Turning treasury into a profit center

July 6, 2023

In modern times, technology has proven itself the enabler for transforming the economics of the treasury department. For many years, the central question of any plan to develop treasury from a cost center to a profit center was whether it was feasible. The question was answered as the advent of the treasury management system made that challenge less daunting. Treasury has since been able to integrate with other divisions within the organization, and increasingly sophisticated technology means that the question is not if it can be met, but how it can be made profitable.

Bringing the process in-house

Treasury management systems (TMS) have provided the momentum for the emergence of payment hubs, also known as payment factories. These have developed as a key driver for centralizing treasury activity and reducing expenses. While some treasury departments utilize banking services for their payment factory, others leverage the capabilities of their treasury management system to gain further savings by bringing the process in-house. For example, many organizations have created an in-house bank structure to reduce costs by leveraging processes such as payment on behalf of, multi-lateral netting, and management of internal accounts.

Yet despite this progress, the task of eliminating unnecessary costs is too often still hampered by basic inefficiencies. While FinTech offers new ideas and capabilities, treasury departments too often continue to rely on spreadsheets and emails for workflows. This creates the potential for errors, security breaches, and data of questionable quality. Many departments have yet to automate manual processes such as bank reconciliation, or they lack scenario analysis tools to gauge the impact of possible future events. They may also be without any consolidated view of their currency, interest rate, and commodity risks, rendering them unable to reduce hedging costs. Treasuries with on-premise installations miss out on the cost advantages of the pay-as-you-go financial structure of cloud-hosted solutions.

A single source of truth

There are a host of other efficiencies that the savviest treasuries can achieve from having a single source of truth in an enterprise-wide combined treasury and risk management system. Delays caused while data migrates from one system to another are eliminated, so treasurers benefit from having an accurate snapshot of the company’s cash position and liquidity at any specific moment. Gaining maximum visibility of the company’s lines of credit enables them to be distributed in the most cost-effective way. The advantages of timely data also extend to accounting, which can use the latest valuations and transaction data in their hedging activities while comfortably meeting reporting deadlines.

A treasury management system also offers cost savings from consolidation. Expensive interfaces between cash management, risk management, foreign exchange (FX) trading, accounting, and other processes are eliminated when the features can all be leveraged from one system. Other costs—such as obtaining licensed software, systems upgrades, and handling a variety of different databases and systems—are all reduced.

By centralizing FX trading, treasury can achieve lower spreads through higher volumes, while the improved routing of payments via in-country accounts can eliminate the need for paying foreign currency transaction fees to suppliers outside of that country. Setting up an in-house bank results in lower payment processing costs, as the in-house bank can be used for the netting of payments between subsidiaries.

Still to come

Treasury management systems haven’t been the only enabler. Regulatory authorities’ growing scrutiny of tax havens, and the recent tightening of rules on the banking sector due to recent financial crisis, are also drivers in helping treasury cast off its reputation as a cost center. An in-house bank becomes an attractive proposition when it can provide services for the company and be compensated for them, and a central treasury platform offers benefits for treasury in terms of tax optimization and timely regulatory reporting.

Looking to the future, expect solid analytics to firmly be a major part of treasury’s toolkit in taking control of banking fees, pricing, and spreads, and identifying areas of improvement. Businesses need to invest in bank fee analysis to control fees. System providers are already working on using analytics to provide end users with up-to-date risk analysis and easy-to-use dashboards to track KPI and covenant ratios.

In the years ahead, the potential of new tools leveraging technologies like artificial intelligence (AI) and robotic process automation (RPA) will augment treasury management systems in further developing treasury as a profit center. It’s likely that AI will deliver solutions that further automate redundant and repetitive tasks, detect payment and trading anomalies, and find patterns of behavior that better predict future forecasting assumptions. AI also has the advantage of being self-correcting, using the relative successes and failures resulting from earlier decisions. These could prove to be transformational, but a number of technical and operational challenges must first be resolved.

The journey from cost center to profit center is most likely to quicken by open application programming interfaces (APIs) that leverage real-time information, GPI providing views into payment routing, and cloud-based solutions transforming the nature of IT departments. Yet it will also depend on senior management recognizing the profit potential that has already been tapped by treasury management systems and providing the investment and resources for the journey to continue.

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