Focus on digital customer connectivity has increased sharply over recent months. So, how can Treasury can play a strategic role in building a corporate’s digital business model? We explore what is possible.
Reaching customers through digital channels has become a priority for organisations during global lockdown. But reaping the benefits of a digital business model requires treasury to be fully connected to the company’s overall digital strategy.
Srinivas Kasturi, Head of Mass Payments and Country Product Management, Corporate Banking, Barclays, and Daniela Eder, Head of Payments & Cash Management Europe, Barclays, explain how treasurers can plug in to the potential upsides of digital business models – through tools such as instant payments – while outlining how to manage risks, including increased collection costs and greater foreign exchange (FX) exposures.
It’s no secret that Covid-19 has accelerated the adoption and evolution of digital business models – across almost every industry sector. Supermarkets have seen an explosion in online ordering. Healthcare providers have embraced video consultations. Virtual gyms and classrooms have become the norm for many. And the list goes on.
Perhaps more surprising than the range of digital services now available is the speed at which they have been rolled out. Data from consultancy firm McKinsey suggests that – in the space of just eight weeks – the world has jumped forward five years in terms of consumer and business digital adoption^ .
With this rapid rise in e-commerce, and reduced footfall in retail establishments, many companies have begun complementing their wholesale models with direct-to-consumer (D2C) sales. Heinz Kraft, for example, is now selling bundles of its most popular products straight to consumers^ via its website.
The benefits for customers are clear: convenience, a superior shopping experience, better service and more instant access to the products they want. For the C-suite, margins can be improved by cutting out the middlemen, revenue sources can be grown, and new markets can be entered without a physical presence.
But what does this shift towards digital business models mean for corporate treasurers? And how can they harness the opportunities on offer, while managing the inherent risks?
Examining the D2C trend is a great way to understand the treasury impact of the wider shift towards digital channels, in both B2C and B2B segments.
Head of Payments & Cash Management Europe at Barclays
The first and perhaps most obvious treasury ramification in the D2C space, according to Eder, is the dramatic shortening of the order-to-cash (O2C) cycle.
“By settling the transaction direct with the end consumer, the treasurer no longer has to wait an average of 60 days for their cash – it could be in their account within 24-48 hours, or even a few minutes, if instant payments are used.” Reducing days sales outstanding (DSO) in this way has obvious working capital benefits, since treasurers will have more cash on hand. Nevertheless, this will “require an increasingly proactive approach to short-term investing – and expedited reporting,” she notes.
D2C cash flows also differ in terms of volume and value. “With wholesale customers, cash flows tend to be low volume, high value. They also have a certain level of predictability, as orders are often regular. For retail customers, the opposite is true. D2C sellers receive a very high volume of typically low value payments, and there is little predictability – these purchases may even be one-offs.”
For the treasurer, this shift brings several challenges, believes Kasturi. “A much greater number of incoming payments can significantly increase the cost of collections. As such, treasury will require robust, automated, high-volume connectivity, to process all of the receipts from direct sales. Clients may wish to look at establishing a receivables factory, and leveraging technology such as robotic process automation [RPA], to assist with those high volume receipts. Without significant efficiency on the collections side, the working capital benefits of the model could be negated,” he highlights.
Naturally, the choice of payment method(s) offered to consumers can also affect the cost of collections. “Consumers’ use of debit or credit cards, or solutions such as PayPal, can significantly ramp up costs when transacting digitally. Bank APIs (application programming interfaces) and fintech led-solutions integrated into e-commerce sites are a more cost effective alternative, while still offering an excellent customer experience.
Another challenge with the shift to D2C is the increased range of currencies treasurers may encounter.
Digital business models enable companies to rapidly expand across borders.
Head of Mass Payments and Country Product Management at Barclays Corporate Banking
“Inevitably, this brings new currencies into the cash management mix – ones that the company might not traditionally deal with,” Kasturi continues. “Leaving FX conversion to card providers can be costly, as wholesale rates are unlikely to be applied, and fluctuating prices can be confusing for the end customer. It is therefore important for treasurers to be on top of their transactional FX costs and deliver clarity of pricing for consumers at all times.”
With these considerations in mind, how then can treasurers make the most of this increasingly digital environment? Eder and Kasturi share some useful tips:
Make sure treasury has a seat at the boardroom table.
According to Eder: “All too often, treasurers are not consulted around the organisation’s digital sales strategy – even though they are the ones ensuring that cash still flows through the organisation in a seamless manner. As such, treasurers must be vocal around the vital role they play in enabling a successful digital business model – and demonstrate their knowledge about the most appropriate ways of collecting cash from customers, especially if a D2C model is being rolled out.”
Review collection methods.
It makes sense, then, that another critical part of the digital journey is reviewing collection methods. Indeed, the results of a new research report published by TMI, in partnership with Barclays, which surveyed 300+ treasury professionals and CFOs on current European treasury trends, indicate that 59% of treasurers have already re-considered their collection methods in response to digitisation.
“The shift towards digital business models is an opportune moment to re-imagine the collections process. Legacy methods can be replaced by more efficient and even instant instruments. Reconciliations can also be improved through technologies such as RPA and artificial intelligence, to accelerate cash application,” she notes.
Review payment methods.
Likewise, considering new payment methods for suppliers is vital when implementing a digital business model – and 68% of survey respondents have already done so. Kasturi explains: “A payment that arrives too late can amplify the fragility of the supply chain, which is far from desirable in uncertain economic times. Embracing real-time payments, like SEPA instant, and initiatives such as SWIFT gpi, can help to improve a corporate’s own liquidity management and support strategic counterparties through this difficult time. Paying promptly is part of being a responsible, digital business.”
Embrace real-time treasury.
It is one thing implementing instant payments and collections, but to reap the full benefits, treasurers need to speed up the rest of their processes too – and move towards the broader definition of real-time treasury. Kasturi comments: “As Dani mentioned earlier, this means undertaking reporting in real- or near-real time. In turn, this should enable smarter, faster decision-making and help to make treasury more efficient – enhancing the department’s overall ‘fitness’ for the future.”
Don’t forget about data.
One of the major benefits of digital transactions is the data that accompanies them, especially now that the ISO 20022 standard is gaining traction. “The enriched data that is available with some of the newer payment methods, such as SEPA instant – which Barclays will soon be adopting – presents an opportunity to not only make processes such as reconciliation more efficient, but also to bolster intra-day liquidity monitoring and real-time decision-making,” says Eder.
Engage your banking partners.
Many of the headaches treasurers are likely to encounter when accommodating a digital business model can be eased by banks. “Take FX, for example,” says Kasturi. “Barclays provides a solution which helps retailers and D2C sellers to display consistent prices by protecting the rates linked to each transaction.” Eder adds that banks can also assist treasurers to “put in place the necessary API connectivity to aid the high volume flow of real-time information that digital business models bring”.
When re-thinking fundamental treasury processes in light of digitisation, it is also worth considering how other potential business model changes might impact cash management. One such change is the growing consumer, and indeed business, trend towards sustainability.
“There are many different types of sustainable business models. We’ve seen the sharing economy take off with Airbnb, for example. We are also seeing more companies leasing products to consumers, rather than selling them outright,” says Kasturi. “While sustainable business models are not - yet - as well established as digital ones, treasurers might want to factor sustainability-driven changes into their future-proofing processes. And we can see from the survey results that 20% of companies are already witnessing shifts in this regard.”
Source: New Europe: Is Your Treasury Fit for the Challenge? PDF†^
Eder picks up on this, saying: “If leasing grows, as we are seeing among car manufacturers in Germany, for example, this will inevitably impact cash flows – as higher value one-off receipts will be replaced by regular, smaller value receipts. Under IFRS 16, leases must also now appear on the balance sheet, which adds another dimension for treasurers to consider.”
Of course, sustainable business models will impact some sectors sooner, and more dramatically, than others. But, as Covid-19 has demonstrated, the business environment can shift rapidly and unexpectedly. Before the pandemic, digital business models were still seen by many organisations as ‘nice to have’. Now, they are a ‘must have’.
Eder concludes: “As a result, treasurers have an open invitation to re-imagine payment and collection methods, and embrace developments such as real-time treasury. In addition to helping fast-track their organisation’s digital growth, it makes absolute sense for treasurers to consider other business model changes such as sustainability, given their increasingly strategic role within the organisation.”
Daniela Eder, Head of Payments & Cash Management Europe, talks to Srini Kasturi, Head of Mass Payments and Country Product Management, about how treasurers can plug in to the new potential upsides of digital business models whilst managing the associated risks.
Dany [00:00]: Hello, and welcome to our latest podcast in our series, Exploring What is Possible, for treasurers in the new Europe. My name is Dany Eder, Head of Payments and Cash Management for Europe, and today I’m joined by Srini Kasturi, Head of Mass Payments and Country Product Management at Barclays Corporate Banking. And we’ll be discussing how treasurers can plug in to the new potential upsides of digital business models whilst managing the associated risks. A warm welcome to you, Srini! [00:24]
Srini [00:25]: Thank you, Dany. It’s a pleasure to be here. [00:28]
Dany [00:29]: And we are delighted to have you. I want to jump right in. This past – or this year – has been highly challenging. We have seen so much change driven by Covid-19; and especially the business changes. Share with us what you have seen, especially on the change in buying power, or buying behaviour. [00:45]
Srini [00:46]: That’s a great question, Dany – and it’s very topical. We’re seeing economic results coming out from various countries declaring a contraction due to the lockdown. And while that is very much an expected outcome of the lockdown, what is not clear is the shape of the recovery and, again, various projections have been put forward by economists.
What we have seen, in terms of the business and the transaction volumes that go through our platforms, is a mirroring of this contraction. Definitely, volumes have come down; but what is interesting is that there is a disproportionate decrease in certain kinds of volumes, specifically cash and cheque volumes.
They went down much more than electronic transactions did. And now there’s a bit of a bounce back coming through; we’re seeing transaction volumes pick up again, but we’re not seeing cash and cheque volumes pick up at the same speed. We expect that they will not bounce back to pre-Covid levels. Definitely there is a digitisation of the buying chain that’s going on.
In line with this, and also because of the lockdown, definitely the retail industry has taken the biggest hit. So, we’re seeing an increase in online spend, that’s also borne out by results from some of the largest eCommerce businesses globally. It points to a shift in consumer spending habits. There have been whimsical purchases; there have been impulse purchases, but they’ve all gone online and not over the checkout counter.
With this level of rise in eCommerce, there’s a shift in the structure of the supply chain, and that needs serious examination. There is no guarantee that this will go back to pre-Covid levels; but this growth, or a large part of it, is here to stay.
So, the most interesting shift of the supply chain is in large businesses realising that they need to go direct to consumer. The retail footfalls aren’t there; participating and taking control of the digital supply chain is becoming an imperative. And the direct-to-consumer shift points to the need for a receivables factory. So overall, quite a large transformation going on right now; and it’s interesting times to live in. [03:05]
Dany [03:06]: I couldn't agree with you more. We're really seeing in front of our eyes today how a larger transformation in economics is happening, and it is really a rise of eCommerce in a very short period of time. And, rightfully so, you've already touched on the receivables factories. So, what developments do you see in this area? Also – excuse me, again – in terms of consumer payment preference? [03:29]
Srini [03:31]: The consumer payment preferences and the consumer behaviour changes are driven largely by the extent of optimism in the economy. So, large purchases, capital expenses from businesses, all of these are under pressure. The asset ownership model is shifting towards a leasing model from an ownership model, including for individuals and retail consumers. There is an increase in funding offers from retailers – six months’ interest free or more – for large purchases. Anywhere from televisions through to automobiles. And the automobile leasing industry should see an uptick.
The other interesting change that we will see in consumer behaviours – and we're witnessing right now – is how businesses need to adjust to the eCommerce shift. And consumers drive how they want to pay. Would they want to use an electronic wallet? Would they want to use a push payment through open banking? Would they want to use a credit card online? Everybody has a different answer on what they prefer, and businesses need to absorb this complexity and resolve it at the point of purchase.
That checkout screen has never been more important in terms of offering a diversity of choices while resolving the Treasury processes that sit behind it to enhance reconciliation processes. So, consider a diversity of payment methods, and diversity of payment options like part payments; deferred payments; government subsidised payments, as you see in the case of the UK government’s Eat Out to Help Out scheme. There is a reconciliation problem sitting behind all of this now, and these were problems that traditionally did not exist at this scale for many businesses. [05:17]
Dany [05:19]: Srini, that's quite interesting around the receivables that you just mentioned. I wanted to share with you, and maybe our listeners as well, a quick encounter that I had as a consumer. So, during the lockdown here in Germany, we were helping the local pizza parlour, and you could pay online via PayPal to him over a third-party provider.
And you could order your pizza, but you couldn't get the delivery boy or the delivery individual a tip for bringing you the pizza. And so what we would do here in the neighbourhood, we would put a couple of coins in an envelope and tape it to the doorbell, and then he would come and ring the doorbell he would take the envelope and it was a joy to see the expression on his face as well, because we hadn't forgotten him.
And it didn't take very long, and digitalisation took place. And about, I would say, two or three weeks after the experience, I went again to order pizza. And this time I had the choice of giving a percentage tip to the person that was going to deliver my pizza. And I thought, wow, in the past stuff like that took years to develop, and here within three weeks everybody was getting their fair share. What's an interesting story. What do you think? [06:16]
Srini [06:17]: Isn't that amazing? And that's the magic of the rapid digitalisation that we're seeing in the face of these headwinds. It's probably accelerating us into the future. [06:25]
Dany [06:26]: Yeah, I think it's really neat. I'm a big fan of digitalisation. And we shouldn't forget the risks that are associated with it, but it was a joy for me to see how quickly we can develop if we really, truly put our minds to it.
It kind of leads a chain reaction to Treasury. As Treasury has become vital and more strategically important, or fast-tracking Treasury nowadays, as mass amounts of data and quicker expediting digitalisation, expediting payment flows and so forth, and reconciliation.
Share with us your views on the fast tracking Treasury, and the impact of the processes associated with that. It's not just a matter of making that payment; it's what happens in the background, and how it is processed as well. Share your views on what you're seeing, not only on the instant and real-time payment infrastructures, but also the treasurer’s need to consider how to make that transition. [07:19]
Srini [07:20]: Fast tracking of Treasury – I love that you use that phrase, because there's enough and more chatter about real-time Treasury, but Treasury processes are lagging behind significantly, and haven't really stepped up to take full advantage of real-time clearing.
So, fast tracking of Treasury – what is that? And how do you get there?
We've already spoken about the receivables factory, which is already a shift for large treasuries – to move from just having payment factories to having reconciliation factories for receivables. But the fast tracking of Treasury has to do with the payments as well. And it has never been more important to be timely in payments.
A payment too early or too late amplifies the vulnerabilities that exist in the supply chain today. The supply chain is made up of a number of businesses delivering different kinds of value to the supply chain, and they all need to get paid on time because they just don't have the cashflows through the lockdown.
So the fast tracking of Treasury is really not about ripping out all of the batch processes and replacing them with APIs today, right now, urgently, because that's not going to be feasible, especially with the availability of resources to work on such large projects. So the transformation can be in steps. Start with examining the batch-based processes, shrink the batch sizes down, increase the frequencies of batches, and run more payment runs, as it were, from the Friday afternoon to perhaps every day. Many times a day.
So, there's a lot of transformation that can happen with existing processes without ripping the wires out. And that's my view of the fast tracking of Treasury. I think it's an exciting place to be, simply because there is a social responsibility too that gets addressed with the fast tracking of the Treasury, but without ripping out the guts of the Treasury to replace it with something new and shiny. [09:20]
Dany [09:21]: Many thanks, Srini. Those were some very helpful tips and good advice.
When we think of fast tracking Treasury – or maybe, as it's been referred to, real-time Treasury – we always automatically think that we have to jump to the next emerging technology, and APIs; but actually the steps or the tools that we have available today can help us fast track Treasury to get to that real-time Treasury.
And I'm delighted to say that we are assisting our clients along the journey, and we’re implementing SEPA Instant for inbound receipts in our Frankfurt office later this year. And taking those phased steps to make sure that our clients are part of the journey, and we're not just imposing new processes on them.
That kind of gets me into my last question around the digitalisation and the models, and general digitalisation. We see the impact to the back offices, and we have kind of a manual and digitalisation coexistence at the moment. Share with us your views on the impact to the back offices and the processes, and those that remain manual today. [10:20]
Srini [10:21]: You’ve touched upon a significant pain point there, Dany, and one that became quite visible as the lockdown started. Teams found themselves with team members distributed at home around the globe and unable to support processes that were never considered to be digitalised in the past. These are processes around account management, service queries, even offline payment approvals, and there's been an urgent effort to get as many of these digitalised as possible. And many of them with workarounds, like email approval instead of paper trails.
But this shift to digital, there's no going back. But certainly, over the months of the lockdown, there's been a maturing of these processes; there's been a re-evaluation of these interim workarounds; and there's definitely a plan with all clients that we talk to and support in their journey to make these processes more permanent and robust.
So, we've had to do this ourselves, as a bank, to support our clients, to digitalise a number of processes to support the diverse ways that our clients are responding to the digitalisation of various back office processes. So we're seeing a maturing of that conversation and a more standardised approach coming in. [11:36]
Dany [11:37]: Thank you so much for sharing your thoughts with us today, Srini. It was really great to have you with me on this podcast. Come back and see us anytime. Thank you very much. [11:46]
Srini [11:47]: Thank you Dany, always a pleasure to talk to you. Thanks for having me [11:51]
Dany [11:52]: That concludes our podcast for today. Thank you for listening. You can learn more about how we can support corporates across Europe by going online at barclayscorporate.com/europe. [12:03]
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