From the March 2009 issue of Treasury & Risk magazine

After Tomorrow

Months after the financial meltdown, any vision of the future is still shrouded in a swirl of uncertainties. With even fundamental assumptions in doubt, many treasury professionals are trying to anticipate what's coming next week, next month or possibly at the next renewal of a syndicated credit. "The historical norms are being tested," observes Eric Kamback, CEO of Bank of New York Mellon Treasury Services.

Insight into the more distant future has never been more valuable, and a few treasury visionaries think they have a sense of what's coming next. "In my nearly 25 years in this industry," says Glen Solimine, president and CEO of Speranza Systems, a treasury technology provider based in Portland, Maine, "I have never lived or worked through a period with as much uncertainty and negativity as we are seeing now. The appetite for long-range projects has greatly diminished as the very immediate issues of keeping precious liquidity safe from credit and fraud risk have become more urgent."

With short-term survival on everyone's mind, is there value in trying to look further down the road and start preparing for a different and challenging future? Some savvy veterans believe there is. Instead of defaulting to a survival strategy, treasury staffs should opportunistically use the meltdown and their current importance in the corporate hierarchy to "revisit and update their systems, policies, procedures, financial models, approval escalations, counterparty exposure policies and agreements," says Brent Callinicos, treasurer of Google Inc. "We've all had a sobering view of the shortcomings of historical models. This is the time to come up with something better."

While funding and meeting working capital needs will be a preoccupation in the future, treasury staffs also need to think about the technology they will need, and here experts express a broad consensus. The future of treasury is "more about the power of information and less about payment methods," says David Fuller, executive vice president over SunTrust Bank's treasury and payment solutions. "Data and analytics will be the drivers. It will be increasingly difficult to determine where the company's finance/accounting function ends and where the bank's begins. This increased availability of real-time data will allow us to turn insights into action, especially as it relates to security and company safety. It will be easier to catch fraudulent transactions."

In the past, cutting-edge technology has been all about efficiency. In the future, it will also be about speed. Future treasuries will just have to be a lot quicker to analyze, recommend and act than they are today, Callinicos argues. "In the vast majority of treasuries, it takes too long just to come up with the answer to a question. We will need to have current data at our fingertips and use it to make quick recommendations." And that will require better technology.

The role of the treasurer will evolve into something very different than it is today, says Raymond W. Fattell, senior vice president and head of product for the Americas in HSBC's global transaction banking unit. "It will become increasingly a 24x7 global activity," he says.

Better technology is coming. "The technology evolution, already under way, will deliver capabilities that only a few years ago would have been unimaginable," says Julie Monaco, region head of global transaction services for North America at Citigroup. Expect modular portals and service architectures, online analytic processing, mobile access and increased digital security with Web 2.0 capabilities, she says. Analytic dashboards with metrics and indicators will help treasury staffs drill down to underlying data and provide valuable insights into payment flows, receivables trends and service investigations, right from a desktop, she predicts.

Early warning systems displayed on dashboards will "offer exception reporting that will actually be used by treasurers," says Craig Jeffery, managing partner of Strategic Treasurer, Atlanta. "Events and triggers will alert treasury to pending, imminent and broken covenants and policies. Senior members of treasury will rely on this capability rather than the standard monthly reports. These alerts and information will be pushed to the proper person for action."

Integrated technology will finally arrive, says Bob Stark, director of marketing strategy for corporate treasury services at Thomson Reuters, New York. "The goal is complete information about the company's financial positions, along with timely access to market intelligence. Today, this is achieved by using a treasury workstation in tandem with a link to a market information provider. "In the future, treasury staffs will be able to get it all in one solution," he says.

Application programming interfaces (APIs) need to evolve to enable systems to talk to one another and exchange information more easily. "Treasury personnel will need to become more technology savvy," says Jennifer Ceran, treasurer of $8.5 billion eBay, San Jose, Calif.

But integration alone is not enough. Corporations that achieved automation and even integration at the expense of flexibility will pay a price. The future will require great flexibility, says Anthony J. Carfang, founding partner of Treasury Strategies Inc., Chicago. "You will need the technology and infrastructure to plug in a bank or unplug one in two hours. You'll need to be able to switch counterparties just as quickly. Or move assets from one class to another. Companies that have spent years implementing a complex system that relies on hard coding will be at a big disadvantage. They won't be able to make changes fast enough. We're in for some major rethinking about the treasury technology we will need."

But, when it comes to predicting a future for treasury, much of the immediate attention focuses on what will happen to banks. "It will be a new world," says Carfang. "We'll see the financial system restructured and re-regulated."

In a post-recession future, corporate treasuries will be dealing with a banking industry that is "radically smaller, radically less ambitious and radically less capable," says consultant Jeff Wallace, managing partner of Greenwich Treasury Advisors. Treasury staffs will feel the pinch particularly in their access to credit. "They will be reduced to searching through the rubble, setting up many small lines and paying much more in fees and spreads," he predicts.

Restructuring will be radical. "Even today, the banking system in the United States is insolvent and being propped up by the government. Who's left standing will be basically up to the government," says Eric Bass, head of the banking and brokerage practice at SMART Business Advisory and Consulting, New York. "The combined market value of Bank of America and Merrill Lynch now is less than B of A paid for Merrill Lynch last September," he notes. Some U.S. banks will be completely nationalized, with all private shareholder equity wiped out in 2009, he predicts.

With a new Securities and Exchange Commission head and calls for a myriad of new financial regulation, it's hard to predict how that will affect treasurers, says Jim Kaitz, president and CEO of the Association for Financial Professionals (AFP), Bethesda, Md. The effect on banks could be profound. "Everyone in finance is working without a net, trying to adapt to a changing landscape."

Bob Warren, vice president of corporate development and finance (and former treasurer) of $3.2 billion Diebold Inc., Canton, Ohio, predicts the regulation will change radically, and "treasury staffs will have to learn to operate in that environment." One major casualty will be relationship banking, Warren believes. "Relationship banking served us well in the past. We could rely on help from familiar humans when we ran into a problem. But credit analysis, not relationships, will drive banking in the future. That relationship manager will have less influence in helping us get a deal done. We will have to carry the ball ourselves."

Banks in previous booms derived a lot of their power to finance big deals from secondary markets, but now "new regulations are likely to make it harder to originate and then sell assets," Carfang says. "The buyers--money-market funds, GSEs like Fannie and Freddie, and hedge funds--are all suffering and investors are disappearing." Balance-sheet banking gave way to originate-to-distribute banking in the booming '90s, as banks originated and quickly resold loans. No-risk lending led to sloppy underwriting and now to a strong regulatory reaction. Corporate borrowers may face radically reduced capacity to borrow from banks unless a new model can be developed, he suggests.

While more bank failures and arranged mergers are inevitable, the financial meltdown may have thrown a wrench into the trend toward fewer larger banks. "I think we'll see regulatory pressure to limit bank size," Carfang says. "We now see that we have to protect the system itself, not just depositors, and that very large banks can jeopardize the system." Expect something like tiered capital requirements, where a bank may be required to hold 8% capital for its first $100 billion of assets but 10% for the assets above $100 billion and even 12% for assets above $1 trillion, he forecasts.

Some proposals being floated at the most senior regulatory levels are "absolutely bone-chilling in their lack of understanding," Carfang says. "One proposal calls for money-market mutual funds to become special purpose banks operating under bank charters. I don't know what we'll end up with, but every regulator now feels compelled to come up with new proposals to justify his or her position."

More of the big players are likely to disappear. "It's hard to know how many major global banks will survive and what they will look like," AFP's Kaitz says. But new players will emerge. "The global transaction business will continue, but the players may be institutions we never expected," he says. AFP now has a joint venture running in China, and there's a reason. "The Chinese banks know that to be global they need to learn more about corporate treasury and finance. Those banks intend to play in the global markets. More Asian banks are likely to emerge as global transaction banks."

One big question is whether and when the country can transition from partially nationalized banks back to privately capitalized banks. "One banker I know now refers to himself as a 'civil servant,'" says George Zinn, treasurer of $60 billion Microsoft Corp. "As long as the government has invested at the most senior level and has control, it will be hard to attract private capital." Future capital markets funding will also be under pressure, Zinn suggests. Credit rating agencies will be more important in the future, as the availability and cost of funding is paramount, but rating agencies will learn to react much more quickly to events or signals in the companies they rate, he predicts.

While many economists and business leaders focus on the expected depth of the recession and the breadth of the big stimulus, the real danger lies in the opposite direction, Carfang insists. "The Fed and Treasury have pumped tremendous amounts of liquidity into the system," he points out. "They need to be ready to drain it quickly or the next bubble will start to build." The politicians and the media have built up so much recession-battling momentum that a recovery that has already started is getting scant attention, he charges. "In December, the index of leading economic indicators went up, but you didn't hear much about that. The economic leaders are saying we have to get the banks to start lending again, but the Fed's own numbers show that bank lending is up in almost every category."

If access to bank credit is hamstrung, treasuries will react by managing working capital more aggressively and streamlining supply chain finance. Corporations will have to rely more on their own devices and will become more serious about how they manage working capital and supply-chain financing, Carfang says. "Working capital is the grease for the cogs of commerce. As you build more efficient supply chains, you need less grease," he notes.

Future solutions are more likely to come from supply chains themselves, agrees Jon Richman, head of North American sales for trade finance and cash management at Deutsche Bank. "Supplier and distributor finance that can produce working capital improvement and provide an additional source of liquidity for a corporation and its trading partners will be considered a core strategy for the treasury of the future," he says.

Within supply chains, the economics of card payments will change, says Jeff Tinker, senior vice president in the wholesale Internet and treasury solutions group at Wells Fargo Bank. "Interchange will come down to encourage greater card acceptance, which means lower rebates. Payers will use cards because they make sense, not because it puts money back in their pockets," he predicts.

To wring more value out of working capital, treasury staffs will "unlock the value of approved invoices to achieve a better return on cash, inject liquidity into the supply chain, reduce supply chain risk and free up working capital for strategic investments," says Citigroup's Monaco.

To the extent that past treasuries have relied on short-term gains from complex Wall Street financing tools and tactics, future treasuries will seek longer-term results by making working capital management an alternative to debt and equity financing, says Craig Saxer, senior vice president of treasury management at PNC Bank. "By placing receivables, credit and payables responsibility under treasury, a business can integrate the transaction and tracking functions, clarify responsibility for working capital and add parameters to assess counterparty risk," he explains.

Working capital gains will not come primarily from pushing changes in payment timing, Wallace says. "Slowing payments to suppliers probably won't work because many of them are in a worse credit bind than their customers," he says. Efforts to reduce A/R days will be another likely dead end. Reducing safety stock levels of inventory is where there the greatest gains will come, he argues. "Cash flow metrics will trump operating income numbers in the future."

One of today's entries that will become a winner in the future is SWIFT Lite, according to Rick Schumacher, head of product for Wall Street Systems, New York and London. "Mid-sized corporations will embrace this opportunity to use a less costly alternative to the multiple communication interfaces they use today to hook up to the various banks for payment processing, cash management and account reconciliation," he says.

Having to deal with a large increase in bank relationships will put a premium on use of SWIFT, Wallace agrees. "Interacting with banks through one bank-independent pipeline will become a necessity. Few treasurers will be willing to entrust their global control of cash and debt to any one bank or group of banks. Trusting SWIFT entails no credit risk," he points out.

The economic problems have brought unanticipated risk and provided a lesson in the inadequacies of current risk management practices. "The risk management models we learned in business school and on the job must evolve to fit a new landscape," eBay's Ceran says, "so we can provide keen oversight of the company's capital all over the world and have the necessary tools to preserve and enhance it."

"Even when we come out the other side of this crisis, things will be different," says Microsoft's Zinn. "We'll never manage settlement risk and counterparty risk the way we did." Hedging programs will get bigger and more sophisticated. People who never hedged will start," he says.

Watch for the chief risk officer to emerge as a major player, suggests Russell Paquette, corporate treasurer of $1.3 billion REI, Sumner, Wash. "We will start to see more companies embrace enterprise risk management as the backbone of decision-making for the organization." While the CRO title is gaining importance in the current environment, it remains to be seen whether this will evolve as a separate function or be incorporated into treasury. "A substantial portion of enterprise risk management involves significant coordination with treasury," PNC's Saxer points out.

State-of-the-art risk management systems and practices won't simply be critical to hedge interest rate, foreign exchange and commodity exposures. They will be the key to what companies can borrow and how much they have to pay for it in the future, Bass says.

Will future treasury practitioners, having been burned in 2008, operate more cautiously than in the past? Not everyone thinks so. "Speculating in the financial markets will become a core part of treasury's mission, the key to future health," says Chris Zingo, senior vice president for the Americas at London-based SuperDerivatives. "This will require a radical shift in mindset," he concedes, "but it will take speculative hedging to lock in future cash flow."

One example of what Zingo thinks will become part of the new mindset was Southwest Airlines taking a strong position that fuel costs would rise and locking in 2000-2001 prices with hedges, giving that airline a competitive edge over its rivals that lasted for years. The current drop in most commodity prices provides a golden opportunity for treasurers to get started in the new paradigm and protect themselves against future price increases, he points out.

To be prudent speculative hedgers, treasuries will need systems that allow them to operate independent of banks, counterparties and other sources of information, Zingo says. "Self-reliance will become an important trait as treasury staffs position their companies ahead of the curve," he adds.

Whatever the policies, greater emphasis on risk management means stronger treasuries in the future. "Treasury is in a unique position to understand and quantify internal and external risks that might impact the company's overall financial health and plan ahead for contingencies. Enterprise risk management should become a higher priority than ever, transforming itself from something theoretical to something pragmatic that can be understood through the organization," Ceran concludes.

In fact, the whole spectrum of anticipated changes point to a more robust, more strategic treasury. CEOs' greater focus on liquidity and cash flow will open doors now for treasury to play an even greater role in setting strategy and involvement with business activity. "Our importance has been validated," Warren says. "Now is the time for treasury staffs to step up to the challenges and take on more responsibility." "Treasury will get stretched" as the CFO shares more of the CEO's job and their financial duties get distributed, Paquette says.

Providing sufficient liquidity at the corporate level will no longer be enough. A successful treasury in the future, says John Tus, vice president and treasurer of $37 billion Honeywell International, Morristown, N.J., will have to help each business unit "execute policies and procedures to drive value creation through increased sales [trade and customer finance], increasing operating margins and asset efficiency [working and fixed capital management and turnover] and the development and execution of an efficient capital structure and an effective capital allocation and cash distribution plan."

Treasurers and their staffs certainly have a chance to come out of the current crisis with their prestige and responsibilities enhanced, Kaitz says. "Treasury staffs are now taking on responsibilities that traditionally belonged to the CFO--working with analysts and investors. Their liquidity management and funding skills have become very important. They're not likely to shrink back into their old roles. The treasurers of the future will be very involved in IR, pension investment and the funding challenges for employee benefit programs."

However, gains in prestige and breadth will come with higher expectations. Senior management and boards of directors will demand that treasuries have clear visibility into liquidity and threats to liquidity, says Strategic Treasurer's Jeffery. "They will no longer tolerate answers that it will take days to figure out who counterparties are or why a cash balance is off by $25 million from what was expected. The future treasury must be able to "take multiple hits and remain standing," he adds.

But success, if treasury staffs achieve it, could be historic. "When the Harvard Business case study reviews report on this period," says Bridgit Chayt, senior vice president for treasury management services at Comerica Bank, "I think they will cite treasurers and CFOs as MVPs in those organizations that reversed the tide and found success and growth in a troubled and challenged economy."

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