Intercompany Transactions Guide: Meaning, Management & Strategies
This article is written by Nomentia Intercompany (IC) transactions (or intra-group transactions) are heavily used in the operations of multinational corporations, where financial exchanges between entities within the same corporate group occur frequently. While these transactions offer operational flexibility and efficiency, they also present unique challenges in terms of efficient accounting processes, compliance, and financial reporting. In this blog post, we’ll dig into the intricacies of intercompany transactions and explore strategies for effectively managing them. There will also be a bonus case study on what optimized intra-group payment setups can look like. But first, let’s have a closer look at what IC transactions actually mean and how they work. The meaning of intercompany transactions Despite there being various types of intercompany/intra-group transactions, they can generally be defined as transactions that occur between different entities within the same parent company or corporate group. These transactions can involve the transfer of goods, services, or financial assets between subsidiaries, divisions, or other affiliated entities within the organization. Types of intra-group transactions Intercompany transactions can be categorized into three main types based on the direction of the transaction and the relationship between the entities involved: The categorizations help to understand the directional flow of transactions and the dynamics within the corporate group. Each type of transaction serves specific business objectives and requires careful consideration of factors such as pricing, documentation, and compliance with local regulatory requirements. Examples of intercompany transactions When it comes to the actual transactions themselves, various examples are relevant for finance, accounting, and treasury teams. They illustrate how diverse the nature of intercompany transactions is and how crucial they are for multinationals to function properly. The most common examples of intercompany transactions include: Each intra-group transaction requires a slightly different approach, varying stakeholders, documentation, or compliance. It can be very challenging for companies to manage them efficiently and transparently. How does the intercompany transaction process work? To provide more clarity about the actual work that goes into each example of IC transaction, you can look at the related processes that consist of several steps involving various stakeholders within the organization along the way. How these tasks are divided highly varies in each organization. Yet, you can usually see that the process looks similar to the one below: 1. Identification of intercompany transactions Companies need to identify transactions that occur between different entities within the same corporate group. These transactions may include sales of goods, provision of services, loans, transfers of assets, royalties, or other types of financial exchanges. 2. Recording transactions Once identified, intercompany transactions are recorded in the accounting records of the participating entities. Each transaction is recorded at fair market value, which is the price that would be agreed upon by unrelated parties in an arm’s length transaction. 3. Elimination process The transactions need to be eliminated from the consolidated financial statements to avoid double-counting. When the parent company prepares its consolidated financial statements, it combines the financial results of all its subsidiaries into a single set of financial statements. To ensure accuracy, intercompany revenues, expenses, assets, and liabilities are eliminated during the consolidation process. 4. Intercompany pricing One of the critical aspects of intercompany transactions is determining the transfer price, which is the price at which goods or services are transferred between related entities. Transfer pricing is crucial for tax purposes and to ensure that each entity within the corporate group is fairly compensated for its contributions. 5. Documentation and compliance Companies must maintain proper documentation of intercompany transactions to comply with accounting standards, tax regulations, and transfer pricing rules. This documentation typically includes intercompany agreements, invoices, pricing policies, and other relevant records. 6. Tax implications IC transactions can have significant tax implications, especially when they involve entities in different tax jurisdictions. Tax authorities scrutinize the transactions to ensure they are conducted at arm’s length and that transfer prices are set in accordance with regulations to prevent tax evasion and profit shifting. 7. Risk management Managing risks associated with intercompany transactions is crucial. Companies need to ensure compliance with regulations, mitigate transfer pricing risks, and maintain transparency in their financial reporting to avoid legal and financial repercussions. It is clear that IC transactions play a vital role in the operations of multinational corporations, facilitating the efficient allocation of resources, sharing of expertise, and coordination among different entities within the corporate group. Simultaneously, it’s a time-consuming process that requires many steps, stakeholder management, and documentation. Let’s zoom in on the documentation aspect further, since that’s where companies can optimize processes in particular. Documentation is a critical part of managing IC transactions Traditionally, intercompany transactions are documented through various means to ensure proper record-keeping, compliance, and transparency within the corporate group. Some common documentation methods include: Intercompany agreements: formal agreements that are drafted to outline the terms and conditions of intercompany transactions. These agreements specify the nature of the transaction, pricing mechanisms, payment terms, and any other relevant provisions. Invoices and billing statements: invoices are issued for goods sold, services rendered, or other transactions conducted between entities within the corporate group. These invoices detail the quantity, description, price, and total amount due for the transaction. Transfer pricing documentation: transfer pricing documentation is prepared to support the pricing of intercompany transactions in accordance with applicable tax regulations. This documentation typically includes a transfer pricing study, analysis of comparable transactions, and documentation of the pricing methodology used. Accounting records: each intercompany transaction is recorded in the accounting records of the participating entities. These records include journal entries, ledgers, and other financial documents that capture the details of the transaction for internal and external reporting purposes. Intercompany reconciliation: there need to be regular reconciliation processes in place to ensure that intercompany balances and transactions are accurately recorded and reconciled between the entities involved. This helps identify and resolve any discrepancies or errors in the accounting records. Even if this documentation process sounds labor-intensive, there are ways to make it more efficient, for example, by adopting dedicated tools. Other improvements and strategies we’ll discuss more in detail below. Strategies…
FranklinKeys to Achieving Financial Data Integration & Process Automation in Treasury Technology
This article is written by TIS Payments Notice: This blog is based on an interview-style conversation between TIS representative Edgar Goldemer and Julian Fisahn, Specialist in Treasury Management Systems at BayWa r.e. The focus of their discussion centers on best practices for managing a treasury technology project, from gathering requirements and aligning with stakeholders to building an RFP, selecting vendors, and kicking off the implementation process. The ultimate goal? Identifying and instituting a platform to manage global financial data integration and process automation for treasury’s core payments and cash management operations. This article was originally published in the Q1 2024 edition of the TIS magazine. To access the full spread of exclusive magazine articles and industry insights, refer to the above landing page. Read the Full Interview Between TIS & BayWa r.e. below Edgar Goldemer: Julian, can you get us and our readers on board in a few sentences: How did the need for greater financial technology automation arise for your treasury group? What is the backdrop of the RfP which ultimately led to identifying TIS as a vendor? Julian Fisahn: Certainly! Within BayWa r.e.’s Treasury, we currently operate on a rather classic setup involving a treasury management system and a reporting tool. However, we’ve realized that these solutions are not scaling with our current growth. Over the last 10 years, BayWa r.e. as a group has experienced significant increases in terms of revenue, global footprint, and the number of newly onboarded employees – including those related to Treasury. Given that our current treasury solutions are not keeping pace with our current growth, we figured that we have to revamp our Treasury setup. Therefore, we initiated an overall Treasury transformation. Encompassing aspects such as organizational design, Target Operating Model definition, and, subsequently, the system selection process. We use all our Target Operating Model decisions as a basis for determining the requirements of our upcoming or new systems. Edgar: It’s great that BayWa r.e. already had clear objectives and a holistic vision when reaching out to us. The approach they followed is something I would recommend to any company considering a Treasury transformation project. Without a vision or clearly defined goals, sooner or later during the RfP process, companies risk getting lost in individual features and function discussions in the RfP spreadsheet. There are so many details to consider and to evaluate. To avoid losing focus or spending valuable time on something that might actually not be relevant for the operations, having the big picture in front is crucial. It facilitates evaluating features, functions, and strategic conversations. Having defined a vision beforehand can be helpful to zoom out and look at the big picture again. So, scalability and a future-proof solution for your Treasury to keep up with the pace of your company’s growth was the main focus for BayWa r.e.? Julian: Yes, partially. In Treasury, we were indeed searching for scalable solutions that we, as a Treasury team, can effectively maintain and administer to a maximum degree. I’m referring here, for example, to the onboarding of new colleagues, functionalities, or of new countries we need to include in our new system landscape. That’s on the one side, that’s the Treasury perspective on things. And on the other side, we are looking at dozens of legacy systems outside of Treasury that our systems need to communicate with. With a strong growth in new markets unavoidably comes the task to integrate older legacy systems from companies we acquired. Our ERP landscape is still very heterogeneous across the whole globe for the BayWa r.e. Group. Therefore, we were looking for system solutions that are seamlessly interfaceable with these legacy systems, ensuring the smooth flow of data and processes from outside of Treasury into Treasury and back. This aspect was a crucial consideration for us throughout the entire system selection process. Edgar: A dynamically growing business environment is certainly amazing news. However, the challenges it poses on the operations of Treasury departments are remarkable. It’s not just about the numerous legacy systems that you just mentioned. There’s also the international banking landscape, limited IT resources, non-compliant manual processes, a lack of cash visibility, and the people to take into account. The complexity is extraordinary. I believe that each of those factors alone is reason enough for Treasury to seek out and look for a centralized payment hub – a solution that allows for agility and security around the Treasury and payment operations. The more factors come into play, the more entities, or countries, the higher the overall complexity is, the more important it is to have a really robust and dedicated payment hub. How many systems and countries were in scope for the treasury transformation project you aimed to start? Julian: Currently, we operate on thirty different ERP instances, involving a lot of different vendors. Additionally, we have master data systems in place, with which we need to exchange data to ensure a full and up-to-date overview on bank accounts, bank partners, and on the relationship to our legal entities. We have hundreds of legal entities, it’s between 600 and 800. The number is pretty fluent in our case. In summary, there are numerous entities that we need to onboard, each with many bank accounts. So, there’s quite a lot of things to do for us with TIS. Edgar: Definitely, and we’re looking forward to it! Is it the first time you are conducting a comparable project at such a scale? Julian: Fortunately, I personally have some experience with Treasury transformation projects and also with system selection and implementation projects. So, this is rather not new to me. And luckily, it’s also not new to our colleagues in Corporate Treasury. We have a very motivated team, which fortunately has a lot of experience with such projects, also from former positions. And, generally speaking, BayWa r.e. is very open to change. I mean, we, as a corporation, have been in a constant change management mode over the last 10 years. So many new countries, legal entities, and systems were onboarded. People here are very used to working in a project context, and excited to…
Identifying the ROI in a Treasury Transformation Project
This article is written by Kyriba How do you truly identify the total value of the Treasury Transformation Project? While some aspects of a treasury transformation project may seem black and white, other value components are difficult to quantify, and many are often overlooked completely. When evaluating the ROI of a treasury initiative, it is important to ensure that all components of the value proposition are accounted for. This blog, which is part of our Value Engineering series, highlights some of the key attributes that are often forgotten when determining the value of a treasury project. Establishing Treasury as a Strategic Partner As a former treasury practitioner, it sometimes posed a challenge to change the view of treasury held by many in the C-suite. Historically, treasury has been viewed as more of a tactical department, serving as a firefighter when things go wrong. However, the view has since expanded to see the value treasury can provide to an organization. With the correct tools at their disposal, treasury can be elevated to a seat at the CFO’s table by providing valuable information to an organization’s global liquidity profile. Investing in an enterprise liquidity platform enables treasury to provide essential insights to ensure an organization’s sustainability and financial longevity. What would elevating treasury to the role of strategic business partner to the CFO do for your team? With a treasury solution in place, what type of analysis and support would you be able to provide your internal customers? Clearly articulating this value is critical to ensuring an accurate and comprehensive ROI assessment. Business Continuity Risk Many organizations have processes in place that inherently live within team members and help establish existing workflows. Although written workflows provide some controls and guidance, they do not always capture the whole picture of the process, are not regularly updated to include recent changes, and often lack the ability to list out all inevitable exceptions to the rules. Standardizing processes and managing repetitive tasks through treasury software helps protect the organization from employee turnover or reductions in overhead expenditure by eliminating reliance on subject matter expertise. Furthermore, overreliance on team members tends to perpetuate the monotonous following of established procedures, rather than encouraging employees to gain a true understanding of the logic and reasoning behind processes and think outside of the box. The systematic enforcement of processes and procedures allows more time for the evaluation of current processes and offers opportunities to establish best practices rather than staying with the status quo. Think about the current structure of your team and the various responsibilities each member has. What would happen if a key employee left the company? Would you be able to continue operations smoothly? Could remaining members absorb and redistribute the workload, or would there be a steep learning curve? Being able to seamlessly provide continued support at the same level of service, as well as the ability to improve the status quo is a vital component of the ROI calculation. Human Capital Optimization Companies work hard to ensure that their treasury team is composed of intelligent, highly educated individuals, often with years of experience. However, without a TMS in place, team members frequently spend their time on manual tasks like data collection and consolidation. The cost of not optimizing the organization’s greatest asset, its human capital, not only leaves missed opportunities for growth—it can decrease employee morale and increase turnover. Additionally, the labor market in today’s economy is increasingly competitive. The ability to include the usage of a TMS or enterprise liquidity management (ELM) platform in a job description provides a strong competitive advantage. This allows the organization to attract top talent. The ROI of a Treasury project must include the value associated with repurposing time spent on tactical activities. And optimizing human capital by leveraging it for more value-added and strategic initiatives. Think about how team members will be able to better use their time. And what the impact of new strategic initiatives will be on the organization. For example, your team could now have time to work with experts to evaluate, create and implement an FX risk management program to mitigate the impact of currency volatility. There may be an opportunity to launch a dynamic discounting or supply chain finance initiative to optimize working capital management. All potential projects that a Treasury Transformation project would enable need to be evaluated and included as part of the ROI calculation. Increased Controls The final value component that is often neglected is the importance associated with the harmonization and centralization of controls. KPMG studied over 642 organizations in 2022. 83% of those surveyed indicated that they had experienced at least one cyberattack over the past 12 months. In addition, 71% of respondents indicated they have experienced some sort of internal or external fraud. And 55% suffered losses due to regulatory fines or compliance breaches. Payments fraud attacks impact not only the bottom line but also pose a risk to the organization’s reputation. Leveraging a TMS or ELM platform would provide the ability to standardize controls and reporting globally. Ensuring auditable enforcement of internal policies and minimizing the opportunity for successful fraud attempts. Without a treasury solution in place, how effectively can you protect your organization, its assets, and its reputation from fraudsters? How would you quantify the reputational impact of reduced sales, lost customers, potential lawsuits, or loss of future business? The value of mitigating this risk is an essential piece of the ROI calculation. Next Steps Evaluating the return on investment for a Treasury Transformation Project is a complex undertaking. Thus, it goes far beyond evaluating productivity savings versus the cost of the solution. Companies need to ensure that they consider all potential value components of a Treasury project and its impact. This is to ensure that a full value assessment is included in the decision-making process. Many intricacies and value components are often neglected. This makes many Treasury teams look for outside guidance in calculating the potential ROI of such projects. In order to ensure that they are comprehensive in their evaluations. Also Read
FXBEACON: 75 HARD, 100% SMART: CURRENCY HEDGING LESSONS FROM MY “75 HARD” JOURNEY
Imagine that at the beginning of July, you decided to join me on a personal journey. To transform physically and mentally by taking on the “75 Hard” fitness and mental wellness challenge (which I started 66 days ago). For those who are not familiar, “75 Hard” consists of 5 daily challenges: A) Two 45-minute workouts (one has to be outside) B) Stick to a diet of your choosing (no alcohol and no cheat meals) C) Drink a gallon of water each day D) Read 10 pages of a non-fiction book, bonus rule E) Take progress pictures If you skip a day, you start over. Throughout the process each day, I wake up knowing that I’ll face grueling workouts. Couple with mental toughness exercises, and strict discipline requirements. Meanwhile, in the business world, many companies are navigating their own set of daily challenges. Like the hurdles I’ve encountered on my journey. Surprisingly, there’s a striking similarity between a commitment to “75 Hard” and a business strategy called Currency hedging. Hedging or protecting against/mitigating risk. Currency exchange uses the same principles of resilience and adaptability you need to complete “75 Hard.” And each is equally vital for businesses seeking success in an unpredictable world. Think about how important your health is to you. That headache that lasted a little too long, that cramp in your calf, the lower back pain that keeps you from sitting in certain positions. People regularly spend hundreds of thousands of dollars on their physical health. If you ask anyone over the age of 70 if they would rather have the health they had in their 20’s or a few million dollars, they will unanimously choose their health. We can all agree that the financial health of a company is just as important to the longevity of that business as physical and mental health are to humanity. By Currency hedging, businesses are able to reduce the effect of adverse market movement. Such as fluctuations in interest rate differentials or currency exchange rates, similar to the way mental and physical exercise combat the adverse effects of aging. By doing so, these companies can safeguard their profitability and long-term viability. So far, I’ve learned that the daily consistency required by “75 Hard” has created both physical and mental predictability in my life. Although challenging, I know what to expect each day. Without that predictability and routine, there is no way I would have been able to make it this far. Almost identically, hedging strategies provide businesses with stable financial footing by minimizing volatility and eliminating a variable from their business. This stability is crucial for effective planning and decision-making. This enables companies to pursue their strategic and FP&A goals with far greater confidence. Although predictability is the ultimate goal, nothing happens exactly as planned. Because of the unpredictability that life has around every corner, “75 Hard” also emphasizes adaptability. By requiring participants to complete their daily tasks, rain or shine (my run in southern California during Hurricane Hillary can attest to that), it forces participants to stay nimble in the face of uncertainty. Similarly, businesses need to have the ability to adapt to shifting market conditions. Hedging allows them to respond to unexpected changes by providing at least one concrete aspect of the business as a safety net that cushions the impact of adverse events. This protection ensures that companies remain agile in a dynamic business environment. Locking into metaphorical sunshine for the foreseeable future. Kiss those rainy runs goodbye. Every day, companies invest significant resources in various projects and operations. Wouldn’t it make sense for these same companies to do everything in their power to protect those investments? Hedging their currency exposure safeguards these investments, ensuring that they yield returns even in unfavorable circumstances. The ever-changing economic markets have become a nonfactor. In the world of business, competition is fierce, and companies that hedge effectively can gain a competitive edge over their rivals by reducing their vulnerability to market fluctuations. This allows them to focus on strategic growth rather than reacting to external crises. Doing the physical part of “75 Hard” In the same way that I’ve committed to diet, exercise, and mental improvement over the past 66 days, businesses need to demonstrate the same discipline if they stand a chance at surviving our current market. It’s crucial to manage risk so that, regardless of the uncertainties that may arise, these companies are protected. Lifting weights, going on hikes and runs, and daily reading have cultivated the necessary mental toughness, teaching me to push through discomfort and setbacks. This has better prepared me for the unpredictable challenges that life throws my way. In a similar sense, companies that hedge are better prepared to withstand economic downturns, emerging stronger on the other side. Both “75 Hard” and foreign currency hedging require a long-term perspective. The short-term sacrifices that I’ve made each day have led to long-term gains in my personal fitness and learning. In the same way, in order to help secure a company’s long-term financial success, they must practice delayed gratification. Make small sacrifices now, and reap huge rewards later. By taking time now to consider and protect against potential risks over time, companies are protected from whatever the market throws at them. Throughout “75 Hard,” I have strived for continuous improvement in the same way that most businesses that work with GPS do. This improvement mindset is such an important piece to the equation in order for companies to refine their hedging strategies and learn from past experiences to be better equipped to protect their assets and investments. The correlation between hedging in the business world and the principles behind the “75 Hard” regimen, although unorthodox, is striking. These similarities emphasize a strong connection rooted in discipline, resilience, adaptability, and a forward-thinking approach. Just as individuals take on the “75 Hard” challenge to cultivate physical and mental fortitude, companies adopt hedging strategies to safeguard their financial stability and mitigate FX risk. Embracing these fundamental principles can empower both individuals…
Oscar AugustineUnderstanding IBAN Discrimination and How to Combat It
This article is written by Pecunia Treasury and Finance What is IBAN Discrimination? International Bank Account Number (IBAN) discrimination occurs when individuals or businesses are denied financial services or face obstacles in making or receiving payments due to the country code in their IBAN. This form of discrimination undermines the efficiency and inclusivity of the European payments market. Leading to challenges in cross-border transactions and affecting economic development. The Legal Framework The European Union addresses IBAN discrimination through SEPA Regulation (EU) 260/2012. This ensures the smooth functioning of the European payments market. Article 9 of the regulation explicitly prohibits specifying the Member State in which an account to be debited or credited is located. This rule aims to guarantee that any IBAN from an EEA country is treated equally. And can be used to make or receive cross-border euro payments as efficiently as domestic transactions. Prevalence and Impact Despite the regulatory framework, IBAN discrimination persists across the EEA. This discrimination can manifest in various forms, including: The practice has a direct impact on individuals and businesses, disrupting financial stability and operations. For example, individuals may struggle to receive wages, while businesses face challenges in conducting international trade. Efforts to Combat IBAN Discrimination To address IBAN discrimination, the European Commission has made efforts to simplify the reporting process and increase awareness of the issue. In 2014, a registration center was established to track reports of IBAN discrimination. Additionally, the website www.acceptmyiban.org provides a streamlined way for individuals and businesses to report incidents of discrimination. Increased reporting has shed light on the extent of the issue, with several thousand reports in 2021 alone. This has led to greater scrutiny of companies and institutions that engage in discriminatory practices. How to Address IBAN Discrimination If you encounter IBAN discrimination, follow these steps: Conclusion IBAN discrimination poses significant challenges to financial inclusivity and cross-border transactions. By understanding the issue and taking action when faced with discrimination, individuals and businesses can contribute to the ongoing effort to eliminate this unfair practice. Increased awareness and streamlined reporting mechanisms will help ensure the smooth functioning of the European payments market and support economic growth across the region Also Read
A New Practice Area Emerges for CFOs: Enterprisewide Liquidity Management
This article is written by Kyriba For CFOs, treasurers, and corporate boards, the COVID-19 pandemic represented a moment of clarity. Seemingly overnight, CFOs were faced with a crisis bigger in many ways than the 2008 financial crisis. In the space of days, treasurers had to shift from managing long-term strategic initiatives of the business to ensuring immediate access to cash to fund basic business operations. Corporate finance leaders long burdened by dwindling IT budgets and limited head count were forced to lean heavily on their treasury and cash management tools. Unfortunately, some treasurers were hampered greatly by their legacy software packages, thwarted by a lack of agility and visibility with their legacy software. Yet, as with all major events, CFOs are often the powerful catalyst for change. The role of the CFO was already changing, but now, because of the past year, the CFO’s environment has changed as well. Key Pain Points for Today’s Liquidity Management Teams To better understand these changes, IDC conducted a survey of more than 800 corporate finance leaders and practitioners in August 20211 to explore the emerging importance corporate finance leaders are assigning to liquidity management, both during times of crisis and to leverage opportunities for growth. The results of the survey were compelling in many aspects including findings that strongly indicate urgency for CFOs, treasurers, and other financial leaders to design and deploy strategic initiatives to manage liquidity holistically. Effective and efficient liquidity management is among the top priorities for survey respondents2. Here are a few reasons driving increased urgency for liquidity management for treasurers and other financial leaders: Liquidity Management Emerges as a Practice Area The events of 2020 have forced CFOs to prioritize business resiliency and continuity by optimizing liquidity management. This will mean a greater focus on working capital management3 including sourcing external funding and providing financing for critical suppliers efficiently. Given the current economic uncertainty, cash and liquidity management have been top of mind for financial leaders. The pressure to maintain liquidity is tremendous as companies of all sizes fight to retain market position and, in some cases, simply stay alive. As a result, businesses have found themselves needing to reforecast their liquidity and cash flow more frequently (weekly or even daily). However, this is a difficult proposition for any company considering the following survey data points, according to the IDC survey of more than 800 corporate finance leaders: In addition to being able to forecast and reforecast quickly and efficiently, financial leaders found that they desperately needed the ability to simulate future what-if scenarios and to create plans based on those what-if scenarios4. The benefit of this capability is that business leaders can remain in lockstep around core business objectives even as the business environment changes rapidly. Unfortunately, many financial leaders don’t have the tools to support scenario planning for liquidity, and as such, they must cope with limited visibility for decision making. The most prominent area of impact is in decision making for treasurers and their executive teams. CFOs with limited visibility are slower to make decisions regarding money movement, internal funding of projects, or M&A activity. Furthermore, a lack of visibility can even impact the bottom line, as companies may choose to be less aggressive in moving money into/out of the exchange markets and may opt for expensive external funding sources unnecessarily. Managing Liquidity Enterprisewide Requires Unification More and more, organizations are coming to the realization that liquidity management is not only a critical aspect of functioning in this “new normal” but also a team sport. Organizations must have a unified approach to all data, processes, and human capital related to liquidity management. Here are the key characteristics of an enterprisewide unified liquidity management process: Centralized liquidity and cash data The centralization of liquidity data streamlines financial operation, allowing for better control for financial leaders. Centralization provides financial leaders with the opportunity to standardize cash management across all legal entities, reduce the number of bank accounts in use, and provide a more holistic view of bank or FX exposures. Deep liquidity analytics Having access to deep analytics provides users with the ability to better predict future liquidity. More importantly, it allows them the chance to find patterns or overlooked items that have business significance (e.g., identifying cash as a revenue-generating asset and monitoring bank fees and deposit rates). Partnering environment Financial line-of-business professionals are often left on an island. This is often the case for finance directors, controllers, and heads of accounting. In fact, only 20% of survey respondents have their CEO as their champion who initiates unified liquidity management initiatives. The key to executive participation goes beyond simply getting the CEO involved in liquidity management decisions. The key here is to develop a partnering environment for all operational decision makers and stakeholders. This can be exceedingly difficult without the proper tools to support partnering and collaboration across business leaders. Dedicated tools to quickly expose key liquidity metrics to all stakeholders within the business are essential. Seamless integration Data must flow between all the relevant cash functions, including treasury, accounts payable, accounts receivable, FP&A, order management, and procurement. In addition, the data must flow outside of the finance teams as well including investors and lenders, certain government agencies, credit rating organizations, and evens to certain customers and suppliers7. Only then will financial leaders be able to gain a holistic view of the organization’s current cash/liquidity position. Real-time massive data Finance leaders need real-time information to optimize decision making, but often they must wait till the end of day/period/quarter to get an accurate and holistic view of the current state of enterprise liquidity. Today’s liquidity managers need real-time data to build accurate forecasts and market simulations. Real time is also essential in effective communication of the business cash position between stakeholders. Follow the Leader The process of managing treasury at the corporate level is complex and ever changing. In these cases, it is not unusual for CFOs and their treasury managers to reach out to gather advice from trusted sources. Leader companies,…
Reviewing Treasury Best Practices for Bank Account Management in 2023-2024
This article is written by TIS What is Bank Account Management & Why is it Important? Within the context of corporate treasury, bank account management (often referred to as “BAM” or “eBAM” for electronic BAM) is one of the most fundamental responsibilities of modern practitioners. Bank account management refers traditionally to the strategic and operational processes involved in effectively overseeing and controlling a company’s bank accounts. It includes all functions related to opening, maintaining, and optimizing bank accounts to achieve financial efficiency, security, and compliance. It also covers the process of systematically managing the transactions and cash balances that flow through these accounts. As well as any data related to bank addresses, IBAN and routing numbers, the “signers” with approval rights over each account, and so on. Today, a significant portion of these tasks can be performed using a variety of software tools. They range from Excel and e-banking portals to ERPs, TMSs, and other Fintech solutions. We will explore the use of these solutions more in a later section. As it stands in 2023-2024, treasury professionals that oversee their company’s bank account management functions are typically responsible for the following operations: 1. Core Bank Account Management Tasks i. Developing an Account Structure When it comes to BAM, determining the appropriate number and types of accounts needed for different financial functions. Such as operational accounts, payroll accounts, tax accounts, and interest-bearing accounts. Perfecting this structure may also require Treasury to introduce in-house banks, cash pooling, and sweeping structures. ii. Tracking Open & Closed Accounts Managing open and closed bank accounts across the company globally is considered a standard bank account responsibility for the Treasury. In today’s fraud-laden environment, maintaining near-real-time visibility over account opening and closing activity is critical in order for treasury to maintain compliant, risk-free, and transparent bank account operations. iii. Managing Approved Signer Lists Tracking the approved “signers” with authority over each of the company’s bank accounts across each bank, country, entity, etc. is another standard component of BAM. This is another role that is vital for reducing the threat of fraud, especially as it relates to having duplicate signers on accounts (or forgetting to remove signers after they leave the company). Managing a clean signer list is also important for keeping up with various banking regulations that impact corporations, such as FBAR in the US. iv. Maintaining Updated & Accurate Account Data As a part of BAM, treasury will be expected to maintain organized and accurate data related to bank addresses, financial statements, account numbers, relationship managers, and routing information. This includes responsibility for updating these records over time as employee turnover, company growth, and bank relationships dictate. 2. Correlated Bank Account Management Tasks v. Bank Relationship Management One of treasury’s main responsibilities relative to BAM involves establishing and maintaining relationships with each of their company’s banking partners, negotiating the related terms and fees, and evaluating the quality of services provided. vi. Reporting on Bank Account Transactions & Cashflows As a function closely tied to their oversight of company bank accounts, treasury will be relied upon to monitor and report on the various payments, cash balances, fees, and general activity that occurs within each account over time. This includes the process of cash positioning and workflows for bank statement management. vii. Performing Bank Fee Analysis & Account Reconciliation While it can be tedious to undertake, the process of analyzing bank fees and service charges to identify opportunities for cost-savings can become a significant portion of treasury’s BAM responsibilities. Such projects are often necessary for ensuring the company’s accounting structure is as streamlined and optimized as possible. In addition, reconciling bank account statements with internal records to identify discrepancies, ensure accurate accounting, and detect potential fraud is an area of BAM that the Treasury will certainly have a stake in, typically in alignment with accounting. Why are Bank Account Management Roles Usually Entrusted to Treasury Teams? Over the past decade, industry data from the consulting firm Strategic Treasurer has consistently shown that the vast majority of treasury teams hold primary responsibility over bank account management operations at their respective companies. This is, of course, with the help of HR, legal, and other finance groups to perform various related tasks surrounding account compliance, reconciliations, and reporting. In large part, corporate treasurers are the ideal department to manage the company’s banking operations due to their unique blend of financial visibility, operational control, and risk management oversight. As the natural stewards of payments and liquidity and with a deep understanding of company cash flows, treasury professionals are perfectly positioned to analyze and allocate funds across various banks, manage the associated account structures and bank relationships, monitor account activity to identify fraud, maintain compliance, and report on balances and transactions. Because most Treasury teams are already working to foster strong banking relationships, negotiate favorable service terms, and stay abreast of regulatory changes that impact banking activities, their holistic perspective on the organization’s financial landscape enables them to naturally align bank account management with their other existing responsibilities. What Technologies are Typically Used by Treasury to Manage BAM & eBAM? For modern treasury teams, there are five main types of software solutions used to assist with bank account management. Depending on the stage of a company’s maturity, the size of their global footprint, and the complexity of their banking operations, a diverse mix of these different solution types may exist within any specific organization. Usually, it is Excel and banking portals that are used most prominently by small and mid-market companies, while larger and more complex companies use these tools in conjunction with more sophisticated ERPs, TMSs, or specialized BAM solutions. Let’s quickly review each of these five standard BAM software tools in more detail: 1. Microsoft Excel Microsoft Excel has held a prominent position in the corporate finance realm since it was first introduced in the 1980s and remains the go-to tool for many Treasury teams when it comes to tracking and managing bank account data. Despite a myriad of solutions developed…
How AI and ML are used in payment fraud detection (16 use cases)
This article is written by Nomentia Artificial Intelligence (AI) and Machine Learning (ML) are two technologies that have been widely discussed in recent years. They offer a range of tools that are gradually being integrated into our personal and professional lives. These technologies are particularly useful in situations where there are many time-consuming and manual tasks. Or where there is a large amount of data to analyze. One such application is payment fraud detection. Before diving into the use of AI and ML in fraud detection, it is important to address them separately. What is AI exactly? AI systems are designed to integrate vast amounts of data with intelligent algorithms. They mimic or simulate human-like actions and decision-making processes. AI can be utilized for various techniques like problem-solving, natural language processing, image recognition, reasoning, learning, and more. The technology functions in a way that collects data, processes it, and selects an algorithm. It trains a specific model, modifies the model’s parameters, and evaluates the results. This can then potentially be deployed in the real world. As it operates, AI typically uses feedback loops from its users to improve over time. What is machine learning exactly? Machine learning is a form of AI that teaches a system to think in similar ways to humans, as it learns and improves based on previous experiences. Machine learning algorithms typically need little supervision because they are learning by themselves. We usually distinguish between three techniques of machine learning: Supervised learning Supervised ML algorithms are taught to make predictions or decisions primarily based on previous data patterns. Here, the ML learns based on already labeled data. So, input data needs to be categorized beforehand. So that the algorithm will use it as a benchmark to come to conclusions when analyzing new data. Unsupervised learning In unsupervised ML, there is no need for labeled or categorized data. Instead, the algorithm tries to find patterns or relationships in the data without explicit guidance. Typically, the goal of unsupervised ML is to explore data and find clusters or relationships. Reinforcement learning With reinforcement learning, you train the algorithms to make sequential decisions. In an environment with a reward or penalty feedback mechanism that it learns from to improve its subsequent decisions. Usually, no labeled data is available. The algorithm needs to learn from its own experiences and the feedback it receives. The difference between AI and machine learning AI refers to the simulation of human intelligence in machines that are programmed to mimic human-like actions and decision-making processes. AI encompasses as a wide range of techniques, including problem-solving, natural language processing, image recognition, and expert systems, among others. It aims to create systems that can perform tasks that typically require human intelligence. Tasks such as reasoning, learning, perception, and problem-solving. Machine Learning is a subset of AI that focuses on developing algorithms. This enables computers to learn from and make predictions or decisions based on data. ML algorithms allow machines to improve their performance on a task through experience without being explicitly programmed for that task. It does so by using statistical techniques to enable computers to learn patterns and relationships from data and make decisions or predictions. Why are these topics relevant to payment fraud? Recent research by PwC showed that 51% of organizations have experienced fraud in the past two years. A 20-year high compared to previous survey results. Fraud mainly impacted organizations in terms of financial losses. Respondents highlighted that many of them will require new, advanced technologies to tackle the issue. Some respondents also mentioned that fraud had more considerable consequences. Like operational disruptions or damage to the brand or customer loyalty. Ultimately, AI has the potential to assist businesses in maintaining a secure payment environment. Thus safeguarding a company’s customers, revenue, and reputation. RESEARCH BY PWC SHOWED THAT 51% OF ORGANIZATIONS HAVE EXPERIENCED FRAUD IN THE PAST TWO YEARS — A 20-YEAR HIGH COMPARED TO PREVIOUS SURVEY RESULTS PWC’S GLOBAL ECONOMIC CRIME AND FRAUD SURVEY 2022 With the rise in cybercrime and the evolving sophistication of financial threats, we’ve come to an era where humans cannot keep up with processing an abundance of data efficiently and securely. We can by no means compete with the speed and thoroughness of data interrogation that AI and ML can deliver today. As a result, we need to embrace and team up with such technologies. To support this view, a recent study by the Association of Certified Fraud Examiners revealed that 17% of organizations already leverage AI and ML to detect and prevent fraud, and 26% of organizations are actively planning to adopt fraud detection AI or ML in the next two years. On top of that, technology providers are now heavily investing in developing practical AI-driven solutions to tackle payment fraud. How can AI and Machine Learning be used in fraud detection? These days, ML and AI can help you with fraud detection in various ways. Let’s focus on some of the main ways how organizations currently leverage the technologies and what the future may bring: For example, AI and ML can streamline payment processes and enable faster risk identification in payables, receivables, and reporting. They can help manage exceptions or spot anomalies in large data sets based on previous patterns it has studied. AI can analyze large datasets much faster than human beings, and it provides good insights and points to pay attention to. Faster analysis will also help speed up decision-making. Especially with more data than ever and little time to analyze, it will become essential to save time while deriving insights by leveraging tools like AI and ML. AI can help automate essential but manual tasks such as data entry, reconciling payments, or generating reports. Minimizing manual processes, in turn, reduces the room for errors and fraud. Reconciliation of payments is essentially comparing two data sets with each other and finding matches, which AI and ML are incredibly good at. Even when anomalies arise, you can train AI to handle them in pre-set ways. Machine learning…
There is No More Ignoring ESG in Treasury
Despite many other burning issues, ESG is a major concern for treasurers. It appears to be moving higher up their agenda every year. But sustainable finance solutions do not always align with fundamental treasury principles. Treasurers’ first, second, and third priorities are, understandably, to secure/protect/optimize cash respectively. And yet green bonds seem to offer less attractive interest conditions than traditional bonds. Moreover, time and cost of developing sustainability frameworks are significant factors. And synchronizing the implementation of ESG projects and raising debt continue to be challenging for a number of corporations. That being said, sustainable finance presents enormous opportunities for growth. and the cost and time of ESG reporting are decreasing, thereby removing a major impediment. Indeed, many treasurers are starting to see the benefits and opportunities arising from ESG investments, such as green deposits. The ESG trend is also increasingly reflected among employees, new talent being recruited, and treasury’s business partners. Asking the right questions Since treasurers sit at the intersection between numerous internal departments and external partners, such as banks, fintechs, and technology vendors, they are well-placed to drive their company’s ESG agenda forward. To assist in this endeavour, treasurers should routinely ask their stakeholders: And when speaking to asset managers, treasurers should also ask: One of the main obstacles here is the lack of visibility around metrics of ESG impact of investments. And I sometimes ask myself whether ESG investment isn’t better suited for longer-term investment because there seems to be a paradox between ESG and the notion of ‘short term’. That being said, I believe that ESG tenets will become increasingly compatible with the needs of Treasury short-term investments because the offering is widening and appetite is growing. Those treasurers who still do not have ESG on their priority lists should familiarise themselves with the ESG success stories of other treasury teams. These case studies illustrate how treasury can be a pioneer in this area, accelerating a company’s ESG agenda and being seen as an example not only to other departments with the company but to other treasury teams. A thorny issue Despite the positivity surrounding ESG in general, there are dark clouds on the horizon. A notable concern is greenwashing. I believe everything hinges on building the right relationship with business partners like banks and fintechs, asking for transparency over ESG metrics, and sharing data. If a treasurer happens to be exposed to greenwashing, they will know the long-term relationship will change—there is significant reputational risk. Due to the fear of greenwashing, investors are taking far more time and care to carry out due diligence. Investors now want to be 100% certain that there will be no reputational damage as a result. As such, greenwashing is not helping ESG investment gain traction, and to protect themselves, treasurers must ask for full transparency from their investment partners. Finally, let’s not forget that not all funds are suitable for ESG. Yet there is a risk that certain funds will be neglected simply because they are not ESG-compliant. Rather than only investing in ESG funds and excluding others, we should apply judgment and common sense when assessing investment opportunities. It’s a matter of enacting the crucial investment risk management rule: diversification is key. Also Read
Benjamin Defays