What is Treasury 4.0?

This article was written by Andre Pereira, Hedge Accounting Business Analyst and David Wiggins, Workflow Specialists Team Lead, at Bloomberg. 

The evolving role of corporate treasury today is driven by real-time data and analytical needs, powered by enhanced digitalization and automation capabilities. This is commonly referred to as “Treasury 4.0.”

Today’s treasurers need to do more with less. Their output needs to be more insightful but delivered at a faster pace than ever before. Errors need to be mitigated and manual processes drastically minimized, or even, completely eliminated. Over the last 30+ years, treasury departments have grown into increasingly complex organizations with a plethora of new requirements, most notably around the area of improved business intelligence. How we meet these challenges — by combining existing technologies with new and emerging ones — is a question that is far from easy or obvious to answer.

Treasury 4.0 fundamentally reshapes the way treasury departments function. Innovations such as robotic process automation, advanced data collection using APIs and artificial intelligence help treasuries improve risk visibility and decision making. The idea of a digital treasury does not just mean the use of a single technology platform, but rather an ecosystem of connected technologies that can be leveraged to add value and facilitate better decisions in real time.

4 levels of treasury automation

1.0 The first level can be seen as an immature, fragmented or informal function, characterized by manual processes. It is localized – as opposed to centralized – based on geographical accounting rules. These don’t include the concept of “fair value” and the hedging process is slow and manual, due the lack of data or difficulties in aggregating and analyzing available data. Corporates at this stage depend significantly on their bank counterparties. These relationships were key for the success of the group.

2.0 A second level is characterized by exponential use of data and technology. Here we see the adoption of trading platforms to replace execution via the phone, and straight-through-processing integration capturing trades in dedicated treasury systems. Essentially, these platforms allowed treasurers to achieve better execution levels through multi-bank dealing rather than inefficiently calling the various banks in search for the best price. The treasury system also became more sophisticated during this phase, in order to support new accounting rules that require FV accounting. Such innovations allowed for better risk management analytics, giving corporations some independence from their bank counterparties, with the front office now staffed with more market specialists.

3.0 At this stage, the role of the treasury group is set as the company’s financial nerve centre. This is a result of the 2008 economic crisis that enhanced the importance of liquidity and timely risk management; but also made possible by the availability of enhanced technology, in the form of enterprise-wide accounting systems, web-enabled solutions and improved bank connectivity via SWIFT. Cumulatively, all made it critical, and easier, for companies to manage more and more centralized global treasury operations. It is at this stage where we saw the emergence of more systems inter-operability via flat file integration using secure file transferring protocols (sFTP).

Treasury 4.0 KMPG, in their same-titled paper, describes it as the “computerization of manufacturing technology with the objective of creating a smart factory that is characterized by adaptability, efficient use of resources, an ergonomic design and integration of clients and business partners into the value chain.”

Traditional roles remain, executing operational activities, investing short-term liquidity and securing short-term credit. However, these traditional roles now fade to the background. Treasurers have to be excellent at these traditional roles, but must now be more focused on ad-hoc demands, monitoring the environment and interacting with business units to understand how business changes will affect liquidity, risk exposures, and so forth.

To meet the new challenges, treasury will need:

• Real-time visibility of balances, forecasts, transactions, counterparty positions, currency exposures, and so on;
• Real-time or near-real-time access to accurate market data and analytics;
• Transparency of pricing with clear identification of its risk factors

These three necessities are essential to further optimizing the execution of their hedges, particularly for FX and commodity exposures. (We will approach this in more detail later on.)

In addition, treasuries also need proper tools and suitable processes to assess the impact of exogenous events. And finally. treasuries will be asked to quickly generate ad hoc reports for board, management and other internal stakeholders who need to understand the impact of events and determine the best course of action. This is essential for equipping the team with the response capability to assess cash flow and earnings impacts from market shocks that could impact global liquidity or significant volatility, akin to what was experienced during the global financial crisis.

Furthermore, for all the improvements mentioned, treasuries will need to maintain updated policies, processes, controls, metrics, and governance.

They will be responsible for building and maintaining a technology infrastructure to support all those requirements, including treasury and risk management systems, and frameworks that allow flexibility and responsiveness.

Hopefully, designed on a scalable and future-proof logic, these integrated solutions can grow and change with the organisation. This is no easy task, and in many aspects quite distant from what one traditionally would expect from an experienced treasurer.

Such focus on technology will be reflected in three major themes:

1. System architecture, characterized by ever-more mingling of systems, and its inter-operability;

2. Advanced analytics: with adoption of best-of-breed solutions, more accurate and sophisticated analytics;

3. And finally, the adoption of AI and machine learning: to create forward-looking data via pattern-recognition, rather than just historical data.

The treasury of the future will be an analytic and technology hub that provides end-to-end business intelligence to the company’s board, business units, creditors, customers, suppliers, shareholders, rating agencies and regulators. For example, the potential impact in liquidity or supply chain, of a credit default of a business or banking partner.

The Treasury 4.0 journey is about better analytics and more insightful data; is about automated business intelligence reporting in form of dynamic dashboards; but is also about the people – a shift to more outward looking vs. internally focused. But above all, is about treasury systems architecture mainly built around automated processes and systems’ inter-operability.

If its adoption is successful,

• Treasurers will do more with less. There will be a significant improvement on its cost efficiency.
• Routine processes will be streamlined, increasing error prevention, avoiding over-dependence on excel with its poor control and audit framework.
• The daily responsibilities of the treasury team members will shift to higher value activities.
• And treasury output will be much more focus on predictive analysis, which will improve decision making, not just of the group, but of the organisation as a whole.

Eleanor Hill, from TMI – an online publication focused on treasury matters – summarises it quite elegantly:

“Next generation treasury functions will work in real-time, with highly integrated, automated systems. They will leverage intelligent tools that can teach themselves how to perform treasury tasks better and better. Data will drive forward-looking decision-making, replacing the hazards of using only the ”rear view mirror” and treasury teams will have the opportunity to exchange legwork for strategic thinking, adding greater value to the business in the process.”