Amid a volatile economic landscape, corporate treasurers are responding by adapting their day-to-day operations to better manage risk, maximize liquidity and leverage new technology. All this is happening alongside pressure from management for treasurers to take on a more strategic role within their organizations.
In an economic era marked by higher-for-longer interest rates, the impact of sustained elevated rates on corporate treasurers — the custodians of cash within corporations — has been profound. This precarious environment has tested their mettle, while presenting them with significant investment and borrowing challenges.
The shift is particularly noticeable at the short end of the rates market, where an inversion in the yield curve has led short-term instruments to garner higher interest rates than longer-term alternatives (see Figure 1). According to Jim Scurlock, assistant treasurer at Expedia Group, the current strategy in this yield curve environment is to stick to the short end of the curve. “This allows us to maximize liquidity in our portfolio and watch the interest income grow as the Federal Reserve tightens monetary policy,” he says.
INVERSION MEANS IT NO LONGER PAYS TO LEND LONG
Two-year U.S. Treasurys have paid a higher yield than 10-year bonds since mid-2022
While treasurers are yielding more by staying in the short end, this will change as interest rates begin to decline. The Fed’s December 2023 Summary of Economic Projections estimated three 25 basis point cuts by the end of 2024, but three-quarters of the way through the year, the first of these has yet to materialize.
Tom Hunt, director of treasury services and payments at the Association for Financial Professionals (AFP), observes that the moment when corporate treasurers will need to start extending the maturity of their investments is nonetheless approaching. “Maybe they won’t get 5.25%, they'll get 4.5%. At some point, the marginal difference will drive the action,” says Hunt.
Diversifying for Security
To mitigate counterparty risk, treasurers diversify their short-term investments across bank deposits, money market funds, certificates of deposit, government bonds and commercial paper. They are naturally seeking the best terms to capitalize on yield opportunities, but as the prospect of rate cuts looms, this drive will only intensify.
“As corporate treasurers prepare for rates to go down, there’s even more shopping around,” says Fabian Khoshbakht, global head of client insight and innovation at BNY Treasury Services. “But they should also see what they can do now to dampen the potential impact of rates going down significantly.”
Commercial paper, reputed to perform well in a declining rate environment, is one option for treasurers to consider.
“As the economy evolves and interest rates go down, treasurers need to be better positioned with a lower yield on their balances. Managing working capital better now is vital for readiness.”
— FABIAN KHOSHBAKHT, BNY
“Our investment policy is rightly conservative, but we can invest in large, well-funded and well-rated companies,” affirms Scurlock. “Commercial paper can provide a little more pickup on typical treasury securities. It’s another safe security to diversify your portfolio.”
Different economic scenarios influence how treasurers manage maturities for investments. With commercial paper, they must decide between 90-day or 30-day paper, or perhaps longer for certain credits. “There’s a complex formula that goes into shifting out of bank deposits and buying commercial paper, but it could be a very viable option,” notes Hunt.
While treasurers have benefited from higher yields on short-term investments, elevated interest rates have also increased borrowing costs. Managing payments and collections efficiently will be essential in preparing for future economic shifts.
“As the economy evolves and interest rates go down, treasurers need to be better positioned with a lower yield on their balances. But beyond that, there’s uncertainty about whether the economy will have a soft landing, hard landing or something in between. Managing working capital better now is vital for readiness,” says Khoshbakht.
The regional banking turmoil in the U.S. during Spring 2023 has intensified treasurers’ focus on long-term financing arrangements. In fact, a recent survey from the European Association of Corporate Treasurers found long-term funding is the top priority for respondents in the next few years (see Figure 2). Even for companies with little debt, establishing potential long-term funding lines is crucial to support future growth or maintain long-term viability.
FOCUSED ON THE LONG TERM
Top priorities for European corporate treasurers over the next 12 to 24 months
Mitigating Currency Volatility
Managing heightened FX market volatility is another key priority for corporate treasurers. In 2022, the total annual currency impact from FX volatility on North American and European corporates stood at $169 billion, dropping to $95 billion in 2023. However, with U.S. dollar strength in the first half of 2024, U.S. corporates could face more challenges.
“It’s key for any corporate treasury to continue using foreign exchange hedging to minimize exposure and protect the company against FX market volatility,” asserts Expedia’s Scurlock.
Banks are also developing new ways to help corporate clients navigate FX volatility. BNY allows clients to move cash at any time of day within the bank’s ecosystem and is also building out a real-time data delivery extension to this innovation for its corporate clients. “It is one thing to move funds 24/7, it’s another to have the right amount of data in real-time to effect this,” explains Khoshbakht.
The effect of these advances within BNY’s ecosystem will mean that when a client’s regional treasury center in Asia starts work in the morning before their U.S. group treasurer comes online, the center will not need to go into the market to source liquidity if they are short on cash — they can source it within the BNY ecosystem.
“On the flip side, if a company is long Singapore dollars and the regional center doesn’t need it, they can push this back to HQ, again with very favorable rates because we’re not relying on any other bank to do any FX,” Khoshbakht adds.
Embracing Technology Trends
Corporate treasurers rely heavily on technology to manage their organization’s cash, particularly in volatile economic circumstances. Treasury technology investment remains significant on enterprise resource planning (ERP) solutions, treasury management systems (TMS), e-banking portals, and niche fintech solutions for payments, reconciliations and risk management.
While 89% of companies with annual revenues over $10 billion have implemented a TMS, this drops to 39% for firms with less than $2 billion. Organizations face a choice between implementing comprehensive solutions like ERP or TMS and opting for smaller tools that automate specific treasury processes.
“We implemented an API-focused fintech providing basic balances and transactions,” says Bruce Edlund, group director, assistant treasurer at Cloud Software Group. “Connecting to the banks via their API is super easy, depending on the bank. You sign some forms with the bank, set up an account on their developer site, and you can have data flowing within a week or two.”
This solution allows treasurers to tag transactions to both track current and forecast future cash flows. It is much faster than the typical TMS implementation utilizing Swift or host-to-host connectivity to a corporate’s various banking partners. “Host-to-host is not enough for some treasury teams. It’s fine for your accounts payable team with a batch payment file or accounting with a previous-day bank statement, but I want current balances. I want a bank portal-style experience,” says Edlund.
“Host-to-host is not enough for some treasury teams. It’s fine for your accounts payable team, but I want a bank portal-style experience.”
— BRUCE EDLUND, CLOUD SOFTWARE GROUP
Automating payments, cash and risk management processes for many treasury teams is part of a wider digitalization journey within their company, which involves ongoing commitment rather than solving an issue in a single implementation.
Expedia has implemented a centralized TMS that consolidates all its exposures from a balance and transactions perspective. Following this, the treasury team built realtime dashboards to enable immediate visibility of the firm’s liquidity worldwide. “If treasury is asked what our balance is in this country or that currency, I should be able to look on my phone within a second and have a real-time dashboard presented to me,” adds Scurlock.
Despite the benefits of digitalization, some processes still rely on paper-based regulatory requirements. Among these are Know Your Customer (KYC), Financial Crimes Enforcement Network (FinCEN), Foreign Account Tax Compliance Act (FATCA), and Foreign Bank Account Reporting (FBAR) requirements. Compounding these challenges is the inconsistency in bank requirements around these data processes.
“A form might need to be recertified and require an original signature, and you might have to print it out, sign it, and fly it to Switzerland. With some banks, you can do a digital signature, with others, a scan is okay, but for some, you have to do wet ink and mail it,” Edlund explains.
Scurlock sees an opportunity to digitize this area of the market. “I’m an operating signer on hundreds, if not thousands of accounts globally. Why can’t I have more of a digital identity on the blockchain, where I have my passport, driver’s license and utility bill for updating accounts? That’s why I find the whole KYC and anti-money laundering process to be so archaic. I feel like there has to be a solution for this out there.”
Strategic Involvement
Despite some areas lacking digitalization, technology has propelled the treasury function to be more visible within businesses. “Treasury is finally being viewed as a business partner and a potential profit center, as opposed to days where it was viewed as a back-office cost center,” notes Khoshbakht. “Fintech has enabled corporate treasurers to actually add value to the entire organization, and not just be seen as a payments and a collections corridor for the business.”
Often, the treasurer will be used by the CFO as a guide to explore new topics that might have a beneficial impact on the finance function, such as applications for blockchain, green initiatives or supply chain finance. While some CFOs regard their treasurers as intrapreneurs, others still view them as little more than cash managers.
Mike Richards, CEO and founder of The Treasury Recruitment Company, recalls his experience with a treasurer who had found their role extremely fulfilling. Then there was a change of CFO. “The new CFO walked in and made it clear the treasurer’s job was to look after the bank balances, and they’ll catch up once a week. That prompted him to give me his resume,” Richards reveals.
Fortunately, the value that treasurers can add to their business, supported by the efficiencies driven by digitalization, is being seen beyond the office of the CFO. Treasurers are increasingly advising business units, procurement, sales and other teams on how to maximize their profits and where to cut obvious inefficiencies.
“I’m an operating signer on thousands of accounts globally. Why can’t I have more of a digital identity on the blockchain for updating accounts?”
— JIM SCURLOCK, EXPEDIA GROUP
For Scurlock, the critical element is recruiting fresh blood to the treasury function that is rich in intellectual curiosity. “The environment is changing so fast, you need to be able to bring in new talent that is curious enough to want to learn new systems, new tools, who want to learn how to build real-time dashboards.”
Given the increasingly elevated role of the treasury function, finding the right talent is essential. Hiring managers are focusing on technically capable individuals who can apply their knowledge to solve problems and adapt to new systems and tools. Data science or computational finance backgrounds are common, as is an advanced degree in coding and programming as part of their master’s degree.
Bringing in new talent is one thing, but retaining it is quite another. A recent survey from the Association of Financial Professionals found that the reality around the career path offered to treasurers fails to measure up to their expectations (see Figure 3). The biggest disconnect is in succession planning. With the treasury function gaining greater influence and visibility within businesses, the onus is on treasury leaders to push for further career pathing tools for themselves and the entire treasury team.
CAREER DEVELOPMENT SERVICES FOR TREASURERS
Career pathing tools offered by organizations and their value to employees
Ben Poole is a freelance writer based in Surrey, U.K.
Questions or comments?
Write to fabian.khoshbakht@bny.com or reach out to your relationship manager.
