Treasury's greatest challenges and opportunities in 2018


By Patrick Moore

Disruption: Do US middle market firms have their heads in the sand?


While many mid-sized US companies believe their industry is vulnerable to disruption, most believe that their company is shielded from it, a recent survey has found. Many of these businesses were underprepared for such an event, Capital One found in its recently released 2017 Disruption in the Middle Market study.

As many as 80% of respondents said their companies have already experienced disruption or expect to experience it during the next three years. However, only one in six believe they are prepared to deal with a disruptive event. While 43% said that their industry is vulnerable to disruption, just 18% believe that their own company is vulnerable. “It was actually quite interesting as there seemed to be some contradictory views from the respondents on disruption,” Patrick Moore, head of treasury product management and innovation at Capital One, told journalist Victoria Beckett. “Many of the respondents felt that the industry of their specific market segment was particularly vulnerable to disruption but they were far less worried about the impact of their own company,” he says. However, 15% of middle-market companies claim they have already faced a disruption that had a material impact on their finances, and an additional 73% expect to experience a disruption within the next three years, the survey found. Middle-market executives as a group cited the Internet of Things and big data analytics as likely causes of disruption, but this finding varied considerably by industry. “One could argue there is a lot going on in their ecosystem but there is a sense that they are being shielded from it,” he says. This may be due to the way companies view ‘disruption’, Moore agues. Disruption has taken place in the industries of most of the respondents and it has impacted their banks, but they may not view it that way. “Often people think disruption is a big bang event, but disruption and innovation can be incremental as well,” notes Moore.

Using digitalisation to change the way a bank interacts with its clients has been ‘disruptive’ considering how quickly things have changed in the past five years. But as the changes were more incremental it does not feel as unsettling. Better prepared firms are more vested in digital products. The survey showed that adopting “disruptive” technologies – including digital treasury management and corporate finance tools – were seen as a good defence by middle market firms. Many of the better-prepared companies share a common approach, with 95% of middle market executives surveyed showing some level of interest in digital products. Online and mobile payments were considered the most promising digital product by 54% of respondents. More than half of the more prepared companies surveyed use new technology for bills, transfers, accounting, and payroll and benefits. Market disruption will undoubtedly be industry specific. Airbnb is an example of this in the travel industry, while Amazon is transforming the retail experience. This is also true for financial services and banking. “Today’s emerging technology must focus on digital and the openness of middle market customers to embrace digital change will push out a number of legacy providers that are not as responsive to changes in the banking interaction model,” argues Moore. “Some of the work we are doing in very much positioning us in a different light to our competitors. We are very focused on the client experience and not delivering a product such as ACH or wire transfer,” he adds. Capital One’s survey found that companies with revenues between $2bn and $3bn are much more likely to see disruption as an opportunity than companies in the $100m to $499m range. They are also more likely to be better prepared for a disruptive event, the survey found. More than their counterparts in smaller companies, the largest companies in the survey have created contingency plans and purchased interruption insurance. They are also investing heavily in research and development (R&D). Half of them have increased their R&D budgets by 11% to 25% in the last year. Compared to smaller companies, these companies are also more likely to be pursuing a disruptive strategy of their own that could lead to a competitive advantage. Smaller companies (revenues between $100m and $499m) are likely to take the opposite view, according to Capital One. They are more likely to view disruption as a threat, primarily because they have difficulty mustering the financial resources for preparation, the survey reported.

A willingness to seek alternative financing

Financial institutions remain the preferred source of funding for most middle-market companies, who are especially interested in asset-based lending and asset securitisation as well as access to private equity, Capital One reported. This is particularly true of those US firms that were better prepared for disruption. The survey revealed, however, a surprising willingness to seek alternative sources of capital like peer-to-peer lending and crowdfunding, although it is primarily the smaller companies and delayers that are exploring these alternatives. Smaller businesses may have alternative lending opportunities, notes Moore, but “treasury management is very often tied to lending,” he says. “As the clients become more sophisticated and climb up that continuum, their need for more sophisticated treasury management products will grow and they will need to engage with more ‘traditional’ financial services. That creates a dynamic where often treasury management and other services are tied in with lending, so there is probably a tipping point where that [alternative financing] model may not be as attractive or lucrative for the company,” he explains.

Change in banking client relationship

Due to market disruption, the relationship between clients and their banks are at an inflection point, argues Moore. “Capital One are taking a more client centric view of how we engage our customers,” he says. “We are not building [our business] and hoping that clients come to us – which has historically been the banks’ approach. “We are trying to understand, through various mechanisms, our middle market clients’ day-to-day activities and processes so that we can help them more broadly better manage their business and not simply be a payment settlement institution – a role that historically banks have played,” he adds. Capital One has had a “very warm reception” from its clients when doing this as banks traditionally hold the status of being a trusted adviser, Moore says. When asked what advice he would give to treasurers operating in markets that are undergoing disruption, Moore says: “Be open and see the disruption as an opportunity not as a threat. It will lead to significant improvement in efficiency and allow for a much broader view around data which will help treasurers to better manage their business. “Treasurers should work with their financial Institutions beyond the traditional ACH or lockbox. Think more holistically about how the relationship with your banking partner can be richer and more expansive, beyond what you traditionally thought of the bank doing for you,” Moore adds.

Capital One is taking a more client centric view of how we engage our customers

Patrick Moore


What will the biggest challenge for treasurers be in 2018?


Tim de Knegt is the manager for strategic finance and treasurer for the Port of Rotterdam – the largest port in Europe.

“The importance of integrated decision-making is becoming much more important with the geopolitical tensions, the effects of Brexit looming and the potential economic impact of the unwind of the quantitative easing programs by European and US central banks. In my opinion the biggest challenge for treasury teams next year is to further strengthen its role as a strategic business partner to ensure they can give their invaluable input. Furthermore, innovation is changing the life of corporate treasuries on a daily basis, it is important to keep on track with this to ensure that there are no unnecessary (cyber) risks taken.”

Steve Card is the group treasurer at Dechra Group – an international specialist veterinary pharmaceuticals and related products business.

The UK-based company has offices across 21 countries in Europe and North America, and exports to over 40 countries worldwide from three manufacturing sites. Dechra employs over one thousand people with its 2015 annual revenue 2015 reported at £203.5m. “For Dechra, the challenges of 2018 are the same as 2017 – uncertainty. What is happening with Brexit? What will Donald do next? Will Italy, Greece and Germany continue their dance of a thousand deceptions? Which way will the Central Banks of Europe, UK and America go – and when? Risk management –and therefore treasury strategy – is the process of identifying, assessing and controlling threats to an organisation’s cash, capital and earnings. Absent the ability to identify those risks with any degree of certainty, that treasury strategy must attempt to manage a wide range of (known and unknown) unknowns, leading to a strategy that is fundamentally defensive in nature. Beneficial opportunities will arise, but mainly of a tactical nature. In a Dechra world where the risks range from acquisitions to Armageddon, retaining flexibility to react to change remains, again, the biggest challenge.”

Alistair Cotton is the treasury manager at Clearsettle – a global payment gateway that connects payment service providers to hundreds of payment methods used worldwide.

“Looking ahead to 2018 we see two key drivers of changing market conditions that treasurers will find challenging. Firstly, developments in the US. Throughout 2018 the Federal Reserve will be unwinding its huge portfolio of bonds it bought since the financial crisis. Interest rates across the yield curve will rise at a pace dictated by the Fed’s sale of securities, so paying attention to central bank announcements in 2018 will be crucial to anticipate how funding costs will change. The US dollar should also begin to rise as interest rates drift higher but the pace of appreciation will be more linked to Donald Trump’s proposed tax reform and if US corporations, currently holding huge USD balances offshore, decide to begin to repatriate funds. “The second key theme treasurers should be paying attention to in 2018 is the ongoing Brexit talks between the UK and Europe and the associated volatility in the pound that accompanies the negotiations. It is still far from clear what sort of deal the UK will get, and what deal is finally agreed will have huge ramifications for other European countries who might also have desires to leave the currency union. Foreign exchange (FX) hedging will become even more important for treasurers as overall volatility climbs as negotiations move towards a climax in autumn 2018.”

Manny Sandhu is the treasurer of high street fashion label Ted Baker.

“The biggest challenge to corporate treasuries in 2018 will continue to be the management of foreign exchange risk. Uncertainty over Brexit implications, global geopolitical tension and a changing US political climate continues to drive volatility in exchange rates and putting pressure on margins. It is hard to imagine exchange rates stabilising in 2018 so corporate treasuries will need to identify rates they are comfortable with and to be opportunistic with hedge trading when these rates are achievable.”