Mitigating Banking Failure Risks: Strategies for Treasury Teams
This article is written by TIS Payments in 2023 At-a-Glance: So far in 2023, there have already been several high-profile institutional banking failures including Silicon Valley Bank (SVB) and Signature Bank, as well as the sudden acquisition of Credit Suisse by UBS. Uncertainty regarding First Republic Bank and other various regional banks has also persisted as a sustained liquidity crunch threatens their daily operations. These unexpected incidents have underscored the need for treasury and finance teams to develop and maintain a bank connectivity structure that supports their need for simplicity, automation, and control without creating an overreliance on any single partner or relationship. In the modern technology era, a popular strategy for accomplishing this is by deploying a multi-bank connectivity solution that is not tied to any specific bank and that can synchronize workflows across a company’s global banking partners by integrating them all through a unified platform. This approach enables treasury and finance practitioners to easily maintain global visibility and control across their full spread of bank connections and accounts, and it enhances their ability to quickly react and pivot to a shifting financial landscape as various bank relationships, regulations, integration methods, financial messaging standards, and other components evolve. Uncertainty in the Banking Environment is a Huge Deal for Treasury & Finance Teams During Q1 of 2023, tepid performance across the financial markets has done little to dispel widespread feelings of uncertainty about the state of the global economy. With the aftermath of the Covid pandemic still fresh in everyone’s mind and many companies now facing subsequent supply chain bottlenecks, heightened geopolitical turmoil, and rising interest rates coupled with soaring inflation, it’s easy to see why risk management has remained top-of-mind for many industry professionals. But recently, the added uncertainty and turmoil caused by a series of high-profile banking failures including Silicon Valley Bank (SVB) and Signature Bank, as well as the sudden acquisition of Credit Suisse by UBS, have sparked even greater worry over whether the global economy can handle further financial duress. Today, these concerns are weighing particularly heavily on those operating within the corporate treasury and finance arenas. Why is this? From an operational perspective, treasury is typically responsible for monitoring and controlling their organization’s banking workflows, account balances, payments activity, and underlying cash flows. Practitioners usually approach these responsibilities by attempting to automate and optimize as much of their processes as possible to drive efficiency and simplicity, but there is often a risk management element associated with the function as well. That is, addressing the risk that any of the company’s banking partners, account balances, or associated cash flows could be impacted by an adverse event or unanticipated scenario that suddenly drains liquidity or renders some or all of it inaccessible (i.e. due to a fraud attack, natural disaster, geopolitical conflict, economic catastrophe, etc.) In many cases, the bank relationships that treasury oversees are spread across numerous countries, currencies, institutions, and accounts. But, there are usually a few core banking partners that help companies manage the bulk of their liquidity and payments activity. Often, having these core partners is helpful because treasury can rely on them to sustain daily operations without overcomplicating their business landscape or having to deal with dozens of separate providers and connections. However, if one of these core banking partners were to unexpectedly fail, how would that impact the organization’s payments and cash flows? Would it be easy to redirect these processes through a new bank, recover the liquidity held in the collapsed bank, and develop a new workflow to transact with vendors, customers, and partners in an efficient manner? Given the critical nature of payments and cashflow activities for supporting day-to-day business operations, treasury could end up dangerously short on options if a bank closure prevented them or their AP and HR colleagues from paying supplier invoices, debt settlements, or employee salaries. If millions of dollars in cash or more is suddenly unavailable and payments are not being executed, companies without the proper bank contingency plan will face significant challenges trying to source alternative liquidity and route it through new networks or channels. Treasury Must Balance Their Need for Banking Automation & Simplicity with Risk Management Best Practices Via Ample Diversification & Integration For many organizations, addressing the above risks is not easy — especially not for treasury groups that have become overly reliant on a single banking partner or a select few institutions to manage cash and payments. And for companies still using individual bank portals to manage the bulk of their payments activity with their partners, then a bank closure impacting one of these key institutions is even harder to overcome. Of course, the “surface-level” response to this challenge is to simply suggest that treasury should diversify their assets across a greater number of banks and accounts. But the answer is not that simple. Over time, each new bank and set of accounts added by a company will result in greater complexity across the back-office as additional connections, data, information, and relationships must be managed. In the long run, a company that overdiversifies their relationships across too many banks and accounts will ultimately suffer from a garbled mess of bank portals, payment workflows, and reporting gaps that negate any benefit derived through the reduction in risk. In fact, they may even create added risk due to an increased threat of fraud and compliance gaps as cash and payment activity is spread across more points of exposure. But given the extent that modern treasury teams must rely on their banking partners to ensure cash flows and payments are properly transmitted and orchestrated on a global scale, how are practitioners supposed to adequately protect against the potential fallout of a banking failure without growing overdiversified, siloed, or inefficient in the process? For a growing number of companies, the answer lies in multi-bank connectivity solutions. Using a Multi-Bank Connectivity Solution Enhances Treasury’s Ability to Orchestrate Global Cash Flow, Payments, and Liquidity During Times of Crisis In today’s digital and fast-paced financial environment, an increasingly common practice amongst treasury teams is to…
Franklin
An Interview with Benjamin Defays, Board Member of Treasury Masterminds
Q: Let us know you, Benjamin. Tell us a little bit about your journey into treasury. How did it all begin for you? I landed in Treasury by chance about 12 years ago, and it quickly became my passion. I started my journey with a CAC40 company, then switched to the largest private company in the US, and now I’m with the world’s largest alternative asset manager. This gave me the opportunity to take part in 3 TMS implementations, plus one for a trade finance platform. And also FX risk, liquidity management, and solution implementation with various cash pooling structures, trade finance activities, and credit and collection management. I was also in charge of automation activities such as RPA and various workflow tools to help monitor activities and measure performance, with managerial roles at different levels. I have been a board member of the Association of Corporate Treasurers of Luxembourg (ATEL) for several years, in charge of education and the sustainability of the Treasury function. I teach and co-founded various Treasury Management training programs. Q: What specific skills do you believe are essential for success in treasury management, and how have you developed and utilized these skills throughout your career? In the evolution of treasury management, there has been a transformative shift from the traditional perception of treasurers as detached consultants to an integral part of strategic decision-making within organizations. Today, successful treasury management demands a multifaceted skill set that extends far beyond conventional financial acumen. At their core, treasurers function as risk managers, meticulously navigating the complexities of financial markets to safeguard the company’s assets and ensure stability in volatile environments. However, they are also indispensable strategists, adept at aligning treasury initiatives with overarching business objectives to drive growth and profitability. Hyper-specialization is crucial in today’s dynamic landscape, where treasurers must possess an intricate understanding of various financial instruments, regulatory frameworks, and technological advancements. This expertise empowers them to optimize liquidity, manage funding efficiently, and mitigate risks effectively. Moreover, treasurers serve as trusted advisors to the CFO and the board, offering invaluable insights into financial performance and implications for strategic decision-making. They act as liaisons between different stakeholders, synthesizing complex financial data into actionable recommendations that drive informed decision-making at the highest levels. In the modern business paradigm, treasurers are not just custodians of financial resources; they are strategic business partners, deeply entrenched in the operational intricacies of the organization. This requires a profound understanding of the business landscape and the ability to tailor treasury solutions to meet specific needs, thereby enhancing the company’s competitive edge. To excel in this evolving role, treasurers must embrace a culture of continuous learning and adaptability. The pursuit of lifelong learning is essential to staying abreast of industry trends, regulatory changes, and technological innovations. It’s not enough to rely solely on past experiences; treasurers must constantly challenge themselves to learn, unlearn, and relearn, positioning themselves as pioneers rather than conservators in the ever-evolving treasury landscape. Furthermore, effective communication skills are paramount for treasurers to articulate complex financial concepts in a language that resonates with senior management and other stakeholders. Clear, concise communication fosters collaboration and ensures alignment across different functions, facilitating informed decision-making and driving organizational success. Lastly, while treasurers are adept at managing external risks, it’s imperative not to overlook the importance of managing internal risks, including career development and professional growth. By proactively investing in their own development, treasurers can future-proof their careers and remain indispensable assets to their organizations. In essence, the modern treasurer embodies a blend of financial expertise, strategic vision, and adaptive leadership, playing a pivotal role in shaping the financial health and strategic direction of the organization. Q: In your opinion, what are the most significant challenges facing Treasury departments in today’s business environment, and how do you approach addressing these challenges? In today’s business world, Treasury departments encounter significant challenges. As highlighted by Charles Darwin’s insight: ‘It is not the strongest of species that survives, nor the most intelligent, but the one most responsive to change.’ Woodrow Wilson’s remark, ‘If you want to make enemies, try to change something,’ underscores the resistance often faced when change is introduced. The primary hurdle for Treasury departments is adapting to change effectively. We must recognize that change is inevitable and view it as an opportunity for growth. Embracing change involves thinking outside the box, avoiding routine, and seeking innovation. Automation is key to addressing routine tasks, allowing us to focus on strategic initiatives. By adopting agile, digital solutions and streamlining processes, we can improve efficiency and resilience. Standardization, simplification, and strong internal controls are essential for ensuring financial integrity. Furthermore, treasurers must enhance their business partnerships and technology skills to meet evolving demands. This includes leveraging data analytics for insights and collaborating across departments. As the role of treasury expands, we must adapt to new responsibilities such as managing working capital, addressing ESG considerations, and navigating emerging payment methods in B2C transactions. By embracing change, utilizing technology, and expanding our skill sets, treasurers can successfully overcome challenges and drive organizational success. Q: Could you discuss a particularly complex Treasury-related problem you’ve encountered in your career and how you navigated through it to achieve a successful outcome? I encountered a complex challenge revolving around the management of thousands of bank guarantees annually. This activity was pivotal for our operations, as it was a prerequisite for receiving payment from customers, many of whom demanded bank guarantees. However, this process was draining our working capital and causing frustration and misunderstanding within the organization. Managing over seven credit lines with predominantly manual processes meant our Treasury team spent excessive time on low-value tasks, with little visibility for management due to the absence of key performance indicators (KPIs). To address this, I prioritized breaking down the barriers between the Treasury and the business units. I initiated several team-building sessions, drawing insights from relevant literature, to foster mutual understanding of the intricacies and risks associated with bank guarantees. This collaborative approach significantly improved communication and…