate. Is the day approaching where an ERP (or TMS) system will refuse a treasurer’s instructions on the grounds that they are sub-optimal? 

The impact of bank AI on treasury 

It is clear that the incorporation of AI into existing and new treasury technology will have an increasingly profound effect on the systems, status and staffing of corporate treasuries. But it may be the use of AI by their providers of financial products and services that has the greatest impact.

Transaction, risk and asset management are, along with credit provision, the core products treasurers need from their banks. So how will banks’ adoption of artificial intelligence change the world for corporate treasury?

Artificial intelligence may well create interesting new money management tools, hedging systems and transaction management services, but by far the most important implication of AI for any bank customer is how it will transform their ability to derive insights from their data.

We have already seen in the retail market that AI-driven bots can act as financial advisers, matching customers to appropriate loan, credit card and investment products. AI is also being used to improve retail credit scoring by looking at core data more intelligently at firms like online lender Elevate, Equifax and ID Analytics. Experian too is researching machine learning while relying for now on traditional regression methods.

The same basic idea will be applied to corporate banking – and while the banks emphasise how AI will lead to better service, more accurate matching of products and services to client needs and better pricing, treasurers need to think of the possible downsides.

Banks have unimaginably large databases of customer behaviour which, until now, they have been unable to analyse in any meaningful way. This data is not simply basic data on loans, timely repayments and core financial variables, it includes details of every payment made and received, the timing and location of those payments, the behaviour of cashflows over time, data on FX flows and hedges, data on indebtedness over economic cycles – and, importantly, data on all the counterparties to these transactions and, of course, the amount of money the bank has made from all this activity.

The combination of Big Data techniques, distributed cloud technology and AI will increasingly mean that they will be able to analyse this data. So what will they do with it? On the upside, it should mean that banks are able to offer a set of products radically improved by the addition of AI-driven advice. So, for example, banks will be able to analyse corporate transaction data across the cash cycle to determine which bills should be paid when, which customers should be offered discounts and what those discounts should be. It could suggest how payment terms could be altered more broadly to improve the overall P&L and to model the impact of suggested packages of products and services tailored to the client.

The data could be used to look at balance sheet optimisation, the best sources and types of funding for particular projects or acquisitions, for asset management and hedging. And, because banks will use AI for their own AML/KYC compliance, they will be able to help corporates with their supply chain and supply chain finance optimisation.

In addition, because the banks will be able to look at all their data, across all sectors, geographies and company sizes, they should be able to provide the kind of benchmarking and advisory services that treasurers have sought for the last 20 years.

However, there is a flip side to all this. The banks’ investments in AI and advanced analytics will be driven first and foremost by a desire to improve their own profitability. Their new-found knowledge may well be used to examine which clients are profitable and which are not; how different products and services should be priced according to individual customer’s needs; which clients are actually far more of a credit risk than existing internal models and ratings suggest because of their exposures to other companies or risks made visible by these advanced analytics; which clients do not meet their AML/KYC requirements because of the nature of their third-party relationships or payment flows – and so on.

Already the banks have finally agreed to pool anonymised credit data to improve their own risk management and pricing methodologies without AI. London-based credit risk management startup Credit Benchmark was founded in 2012 by ex-Goldman Sachs and Lehman Brothers employee Mark Faulkner. It specialises in pooling, aggregating and anonymising credit risk data from leading global banks, so that financial institutions can make better risk management and capital allocation decisions.

In AML/KYC, there are companies like ComplyAdvantage – an AI and machine learning RegTech startup to provide businesses with a feed of proprietary anti-money laundering (AML) risk data as well as on-boarding screening solutions and a monitoring platform for know your customer (KYC) processes. The system collects data from sources such as Interpol’s watch list, international sanctions and media reports to automate due diligence on clients that pose a criminal risk. Off the back of this data it can provide solutions like enhanced due diligence reports, risk and compliance advice and HR services. There is no guarantee that this kind of development will benefit all corporate customers and AI will simply make the analysis more profound.

Not quite yet

The more ambitious of these advances are some way off. Banks have found the task of aggregating and centralising their global databases extremely difficult and they will continue to do so. Only when that problem is solved can they then begin to apply AI and other techniques to those datasets and start to modify their offerings meaningfully.

In the meantime, AI is being applied to discrete functions that do not rely upon that aggregation of customer data. So companies will be able to benefit from advances in, for example, asset management where companies like Aidyia and Kensho are using machine-learning to run portfolios.

Disruptive new technologies promise to shake-up the payments space by offering highly-tailored services to specific market segments. What does it all mean for treasurers? By Simon Brady.

At the fundamental, cross-border infrastructure level, the services offered by banks to their customers are being transformed by new FinTech-driven network initiatives. But for most treasurers, FinTech treasury solutions are service layer integrators that allow companies to plug into multiple external systems and automate one or more treasury processes at the same time. 

The choice solutions in the payments space is bewildering, but most are aimed at smaller and midsized companies that need to receive multi-channel digital payments as part of the digitalization of their business and who need to make increasing volumes of low-value payments – for example firms that do business with many small vendors or marketplaces.

Online payments and processing

So, to list just a selection: Adyen, Stripe, 2CheckOut, Tipalti, Braintree (backed by PayPal), GoCardless, Paymill, Credorax, YapStone, YeePay, Omise, Trustly Group, Bridgepoint, Cheddar Up, Flywire, CyberSource (a VISA company), Payoneer, WePay, PaySimple, Network Merchants, Citrus Payment Solutions, Exchange Corporation, Zooz, Mobeam, Slimpay, ToT Money, Quisk, Alpha Payments Cloud, Sequent Software, Razorpay, Payza, Authorize.net, BlueSnap, Bitpay, Skrill and many others in the payment gateway space.

This wave of largely new companies is often seen as an explosion of innovation but many of them look very similar to the Authorised Payment Institutions launched in Europe following the first Payments Services Directive and spurred on by SEPA. For example, Nuapay’s SaaS solution allows companies to easily set up payment and collection accounts, make and receive payments, create automated payment and collection schedules and have access to full reporting via an online dashboard. The service is an offshoot of Sentenial’s well-established Cloud platform for acquiring ACH transactions, SEPA credit transfers and direct debits. That payments processing business that directs more than €35 billion worth of payments to European banks annually. Sentenial also provides its payments origination and processing services directly to corporates and to other payment service providers (PSPs).

For corporate treasurers, Adyen and Tipalti are gaining ground. Adyen is a global platform that connects businesses directly to Visa, Mastercard, Paypal and all the other key payment methods, enabling them to accept payments across online, in-app, and in store. It is a well-established platform that doubled its transaction volume to $90 Billion in 2016, and has recently added Microsoft, Sephora, Symantec, WeWork and Bonobos to its impressive customer roster of companies like, Uber Facebook, Evernote, Etsy, Nike, Spotify, Airbnb, Mango, Vodafone, Booking.com, KLM, Superdry and Groupon.

Tipalti (see article on ACH) is one of the leading providers of B2B supplier payments to global enterprises. The company claims to be the first-ever cloud platform to automate the entire ‘end-to-end’ accounts payable workflow. Its aim is to create an automated, seamless system to allow accounts payable departments to manage their entire global supplier payments operation. It handles the payment chain from invoice processing, supplier on-boarding, tax compliance, anti-money laundering compliance, global payment remittance, and payment reconciliation and AP financial reporting.

Unlike most FinTechs, Tipalti is investing heavily in infrastructure to allow it to service companies from smaller fast-growing operations to global enterprises.

Big overlaps

All these companies all offer different ways to achieve an overlapping set of functions: to replace expensive or slow money transfer services, to provide, gateway, and payment acceptance capability and, in some cases secure PCI DSS compliance. In the case of a company like PaySimple, these core functions are wrapped inside an integrated automatic billing and e-invoicing system. It, and others, also provide APIs for the development of additional services such as building an online store.

In most cases, the solutions are designed to solve problems encountered by merchants in their online channels, especially smaller companies without the expertise or infrastructure to develop their own systems. 

So Payoneer provides international payments capabilities for companies that do business with multiple small vendors or marketplaces (like Airbnb) cross-border. The beneficiary simply opens a Payoneer account and retrieves the money in the currency preferred via a card number or bank account transfer. 

Similarly, Transferwise, which started out as a consumer payments platform, has launched a B2B payment service as well as a batch processing service for multiple invoices. As yet, it is a small player that uses a peer-to-peer methodology to execute at the mid-market rate. This means that it cannot guarantee a time frame for transactions (quoting between one and four days) and there are various other limitations in the service which make it useful only for the smaller SMEs.

Stripe provides e-commerce merchant payment services through open API development as well as competing with firms like Braintree and Cybersource as a gateway and payments enabler.

PaySimple provides automatic billing, e-invoicing, and payment acceptance services, including a device add-on to accept card payments. So it competes with other merchant gateway and services providers.

And some companies attempt to add value by helping to maximise consumer purchases. So Klarna, for example, extends instant credit for online purchases to consumers without them having to provide payment details.

Solutions for SMEs

Small and midsized businesses who want to expand internationally, but have no infrastructure for making or receiving international payments, can choose from the multitude of e-Commerce and payments platforms listed previously. They can also look at a service like Western Union’s Edge platform, launched in April last year. This is a business-to-business platform that connects companies with each other and which has been designed to take on services like Amazon and Alibaba. WU EDGE unifies AP and AR workflows with Electronic Invoice Presentment and Payment (EIPP) on a single global platform. SMEs can invite existing and new partners to trade globally and interact with them in real-time to potentially enhance trade and growth. It also provides analytics via its foreign cash management and trade intelligence modules to generate insights for companies wishing to optimise their cash flows and profits.

Edge differs from competitors firstly because it is designed to provide a platform that connects businesses already doing business with each other and secondly because it is based on an existing network of 100,000 companies that make payments through WU anyway. Edge offers invoicing services in one platform, and allows ‘near real-time’ service for 22 currencies at its launch. The WU EDGE platform provides fee-free, real-time transactions in 51 currencies, with capabilities in over 130 currencies overall. 

WU Edge has competition of course. Chinese e-commerce giant Alibaba has a platform that allows wholesale buyers and sellers of items to find each other and facilitate payments. Amazon has a similar service called Amazon Business. However, both of these services are a by-product of marketplaces of physical transactions. Edge is solely a platform for companies to execute financial transactions. It also provides analytics and help with international compliance, unlike most e-commerce platforms. 

Western Union does face FinTech competition. B2B start-up Currency Cloud is one of the most prominent and in March it raised $25 million from Google’s venture capital arm, GV and others. The company is both a plug-and-play payments platform as well as a set of APIs that let developers create their own customised access to global payments. Currency Cloud has had more than $25 billion sent across its network. It works with other FinTech businesses such as mobile remittance business Azimo, crowdfunding platform Seedrs and foreign exchange card Revolut.

Treasurers can also look to FinTechs in more specific treasury silos:

Accounts Payable Automation 

The drive to remove paper invoices, cheques and purchase orders is hardly new. So ACOM has been automating B2B payments since 1983; Corcentric has been focusing on e-invoicing since 1998 and Comdata, the payment processor and corporate cards giant, was founded in 1969.

However, there is a large group of newer, mostly Cloud-based FinTechs, again often smaller and midsized companies, offering as a stand-alone service for one or more types of payments. These typically offer to make batch payments, via virtual card, ACH or wire, with all payments managed via the legacy ERP system. The automation is not simply the removal of paper, it is the aggregation of data from multiple systems, business units and locations to manage payments in one place with comprehensive reporting.

To give some idea of the number of FinTechs that pitch themselves in the billing and payments automation space, this is a list of just some of those that have been successful enough to raise announced VC funding: Zuora, MineralTree, Nvoicepay, ConnectPay, Paymentus, Payveris, Aria, MyCheck, Fortumo, Tradeshift, Traxpay, Vindicia, Bill.com, Boku, Transactis, PaySimple, Danal, Judo and NumberMall.

These companies target specific business types. Zuora focuses on businesses with a subscription model. ConnectPay is a card payment gateway. Payveris is a set of digital tools and APIs designed for small banks and credit unions to allow them to offer digital payments and money transfer solution. Boku is a mobile payments solutions for SMEs. MineralTree focuses on accounts payable for growing and midsized businesses. MineralTree captures invoices as they arrive, routes them for approval through existing workflows and directly executes payments. 

The future these companies envisage is one in which firms plug into one or more cloud-based solutions on a subscription basis to access particular functionalities. Businesses that use this model will avoid legacy system issues, nor will they be forced to buy one system that does everything they need. Instead they will end up with a ‘stack’ of solutions working together and integrated with an existing (or new) ERP.

Supply chain finance

Getting supply chain finance to smaller companies is another problem being solved by technology – though in this case the solution may be a combination of older technology and new joint ventures. 

Demica has been providing working capital solutions to large multi-nationals via its reverse factoring platform for some years. This type of SCF has been confined to large corporations not just because of the need to have significant global banking relationships, but also because only companies with fully electronic invoicing can get invoice approval fast enough to enable approved invoices to be funded by the banks. 

To help access the estimated $3 trillion of potential for SME SCF, Demica has just announced a partnership with FCI, a facilitator of supply chain finance tools, to create FCIreverse, a solution that uses FCI’s relationship with hundreds of local and regional banks and factoring companies to allow FIs across the globe to vouch for their own clients. 

Demica CEO Matt Wreford explains, “This way of partnering regional banks with each other is going to transform the industry over the long-term”. “It will enable supply chain finance to go into the mid-market, where global banks aren’t interested in operating. And it will provide a lot more financing to SMEs, because regional banks will run smaller programs and onboard smaller suppliers.”

These SCF platforms need relationships with banks to help with client onboarding and credit provision, but they also need access to more clients and more financeable invoices. So in late 2016, Demica also announced a venture with Basware, the Finnish e-invoicing and purchase-to-pay technology group that will make supply chain finance available to Basware’s clients. 

Joint ventures with e-invoicing networks are a priority for another SCF platform – Orbian. In February this year it announced a partnership with Tungsten Networks, which has 251,000 suppliers using its AP/AR solutions. Tungsten gains the ability to offer SCF to its network; Orbian gains access to the volume of customers and financeable invoices it needs to expand. 

The overall market is certainly growing. Prime Revenue, another leading platform, had a record-breaking 2016. Its 20,000-plus customers in over 70 countries processed more than $100 billion in supply chain financing (SCF) transactions using the company’s proprietary platform. In addition, 3,500 new clients were added to the platform.

These ‘traditional’ players are competing with other marketplaces for receivables and confirmed payables. One of these is LiquidX whose Managing Director, Glenn Kocher, has described it as aiming to be “the Amazon or ebay model for working capital and trade finance.” LiquidX is an auction platform that lists the true sales accounts receivables, supply chain finance programmes and confirmed payables assets of only large cap, usually publicly traded, MNCs. These sellers gain access to asset buyers outside their supply chain programme or core bank group, including other global and regional banks, hedge funds and institutional investors. The platform has executed over $13.4 billion of trade volume and processed over $48 billion in post trade settlement to date.

LiquidX differentiates itself from players like Prime Revenue as the latter – like the other traditional platforms – focuses more on providing a technology solution to the process problems that prevent companies from accessing vanilla bank receivables financing, rather than creating pools of new liquidity and a true marketplace for trade finance assets. 

Munich-based CRX-Markets also has an auction platform, though one that is designed to generate securitised cashflows that can be sold as notes to fixed-income investors, rather than as a primary market for the underlying assets themselves. And C2FO operates another variant in which companies with excess cash can set their desired rates of return on the cash they wish to make available and the market will fill those orders with requests from suppliers that need cash and which have posted the early payment discount they are prepared to accept. The C2FO marketplace matches these orders in real time – achieving the best rate of return for the companies with cash and the best rates for the companies that need cash.

A bewildering choice

The biggest problem for anyone looking at FinTechs today is simply the number of companies. It is a given that most will either fail or consolidate and right now are too small to be serious choices for corporates of any size. Most are also simply service layers offering better wholesale pricing or services to people who previously lacked that access. In addition, almost none provide any fundamental alternative to the underlying infrastructure upon which the financial system rests. Peer-to-peer models do so, but are unreliable and small. Larger players, like Apple and Google may be in a position to create entirely new systems, but these would inevitably be regulated as heavily as their traditional peers, so the benefits of using them would be uncertain.

For now, FinTech is largely a wait and see game for corporate treasury, with the most relevant action happening at the banks. There, both developments such as Ripple and SWIFT GPI, as well as consolidations like D+H/Misys, promise increased efficiency and lower cost within the parameters of the conventional financial system. 

When it comes to FinTech, treasury is already some way up the learning curve. In a recent EuroFinance poll of 250 companies, asked, “are you using any payment services provided by financial technology companies?”, 36.3% said yes. And of the 63.7% who said no, 64.8% said that they would consider doing so in the future.

These responses suggest that treasurers are adopting the simpler and more mature SaaS and Cloud offerings, and waiting to see which companies emerge from the swarm of new start-ups with a resilient and scaleable technology and business model before committing. In the words of one of the more cautious treasuries: “I don’t dismiss anything but we don’t know who those companies are and we are not going to be the first ones to use them.”

Those companies that have taken the plunge in payments are implementing solutions such as C2FO, a receivables discounting solution and are hoping to use new solutions to eliminate bank payments portals. They are also being forced to look at FinTech solutions in geographies from which their core banks have withdrawn.

Other treasurers interviewed by EuroFinance have confirmed that they are actively investigating FinTech solutions but that “the issue is how these would work for us”. One treasurer believes, “There is a real revolution in that area. In the next three years it will change the way we do KYC documentation, trade finance and anything where we have to move money. Where there is a lot of paper work there is a lot of efficiency to be gained.”

But there are cautionary tales too. One treasurer admits: “We have had really bad experiences with being the first mover. It is difficult. The risk of failure is high. Now we will wait and see.”

As well as a legitimate fear of the bleeding edge, treasurers may have another, less obvious reason for waiting. Asked, “Are you satisfied with the data that you are able to get from your current payment processes?”, 67.2% answered yes. This response might be proof that these treasurers have put in place the vast majority of the best practice solutions recommended in modern payments. On the other hand, it may reveal a dangerous level of complacency and unsolved inefficiency. Time will tell.

Most treasurers get the theory, and most know something about the many pilot projects and consortia working on blockchain solutions, but what products actually exist and how do they benefit corporates today? By Mark Parsley.

How corporates and their partners deal with digitalisation will determine whether or not they survive the next decade and treasurers – and their boards – realise it. 

One key technology that has moved from the margins, through hype into the mainstream is distributed ledger technology (DLT), sometimes called blockchain. The differences between the two are technical and the arguments over definitions arcane. Treasurers don’t need to know them. But in short, all blockchains are distributed ledgers, but not all distributed ledgers are blockchains, and the key differences concern how much centralised control exists within the system and how widely data within the system is shared. 

In financial markets, unlike cryptocurrencies, permissioned or private blockchains are required to provide centralisation, which can then compromise the immutability of transaction histories (the centre could change data without being seen) and there is a need for only the parties to a transaction to validate it, unlike a public blockchain.

But the basic idea is the same: a distributed ledger is simply a database that is replicated on many machines and in which control over the data’s evolution is shared between some or all of the entities running the machines. The ledger validates, stores, and replicates transaction data on many computers around the world (hence ‘distributed’).

Cryptography and digital signatures are used to prove identity, authenticity and enforce read/write access rights. And the system contains mechanisms to enforce immutability: making impossible the changing of historical records. In other words, a distributed ledger is like a normal SQL database plus code that can add new rows to the database, validate that these rows conform to pre-agreed rules and ensuring that all the copies of the database are the same – in real time.

The systems of most interest to banks and large corporations do not just act as distributed databases of data, they also embed smart contract technology. So do treasurers think DLT will affect them?

EuroFinance recently asked 250 treasurers whether they believe that DLT will fundamentally change the payments ecosystem. Of those asked, 62.4% said yes. “I am very interested in DLT. We are not using it yet but it is coming. I am interested in that you can get all the data of your payments in real time and it is secure; it means collaboration between banks and corps to make corporate’s life easier,” explains one treasurer. And when will we begin to see concrete products? “In the next three to five years we will see something we can use, a tool for corporates.”

It’s not just payments. One treasurer believes, “DLT will have an immediate impact on reconciliation. We know the banks are really active in this area and that they offering more services in intelligent reconciliation.” And one retailer sees DLT as an enabler for innovative loyalty schemes based on pseudo-currencies and blockchain wallets.

DLT is also still top of the banks’ priorities. In May, the R3 CEV consortium of 80 banks completed the largest fundraising to date for the emerging technology, raising more than $100 million from about half its membership as well as technology group Intel, though the funding round was scaled back twice from $200 million and then $150 million. Of the 25 or so global DLT consortia (22 of which were started in 2016), 13 are in financial services. These include groups such as B3i (insurance), the post-trade distributed ledger group (clearing and settlement) and R3, Digital Asset Holdings and Axoni (financial services).

The last of these, Axoni, raised $20 million from Citi, J.P. Morgan, Goldman Sachs, Wells Fargo, NEX Group, Thomson Reuters, F-Prime Capital and Digital Currency Group (DCG), among others, via December 2016 and May 2017 funding rounds. It is involved in trials of DLT in trade affirmations and over-the-counter (OTC) equity swaps – the latter a bank effort announced in January to overhaul the Depository Trust & Clearing Corporation (DTCC) Trade Information Warehouse (TIW) using DLT. All the major banks use the warehouse.

IBM has driven another DLT initiative, also used by a number of banks, known as the Hyperledger Project. 

And both have competition. In February 30 big banks, tech giants, and other organisations – including J.P. Morgan Chase, Microsoft, and Intel launched a group, the Enterprise Ethereum Alliance, to build business-ready versions of the software behind Ethereum, an open-source, public, blockchain-based distributed computing platform featuring smart contract functionality and with its own cryptocurrency – ether (i.e. it’s in part a rival to Bitcoin).

Treasurers need not worry too much about that yet. For them and for the banks, the key interest in these technologies is cost, transparency and information richness. It is part of the hype that what the internet was to information, DLT can be to transactions – it makes them less expensive to share and record, and reduces the cost of trust in transaction systems.

R3’s CEO, David Rutter likes to cite a McKinsey study that claims banks spend around $3.6 trillion globally supporting their transactions with tens of billions in annual savings there for the taking. But what is the evidence so far that the technology can deliver improved services for corporate clients?

Trade finance 

While many of the earliest applications of blockchain have been in payments (see article on SWIFT/Ripple), trade finance is where real-world corporate applications may appear first this year. Trade is not fully automated, it relies on chains of trust and transactions involve significant amounts of data and require complex tracking.

In 2016, HSBC and Bank of America Merrill Lynch piloted a scheme using Hyperledger Fabric to show that letters of credit can be executed on the blockchain. And Corda, the shared ledger platform developed by a consortium of more than 70 leading financial institutions, brought together by R3, facilitated invoice financing and letter of credit transactions in trials with more than 15 banks using its form of ledger technology and smart contracts. It’s not clear when or if this solution will be rolled out meaningfully and possible changes in the relationship between Hyperledger and R3/Corda – different ways to implement a digital trade chain (DTC) style solution – complicate the picture.

In a potentially more concrete development, seven European banks are partnering on a new blockchain-based trade finance platform for European SMEs and plan to launch in the second half of 2017. The Digital Trade Chain (DTC) initiative was driven initially by Belgium-based KBC and is based on a permissioned ledger, with authorised parties allowed to submit transactions on the platform and manage open account trade transactions for both domestic and international commerce, with visibility from initiation to settlement. The banks involved are KBC, Deutsche Bank, HSBC, Natixis, Rabobank, Société Générale and UniCredit. 

SMEs looking to expand globally face the problem that letters of credit, used by larger firms, are for them complex, expensive and time consuming and the alternative, open account trading, exposes one counterparty or other to the full transaction value risk at any point in time.

Maintaining secure records on a digital, distributed ledger creates the required combination of transparency, verifiability, and immutability of agreements.

At the launch in January, KBC Group CEO Luc Gijsens explained: “SMEs are having to run their businesses differently in an increasingly digital age. Our successful DTC trial shows that blockchain technology offers a number of opportunities that we want to continue testing and developing.”

Deutsche Bank global head of disruptive technologies and solutions Roberto Mancone said: “For DTC to be successful, it needs to be available and accessible by a large number of SMEs – hence the importance of having a number of banks involved.”

A host of other proof of concept trade finance transactions have been executed including: S7 Airlines and Alfa-Bank and the first Russian blockchain LoC transaction; Barclays has completed a test on technology developed by Wave to use a blockchain letter of credit to close a transaction between Ornua and the Seychelles Trading Company; The Commonwealth Bank of Australia (CBA), Wells Fargo and trading firm Brighann Cotton successfully completed a trade finance transaction experiment in October 2016 using blockchain, smart contracts and the Internet of Things (IoT); ICICI, India’s largest private bank, and Emirates NBD, recently announced successful international transactions for both trade finance and remittances using blockchain technology; UBS and IBM have worked on a project that replicates the entire lifecycle of an international trade transaction on Hyperledger’s Fabric blockchain; and Bank of America Merrill Lynch, HSBC and the Infocomm Development Authority of Singapore (IDA) have jointly developed a prototype solution again on Hyperledger Project blockchain fabric to replicate a letter of credit (LC) transaction.

Supply chain finance

In March, Chinese online P2P lender Dianrong and FnConn, a subsidiary of Foxconn Technology Group which provides loans and financing solutions to SMEs, announced the launch of Chained Finance, claiming that it was the first blockchain platform for supply chain finance. The aim of the platform is to help supply chain financing companies potentially triple the number of small suppliers they reach.

The two companies recently completed a successful pilot and proof of concept of Chained Finance by securing funding for small and medium enterprises (SMEs) in China that were otherwise unable to secure needed capital. Chained Finance originated US$6.5 million (RMB45 million) in loans for these SME supply chain operators.

The solution is based on a permissioned blockchain and Dianrong is an active participant in Hyperledger. A ‘permissioned or closed-loop’ blockchain restricts the number of users who can validate block transactions or create smart contracts (which are used in supply chain blockchain solutions) to pre-registered and authenticated users. This differs from the fully distributed ledgers of Bitcoin.

The two firms chose the blockchain because of the control and transparency it allows over the financial history of borrowers and the security of the data within the system. They claim that Chained Finance offers large multinational manufacturers unprecedented transparency and risk control capabilities for their supply chain finance ecosystems. The system will be rolled out throughout China first but in theory can be implemented globally.

It will have competition. In the UK, Tallysticks is building a blockchain SCF platform driven by companies need for an automated solution – the firm has filed four patented processes, including automated custodial transfer and automated transaction settlement.

A functioning blockchain-based supply chain finance/bill discounting and invoice payment solution has also been implemented in India, by Mumbai’s YES Bank. So far the project, using smart contracts built on Hyperledger and utilizing IBM’s Hybrid Cloud technology, allows consumer electrical equipment manufacturing company Bajaj Electricals to digitalise the process cycle for bill discounting at Bajaj Electricals and reduce it from four-five days to almost real time.

The details of invoices processed in Bajaj Electricals’ Oracle system are transferred to Yes Bank on blockchain, and then are discounted and funds are disbursed to Bajaj’s vendors. On the due date, the solution facilitates an automated debit from Bajaj Electricals’ account with YES Bank.

Again, the system ensures transparency for all parties through the shared public ledger, while the entire transaction history of a vendor is recorded and immutable.

Partly driven by the enthusiasm of the central bank, India is a hotbed of blockchain activity. In November 2016, for instance, the $17.8 billion multinational Mahindra Group and IBM announced that they would co-develop a cloud-based application for tracking supply chain transactions via blockchain. 

However, there are certain limitations with the closed-loop blockchain implementations that Kannan highlighted by referring to the YES Bank/Bajaj Electricals case. “We define closed-loop as a private network consisting of one company, one bank, and a set of suppliers. Here, in a way, a supplier is forced to discount his bills with a single bank. He might not be banking with the bank as a supplier or getting better rates elsewhere,” said Kannan.

Both these solutions are limited by the use of the permissioned blockchain. While adding more banks and companies to the list of approved counterparties is a short-term solution, in the longer term an open system would be much more likely to be transformative.

Payments 

We’ve already seen how the blockchain is affecting the fundamental plumbing of the payments system (see article on SWIFT/Ripple), but there are also initiatives that bring DLT closer to treasury.

In December 2016, BNP Paribas completed its first live cross-border B2B payments between corporate clients using blockchain technology, processing several payments for two of its longstanding corporate clients, Amcor, global leader in packaging solutions and Panini Group, international leader in collectables and trading cards.

This news follows the announcement last September that BNP Paribas is co-developing new products and services with a number of clients, aiming to design the next generation of Transaction Banking and Cash Management products with Blockchain technology. The ‘Cash Without Borders’ proof of concept was launched early 2016 after the Bank’s Corporate Trade and Treasury Solutions business embarked on a collaborative process during its first-ever ‘Blockchain Bizhackathon’.

Using Blockchain technology, BNP Paribas successfully processed and cleared for Panini Group and Amcor payments in various currencies between BNP Paribas bank accounts located in Germany, the Netherlands and the United Kingdom. The payments were fully processed and cleared in a few minutes highlighting the real potential of this innovative technology which eliminates delays, unexpected fees and processing errors, paving the way for real time cash management.

Panini Group Treasurer, Fabrizio Masinelli said: “Blockchain technology applied to cross-border payments offers an innovative way of processing in near-real-time high-value transactions between different companies. This proof of concept shows how powerful such technology can be and how it can be utilised as an effective and efficient response to the main issues that treasurers face on a daily basis. This great achievement was possible thanks to the collaboration between Panini’s Group Treasury teams and the various teams of BNP Paribas.”

Jacques Levet, Head of Transaction Banking EMEA at BNP Paribas CIB, commented: “This proof of concept demonstrates that blockchain technology offers real opportunities to considerably improve our offer for corporate treasury managers. On the payments front, this confirms our strong commitment to follow closely and further accelerate our participation in a number of market initiatives aiming at improving the corporate payments experience using blockchain technology.”

Visa’s bet on blockchain

We have also seen how re-invigorating correspondent banking networks using DLT can use the existing payment infrastructure of, for example, ACHs to provide corporate clients with a transformed service without the need to put all their trust in new FinTech startups.

A similar idea lies behind the joint venture between Visa and Chain, a San Francisco-based enterprise blockchain infrastructure startup. Again, the concept is a merger of DLT with an existing, trusted network of banks – in this case Visa’s 17,000 banking partners – to help banks improve international business-to-business payments for their corporate customers. The two companies are currently building Visa B2B Connect, a Visa-operated payments system that uses a permissioned, private blockchain architecture.

The companies claim the system will enable participating financial institutions to quickly process and settle international payments securely with near real-time verification of blockchain technologies.

“We are developing our new solution to give our financial institution partners an efficient, transparent way for payments to be made across the world,” said Jim McCarthy, Executive Vice President of innovation and strategic partnerships at Visa, in prepared remarks.

“Visa is leveraging Chain Core to create a permissioned blockchain network to enable their financial institution clients to directly exchange value on behalf of their corporate customers,” wrote Chain’s cofounder and CEO, Adam Ludwin, in a blog post. “This network allows institutions to move value with greater speed, predictability, and security than is possible today.” 

Competitors like SWIFT, of course, have questioned the demand for real-time payment pointing out that corporate payers actually want to pay as late as possible. The counter argument is simple: if you want to pay on day 30, then real-time payments let you do just that, rather than having to pay on day 27 and allow three days for the money to arrive within the 30-day limit.

And it’s not just bank networks that can be used – with or without blockchain. Western Union recently participated in a funding round for Digital Currency Group (DCG), a firm that collaborates with financial institutions to develop use cases for DLT. One is to improve the core migrant remittance service, But another is to leverage the 100,000 SMEs that make payments through the service to create Western Union Edge, a B2B payments network. Right now, the service is available in a dozen countries and does not use DLT, but given the relationship with DCG and the possibilities of blockchain technology to cut costs, increase security and boost visibility – not to mention the existence of FinTech competitors using DLT in the remittance space, such as Bloom Solutions – and it seems likely that the service will utilise DLT at some point.

Foreign exchange

Some of the largest names in FX have made significant commitments to DLT, focusing on improving trading efficiency. DLT should be ideal in this kind of market, in which so many counterparties – buyer, seller, broker, clearer, and others – hold records of the same transaction. A shared ledger updated in real time and visible to all should slash transaction times and costs. 

For this reason, NEX Group, formerly the interdealer broker ICAP, has invested (via its Euclid FinTech investment arm) in Axoni, a provider of distributed ledger technology for the financial services industry. NEX aims to use DLT to process thousands of foreign exchange trades and to give customers access as participants in a DLT-based system so that, initially, institutional investors can more transparently track and value deals in the spot market. NEX subsidiary, Traiana subsidiary, which acts as a messaging hub for $2tn of forex, fixed income and swaps deals, is developing a combination of smart trade contracts and a blockchain product with the eventual aim of replacing their current post-trade system.

Another FX market giant, Citi, in December 2016 made an undisclosed investment in Cobalt DL, a London startup also developing a DLT solution to simplify foreign exchange trading. Cobalt has also attracted two of the biggest traders of FX, Citadel Securities and XTX Markets, as well as 22 banks and financial firms. The firm believes it can cut the cost of FX trading by 80%. The system is to go live in the third quarter and runs on technology supplied by Setl, a UK blockchain software developer, and data from Northern Ireland-based First Derivatives.

Other key FX banks are members of Ethereum’s Enterprise Ethereum Alliance which has also executed a trial spot trade using an adaptation of Ethereum as the settlement layer. And Goldman Sachs patented a permissioned blockchain concept to achieve much the same thing and which explicitly allows regulators to access the database and provides functionality to comply with anti-money laundering (AML) regulation and know your customer (KYC) laws.

None of this is directly available to treasurers, though the very largest MNCs rival some hedge funds in their FX dealing and so may gain direct access. The real benefit for most corporations will simply be in faster, more transparent and much cheaper FX dealing. 2017 may well be the year this starts to happen.

Capital markets

DLT is even beginning to invade the capital markets. IBM and Japan’s SBI Securities revealed last year that they are working on a blockchain-based bond trading platform using the Hyperledger Fabric.

“As an innovative technology, blockchain has the potential to revolutionise ways businesses work together with their ecosystem of trading partners,” said Takeshi Fukuda, director of IBM Research Tokyo, in a statement. “The technology establishes accountability and transparency while streamlining business processes.”

But for treasurers the key development will be the ability able to issue bonds on a blockchain-based digital asset creation tool. One example is three-year-old startup BlockEx. After developing a white-label cryptocurrency brokerage platform to sit on top of existing exchanges, BlockEx has built an exchange for “the issuance of digital assets including bonds, equities and syndicated loans [that will] collapse origination issuance, asset servicing, exchange, clearing, settlement and reporting into one platform. By templating and streamlining the legal process it becomes possible to reduce the price of origination up to 75% and time to originate and issue can be reduced to days.” In theory, this could ultimately squeeze out bank syndicate functions.

The platform enables issuers to create smart contracts that specify coupons, payment dates and maturities, with the flexibility to create retail-friendly payout structures such as monthly or even daily coupons. The digital assets are sold directly to investors, cutting out bank intermediaries and potentially slashing issuance costs by more than half. 

It allows a company to use the asset creation tool, pick documentation and raise money in a single day, aims to settle trades within 30 seconds and creates a secondary market that generates an indelible history of buying and selling activity using distributed ledger technology.

Perhaps the most exciting thing about the concept is that it brings the benefits of capital markets to SMEs because of the reduction in cost, time and complexity. and medium-sized enterprises eyeing US$10m-$50m issue sizes, which are largely shut out of the capital markets due to syndication costs that average US$200,000-$400,000 according to BlockEx estimates.

The first issues are, apparently, happening any day now and similar efforts are underway at other companies to apply these ideas to other forms of bank loan and to private and public equity issuance. With Goldman Sachs having announced that it already figured out how to automate half the 127 steps in an IPO, robo-issuance is on the way. 

Enterprise risk management

Finally, DLT is breaching the inner sanctum of corporate MIS systems – the ERP. ERPs do not look like ready candidates for DLT. The key principle of an ERP system is the central collection of data for wide distribution, replacing standalone databases linked to multiple disconnected spreadsheets. The centrally aggregated data is then available to all business processes. This is pretty much the opposite of a distributed ledger. 

However, because DLT creates a trackable, immutable record for any kind of transaction, from financial trades to shipping manifests, from supply chains to equipment maintenance schedules, a DLT enterprise solution that draws data from the ERP and is then used to create a trusted transaction and data sharing system between companies has got companies like IBM excited. 

So, for example, anytime a business process requires an immutable, verifiable tracking record, a DLT solution is useful So, a new blockchain system from IBM and Maersk aims to manage and track the paper trail of tens of millions of shipping containers by digitising the supply chain. DLT can be used for audit logging to satisfy regulators or for tracking which users are using which computer systems. Walmart has run a pilot to demonstrate that DLT can be used to track produce through the supply chain. And Sweden-based enterprise software provider IFS, has created a new proof of concept to demonstrate how blockchain can be integrated with organisations’ ERP systems in the aviation industry to track maintenance and parts.

In addition, in May, Hyperledger Project member SAP announced SAP Cloud Platform Blockchain, its blockchain-as-a-service solution. It’s very early days, but it seems designed for companies that are already using its ERP solutions, as they look to implementing distributed ledger solutions for data storage, management, and other applications. If SAP thinks the blockchain works well with ERPs, we can safely assume that it does.

DLT is coming fast

So what does this blizzard of jargon, startups, joint ventures and pilots actually mean for the treasurer? The first conclusion is that DLT/blockchain is happening many times faster even than was predicted a year ago. The objections to the use of public blockchains in finance and commercial transactions have been easily overcome by the development of private blockchains. The technology has been applied to an extremely wide variety of markets and transaction types and in most cases several competing organisations have successfully completed pilots and proofs of concept. 

Can treasurers benefit right now from easy-to-access DLT solutions that immediately reduce the costs of their core processes? Not quite. Will they be able to this year? Possibly. Next year, definitely. Do they need to understand the underlying technology? It’s better that they do, so that they understand the security implications if nothing else.

But, like all new technology, within a very short time, we will all simply be using interfaces that work better, faster and more cheaply than the legacy systems and we will neither need to know how they work nor will we care.

It was only two or three years ago that technology and cyber-security could barely make it into treasurers’ top 10 priorities. Cyber-security is now top and the revolutions in payments, treasury technology and Fintech dominate treasury tactics and strategy. How corporates and their partners deal with digitalisation will determine whether or not they survive the next decade and treasurers – and their boards – realise it.

One key technology that has moved from the margins, through hype into the mainstream is the blockchain. Once thought of solely in terms of crypto-currencies the distributed ledger is now seen as the future of everything from payments systems, contracts and trade finance to airline ticketing systems. So do treasurers think the blockchain will affect them?

EuroFinance, in conjunction with JP Morgan, asked just under 250 treasurers at global MNCs whether they believe that the blockchain will fundamentally change the payments ecosystem. Of those asked, 62.4% said yes. “I am very interested in blockchain. We are not using it yet but it is coming. I am interested in that you can get all the data of your payments in real time and It is secure; it means collaboration between banks and corps to make corporates life easier,” explains one treasurer. And when will we begin to see concrete products? “In the next three to five years we will see something we can use, a tool for corporates.”

And it’s not just payments. One treasurer believes, “Blockchain will have an immediate impact on reconciliation. We know the banks are really active in this area and that they offering more services in intelligent reconciliation.”

And one retailer sees the blockchain as an enabler for innovative loyalty schemes based on pseudo-currencies and blockchain wallets.

When it comes to Fintech, treasury is already some way up the learning curve. Asked, “are you using any payment services provided by financial technology companies?”, 36.3% said yes. And of the 63.7% who said no, 64.8% said that they would consider doing so in the future.

These responses suggest that treasurers are adopting the simpler and more mature SaaS and Cloud offerings, and waiting to see which companies emerge from the swarm of new start-ups with a resilient and scaleable technology and business model before committing. In the words of one of the more cautious treasuries: “I don't dismiss anything but we don't know who those companies are and we are not going to be the first ones to use them.”

Those companies that have taken the plunge in payments are implementing solutions such as C2FO a dynamic receivables discounting solution and are hoping to use new solutions to eliminate bank payments portals. They are also being forced to look at Fintech solutions in geographies from which their core banks have withdrawn.

Other treasurers interviewed by EuroFinance have confirmed that they are actively investigating Fintech solutions but that “the issue is how these would work for us”. One treasurer believes, “There is a real revolution in that area. In the next three years it will change the way we do KYC documentation, trade finance and anything where we have to move money. Where there is a lot of paper work there is a lot of efficiency to be gained.”

But there are cautionary tales too. One treasurer admits: “We have had really bad experiences with being the first mover. It is difficult; the risk of failure is high. Now we will wait and see.”

As well as a legitimate fear of the bleeding edge, treasurers may have another, less obvious reason for waiting. Asked, “Are you satisfied with the data that you are able to get from your current payment processes?” Just 67.2% answered yes. This response might be proof that these treasurers have put in place the vast majority of the best practice solutions recommended in modern payments. On the other hand, it may reveal a dangerous level of complacency and unsolved inefficiency. Time will tell.

Payments survey results

Do you believe blockchain technology will fundamentally change the payments ecosystem?

Yes	62.4%
No	37.6%

Are you using any payment services provided by financial technology?

Yes	36.3%
No	63.7%

If those that said "No" to this question, 64.8% said "Yes", they would consider using payment services provided by a financial technology company in the future?

Are you satisfied with the data that you are able to get from your current payment processes?

Yes	62.7%
No	32.8%

How important is pricing, data presentation and reporting detail when selecting a payment provider (bank or non-bank)?

Not important	2.5%
Important	37.8%
Very important	59.7%

One of the biggest challenges in treasury is still cash. As one treasurer said recently to EuroFinance: “What do you do to reduce the impact of negative interest rates? We are very conservative and we don’t take additional risks so we have to take the hit. We did some diversification on investment products and we will now include corporate bonds but I want to hear how to avoid negative interest rates without taking too much risk.”

It’s a typical demand and one that treasurers have long been known for making – risk-free yield, and it’s as unlikely now as it’s always been, especially with the limitations many corporates impose: “We are very conservative, we don't get involved in anything complicated. We do term deposits through our bank relationships, there is nothing else we can do,” says the treasurer of one Swiss company.

While core European rates remained negative, yield enhancement strategies focused on diversification. First, moving into non-EU bonds provided an instant yield pick-up. Second, asset managers encouraged allocating a proportion of cash to credit – corporate bonds, asset-backed commercial paper or even funds specialising in sub-ordinated or high-yield debt while maintaining cash exposure with products such as cash ETFs.

But it may be time for a re-think on cash piles and investment strategies as treasures are forced to confront the re-emergence of an almost forgotten variable: inflation.

Federal Reserve Bank of New York surveys of consumer expectations have shown a steady increase in inflation expectations to 3.0 percent and core inflation itself surprised to the upside in December at 2.2 percent. Annual average CPI is forecast around 2.0% in 2017 versus 1.3% in 2016. This rise began even before the election of Donald Trump as US president. That election, if the new president’s policies unfold as he has announced, will significantly add to inflationary pressures as Nouriel Roubini, Professor of Economics and International Business at the Stern School of Business, New York University, has pointed out:

“[Another] reason for investors to curb their enthusiasm is the spectre of inflation. With the US economy already close to full employment, Trump’s fiscal stimulus will fuel inflation more than it does growth. Inflation will then force even Janet Yellen’s dovish Federal Reserve to hike up interest rates sooner and faster than it otherwise would have done, which will drive up long-term interest rates and the value of the dollar still more.”

The latest figures from China, released on February 13, by China’s National Bureau of Statistics show that PPI jumped by 6.9% from a year earlier, the largest annual increase reported since August 2011. This was well above the 6.3% increase expected, and followed a 5.5% rise in the year to December. Food inflation rose by 2.7% over the year, up from 2.4% in the previous month, while non-food prices jumped by 2.5%, again above the 2.0% level reported previously. This suggests that inflationary pressures are now accelerating throughout the broader Chinese economy.

Meanwhile in the Eurozone, despite the negative tone of most commentary, the economy has now posted 14 consecutive quarters of growth, the unemployment rate has returned into single digits, and economic sentiment has reached its highest level in six years. Eurozone GDP rose by 0.5% in the last three months of 2016, new data shows, meaning that it grew faster last year than America. Even laggard Italy had its best annual economic growth since 2010 despite political turmoil and a banking crisis. This growth has pushed up inflation. CPI is up 1.8% year-on-year and the European Central Bank’s target is 2%.

Rather than worry about low or negative yields, treasurers need to start thinking about cash in an inflationary world.

Cyber-security continues to top treasurers’ priority list. No surprise when security providers such as Symantec release figures showing that business email compromise (BEC) – or CEO fraud – is affecting more than 400 companies a day. In mid-2016 Symantec claimed that this type of fraud has claimed 22,000 victims around the world in the past three years, triggering losses of $3bn, and has now reached epidemic levels.

And it’s true, BEC fraud is a big problem. In August 2016, the Romanian subsidiary of Leoni AG, Europe's biggest manufacturer of wires and electrical cables and the fourth-largest vendor in the world, has announced it lost €40 million following a sophisticated BEC scam. Austrian company FACC lost €50 million a few months before.

In fact, the convergence of fraud and the digital world is leading to a ‘Model T’ moment in the industrialisation of fraud: digitalisation allows fraudsters to operate at a speed and scale previously undreamt of, and to purchase off-the-shelf kits for executing all the common forms of attack, complete with instructions and customer help desks.

But treasurers need to understand that cyber-security is as much about governance, regulation and compliance as it is about technology and clever hackers.

Governments and lawmakers largely care about consumer data. So the EU’s General Data Protection Regulation (GDPR), which comes into force on 25 May 2018, is largely concerned with Personal Identifiable Data (PID). And it is the protection of personal data and general data privacy on which most jurisdictions focus.

To ensure companies act, the penalties under the GDPR are draconian. Breaches of some provisions by businesses can lead to fines of up to €20 million or 4% of global annual turnover for the preceding financial year, whichever is the greater, being levied by data watchdogs. For other breaches, the authorities could impose fines on companies of up to €10 million or 2% of global annual turnover, whichever is greater. These numbers far exceed the kinds of fines previously levied by national regulators and those imposed by voluntary codes of conduct such as the PCI DSS run by the large credit card brands.

So while there are other significant cyber-risks – loss of commercially sensitive data, ransomware, share price and reputational impact of data breaches – the most significant is likely to be regulatory. It’s also the easiest to quantify and therefore to allocate resources to.

This is good news for treasury because it means that cyber-risk management is little different from other operational risks already managed.

First, just like the rest of treasury, it’s about basic process efficiency: visibility

Do you know what data you have; control: who has access to what; monitoring: can you see and influence the whole transaction chain in real time? And it’s about the application of established standards – for example ISO 27001.

Second, it is about compliance with reasonably detailed national and international laws and regulations

This is no different to the way corporates have to abide by international tax laws, KYC and AML regulations and a host of other regulations in finance and elsewhere (for example health and safety). The same basic operational concepts apply to cyber-risk management. Compliance by itself is not security, any more than it is effective risk management, but it is a way to put the foundations of security in place.

Third, it is about eliminating silos

Large organisations can have separate teams dedicated to KYC and AML, PCI DSS, GDPR/NIS, desktop security, network security, application security – the list goes on. And just as treasurers have learnt the costs of silos in finance and the underlying business, or between treasury, tax and procurement, so they will instantly recognize the dangers of silos in cyber security.

Finally, it is about people

As the BEC scam shows, as well as the other most likely forms of data breach or financial loss, most companies’ key vulnerability is their employees. The most cost effective way to prevent expensive cyber security incidents – aside from good basic IT hygiene – is education and training to create a culture that is resilient in the face of what is now the everyday occurrence of email-based cyber-attacks.

So, while there is clearly an IT element to ensuring cyber-security, the skills treasurers – and especially international treasurers - have built up over many years of building efficient, well-governed treasury processes and teams are exactly the same skills they need to see off the threat of cyber-attack.

Most of the focus on excessive leverage has been on China – and on overall debt levels. However, in June David Lipton, First Deputy Managing Director, IMF, speaking at China Economic Society Event, drew attention to the real problem: Chinese corporate debt.

“Corporate debt remains a serious — and growing — problem [in China] that must be addressed,” he said, pointing out that, “Overall, total debt is equal to about 225 percent of GDP. Of that, government debt represents about 40 percent of GDP. Meanwhile, households are about 40 percent. Both are not particularly high by international standards. Corporate debt is a different matter: about 145 percent of GDP, which is very high by any measure.”

In October 2016, the IMF made the point more forcefully still in a working paper entitled “Resolving China’s Corporate Debt Problem”. The paper estimated potential debt at risk to be about 15.5 percent of the total corporate loan portfolio as of end-2015. Default on this would trigger losses of about 7 percent of GDP. And even a well-planned process of closing and consolidating unproductive firms could cost up to 0.6 percent of GDP in its first year.

Other emerging markets corporate have come under scrutiny too, from Mexico to Turkey, Russia to Indonesia. But should US and European treasurers and CFOs actually be the most concerned? Are they taking credit availability and the ability to service their debts for granted?

The cash pile mirage

On the face of it, that seems a strange question. After all, the big corporate story in developed markets has been cash piles not debt levels, but that focus is extremely misleading. The vast majority of that cash hoard is held by just a few huge companies in a small group of sectors. According to a mid-year report by S&P Global Ratings, if you remove the top 25 cash holders, cash on hand at US companies is declining while debt rises. The bottom 99% of corporate borrowers have $900 billion in cash but $6 trillion in debt. “This resulted in a cash-to-debt ratio of 12%—the lowest recorded over the past decade, including the years preceding the Great Recession,” says S&P. Corporate leverage too is at a 12-year high.

The stress is showing up in downgrades and defaults. Almost 6 percent of U.S. corporate bonds were downgraded just in the third quarter of this year, the largest proportion since 2009, according to Fitch Ratings in a report issued in November. Globally, corporate defaults are also the highest they have been since 2009.

Wasted cash?

If profits were still rising, the leverage issue would be less pressing, but corporate profits have been declining for almost a year now even in the absence of wage pressures. If the huge amounts of debt companies had taken on had been invested in future profitability through R&D or investment in new products or capex, again the issue might be less pressing, but most of the cheap borrowing was spent on M&A (a notoriously poor way to build long-term profit growth) and to fund share buybacks and dividend payments to support share prices in the face of lacklustre profits.

The poster child for this strategy has been Macy’s which has leveraged up to spend $5.2 billion buying its own stock expensively while incurring ratings downgrades and a profits slump.

So what happens when rates rise?

The big issue for companies and for treasurers trying to model cashflows and optimise balance sheets, is how rising interest rates will affect them given these high levels of debt and low levels of profit growth.

Treasurers and CFOs should be modelling worst-case scenarios now, to see whether current debt loads are sustainable. Non-core businesses need to be sold off to reduce leverage while other forms are still willing to make foolish acquisitions. Should short-term debt should be extended as soon as possible? Should all rollovers should be brought forward?

And balance sheet optimization needs to become a reality rather than just a mantra, because US corporates have a serious problem with return on capital. Citigroup’s Financial Strategy and Solutions Group recently compared returns on invested capital with the weighted-average cost of funding for companies in the MSCI World Index going back to 2010. They found that at a third of all companies, returns on capital were below the cost of capital, despite an extended period of ultra-low borrowing costs.

The worst-case scenario is not rising rates, though they pose a significant threat. It is a sudden tightening of credit conditions in which bond investors and banks withdrew from the credit markets as their assessment of risk changed. The threat is greatest for lesser-rated companies who have benefited most from investors’ hunt for yield and for all companies with heavy redemption schedules. Tweaking treasury structures and looking at the blockchain may come to seem like luxuries.

In that speech on China, David Lipton was clear that corporate debt – wherever it is– was a pressing issue of our times. As he said in Shanghai, “Company debt problems today can become systemic debt problems tomorrow. Systemic debt problems can lead to much lower economic growth, or a banking crisis. Or both.”

After years of investigations, Apple has been hit with a record-breaking EU tax bill of up to €13bn, having been found to have benefited from illegal state aid from Ireland. When the EU Commission issued its preliminary adverse finding in 2014 that the Irish government had given Apple illegal state aid, JP Morgan analysts estimated that Ireland may have to collect as much €19 billion in taxes dating backing to the 1990s.

Until today’s ruling, expectations were that any final demand would be much lower – between €500 million and €1 billion, so the scale of the announcement is a shock. But the significance of the ruling is much more than the huge size of the amount owed.

Treasurers and their companies have been able to get away with not paying too much heed to politics, especially in developed markets. No more. It started with the OECD BEPs initiative which, despite the profound changes it implies for treasury and tax management, seems to have had little impact on real-world corporate behaviour, partly because of an assumption that countries like the US would fight the proposals (as they did in Apple’s case) causing their indefinite postponement.

This attitude is a mistake. Governments are cash-strapped and looking for revenues. More important, they face populist revolts against perceived elites, notably tax avoiding corporates and their ever more highly-paid executives. The idea that corporations automatically create jobs and wealth that trickle down to benefit all is less and less accepted. Aggressive tax structuring will become much less acceptable too.

Despite the technical basis for the demand, which is that Ireland’s unique treatment of the company amounted to illegal state aid, the Apple case is really about attacking the fictions upon which much of multi-national tax structuring is built.

Apple said the European Commission was trying “to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.” But it is hard to argue with what the Commission is really saying, which is that the company’s structure in Ireland “did not correspond to economic reality”.

Two Apple subsidiaries managed all its non-US sales and were internally attributed to a “head office” which the commission found existed “only on paper” and could not have generated the huge profits allocated to it, enabling it to avoid tax in any country. This kind of aggressive tax avoidance – the kind that looks bad even if it is legal – is under sustained attack and the pressure on companies from governments and customers will increase.

Look back in anger

Even if the amount eventually repaid is much lower, the ruling itself will be enormously significant. First, if companies can be forced to repay tax under deals made with national governments dating back years, it creates enormous risk for MNCs all of whom employ complex multi-jurisdictional structures to minimise tax many of which do not reflect underlying business reality.

As in the cases of Uber, Amazon and Stabucks, tax authorities and politicians are becoming increasingly unhappy with the blatant shifting of revenues to low-tax environments and the lowering of profits in high-tax home markets with the use of licensing agreements struck with overseas subsidiaries. As Eurofinance andTreasury Perspectives have said before, as companies get more aggressive, shifting allegedly stand-alone intellectual property around their empires, governments will get angrier at the blatant mismatch between underlying business reality and tax arrangements.

Second, such a ruling opens the way for a more general attack by tax authorities on aggressive tax planning. As a US Treasury department White Paper (published on August 24) on the affair says, the “Commission’s pursuit of retroactive recoveries is not only in tension with the G20’s efforts to emphasise tax certainty, but also sets an undesirable precedent that could lead to other tax authorities … [seeking] large and punitive retroactive recoveries from both US and EU companies”.

The notion that such investigations will demand retrospective repayment should strike fear into the heart of treasurers and their tax departments.

US versus EU

Finally, for corporations with business in the US and EU, the ruling is a threat to the established order. The US Treasury has reacted to the announcement by saying that the “Commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU”.

But even before the ruling the Treasury White Paper argued that the EU Commission was exceeding its powers in its tax investigations: “This shift in approach appears to expand the role of the [competition directorate] beyond enforcement of competition and state aid law … into that of a supranational tax authority that reviews member state” decisions on corporate tax.” It points out that the Commission is a “non-tax agency” and that the dedicated tax authorities in the US and EU member states are better qualified to judge transfer pricing issues.

The paper also says that the investigation runs counter to the OECD BEPs initiative:

“In contrast to the OECD [guidelines], no country will have played a role in developing the commission’s guidance, which also would not be incorporated into bilateral tax treaties between the United States and [EU] member states.”

But it is the suggestion that the investigation is an unfair singling out of US companies which opens the way for retaliation.  And the paper does include the statement that “the US Treasury department continues to consider potential responses should the commission continue its present course”.

Politicians have backed the idea. Earlier this year the Senate finance committee wrote a letter to Treasury Secretary Lew to impose a double tax rate on European companies if the Commission ordered Apple to pay back-taxes in Ireland.

“We are writing to you to express our strong concerns regarding the State aid investigations currently being conducted by the European Commission ("EU Commission") of several of its member States regarding tax rulings and advanced pricing arrangements provided to multinational businesses, most of them U.S. firms … We urge Treasury to intensify its efforts to caution the EU Commission not to reach retroactive results that are inconsistent with internationally accepted standards and that the United States views such results as a direct threat to its interests. We also ask that you consider, pursuant to the President's powers under Internal Revenue Code section 891 (which would impose a double rate of tax on citizens and corporations of foreign countries engaging in discriminatory taxation), whether "corporations of the United States are being subjected to discriminatory or extraterritorial taxes."

One reason why the Committee sees the judgement in this way is that there is potential risk to the federal budget. U.S. companies owe U.S. taxes on the profits they earn around the world and get tax credits for payments to foreign governments. If they pay more in Europe, they pay less to the U.S.

US wants back taxes too

But if you think all that means the US is arguing for a lenient approach to clever-clever tax structures, think again. In July it was announced that the US Internal Revenue Service (IRS) is suing Facebook to force it to comply with summonses related to a 2010 asset transfer. Facebook was summonsed to appear at the agency’s offices in San Jose, Calif., and to produce papers and others records. According to IRS agent Nina Stone, Facebook failed to show up at the appointed date of June 17, nor did it provide the documents.

The IRS is investigating Facebook’s transfer of intangibles (including databases and parts of its online platform) to its Irish subsidiary in 2010. A valuation of these by E&Y “were understated by billions of dollars”, according to a declaration filed in federal court by a local IRS agent. The company has already faced criticism in the US Senate for paying a two per cent corporate tax rate in Ireland versus the headline 12.5 per cent rate.

Treasury and tax need to take a long and hard look

Time for treasury and tax departments to look long and hard at their current structures.

So far, it is mostly the giants of the digital economy that have been affected. But their tax strategies reflect the wider issues of digital business in general, digital IP and services and the fact that tax strategy for the past several decades has been a relentless push to lower corporate tax rates in part by arbitraging real economic activity and its location versus the lowest tax environments.

This will become increasingly untenable. So the real question is simple: what would your business look like if it paid tax on the business it actually does in the countries in which it really does it? What if your transfer pricing mechanisms reflected both real underlying business activity and the real value of the transferred assets? It may be a good time to come up with a contingency plan to run that business rather than the one you have now.