How to use pricing to create an effective hedging program

12-12-2022 | treasuryXL | Kantox | LinkedIn |

In this article, we explore the links between pricing and creating an effective currency hedging strategy. We reveal how a simple PEG framework —Pricing, Exposure, Goals— can allow CFOs and treasurers to correctly define their FX goals, the type of exposure they need to collect and process, and the best hedging program for their business.

Pricing as a hedging mechanism

Transactional currency risk, it is often said, occurs between the moment an FX-denominated transaction is agreed upon and the moment it is settled in cash.

That’s OK, but what if the transaction was priced well before it was agreed, which is a realistic description of how things really work?

That’s why at Kantox, we developed the concept of pricing risk. pricing risk is the risk that between the moment an FX-driven price is set and the moment a transaction is agreed upon, a shift in the FX rate might impact budgeted profit margins.

Closely related to this is the idea that pricing is itself a hedging mechanism. Why? Because you can remove pricing risk by frequently updating your prices.

And that brings us to the topic of pricing parameters and hedging. 

Dynamic pricing

Let us start with dynamic pricing. There is a growing list of industries where dynamic pricing is becoming the norm: travel, chemical traders, hospitality, railways, entertainment, insurance, online advertisement, retail and even shipping.

This trend reflects the fall in transaction costs made possible by the availability of real-time data and the rise of geolocation services and payment apps.

Meanwhile, algorithms take into account supply and demand conditions, competitor pricing and other variables.

Two things need to be considered when it comes to dynamic pricing:

(a) prices are ‘FX-driven’; that is, an FX rate is systematically part of the pricing formula;

(b) prices are frequently updated, therefore leveraging the full capacity of pricing to act as a hedging mechanism. 

Other pricing models

Despite its growing popularity, dynamic pricing is not the only pricing mechanism out there. We can single out at least two other very significant models: 

1. Steady prices for individual campaigns/periods. Some businesses, like catalogue-based tour operators, keep prices stable for an entire campaign/budget period and set new prices at the start of the following period. Things to consider here:

(a) Prices are also FX-driven, just like in dynamic pricing.

(b) The pricing impact of the ‘cliff’, or a sharp FX rate fluctuation between two campaign/budget periods, is fully passed on to customers at the onset of a new period. Here too, pricing acts as a hedging mechanism, but not to the extent it does in dynamic pricing.

2. Steady prices for a set of campaigns/periods. Some firms need or simply desire to keep prices steady not only for one individual campaign/budget period but for a set of campaign/budget periods linked together. Things to consider:

(a) Prices are not FX-driven: the FX rate plays no role in pricing;

(b) The pricing impact of the ‘cliff’ cannot be passed on to customers at the onset of a new period. Pricing, quite obviously, is not a hedging mechanism in this case.

Putting it all together: the PEG framework: Pricing-Exposure-Goals

The PEG or Pricing – Exposure – Goals framework provides actionable clarity when discussing pricing and currency hedging in the context of cash flow hedging programs:

For firms with frequently updated FX-driven prices, the goal is to protect the dynamic pricing rate in all their transactions. The exposure to hedge is the company’s firm sales/purchase orders. The right program is a micro-hedging program for firm commitments.

For companies that keep steady prices during individual campaign/budget periods, the goal is to protect the campaign/budget rate. The exposure to hedge is the forecasted revenues and expenditures for that particular campaign. The right program is a combination of a static hedging program, conditional orders and a micro-hedging program for firm commitments. 

Finally, for firms that keep steady prices across a set of campaign/budget periods linked together, the goal is to smooth out the hedge rate over time. The exposure to hedge is a rolling forecast for a set of periods linked together. The right program is a layered hedging program. 

Currency Management Automation solutions allow you to reach all your goals, whatever the pricing parameters of your business.

Embedded Finance Explained, by François de Witte

08-12-2022 | François de Witte | treasuryXL | LinkedIn | As embedded finance continues to evolve, there is an opportunity for treasurers to explore how these developments could help their businesses. The present article explores what embedded finance really means, what’s driving progress in this space, and where should treasurers begin.

Read more

ESG in Treasury: What Can Treasurers Do to Impact Business Sustainability?

01-12-2022 | Anastasia Kuznetsova | treasuryXL | LinkedIn |

The expression “Money makes the world go round” probably underscores the importance of the finance community for the transition to a greener economy. Financial market participants can significantly accelerate the transition to a more sustainable world by directing capital flows to the most sustainable projects, assets and companies. 

ESG and sustainability in Treasury

What can treasurers do to impact business sustainability?

Corporate Treasurers can have a substantial impact on business sustainability by allocating capital to green projects as well as incorporating ESG factors in their risk management processes. Below I will summarize some of the instruments Corporate Treasurers could use to support companies on their way to sustainability.

ESG debt: Sustainability-Linked Financing

ESG debt is perhaps one of the most common instruments that may help companies to meet their ESG goals. For instance, to achieve environmental objectives, some companies issue green bonds. The proceeds from green bonds can only be spent on funding climate-related projects, including renewable energy, construction of green buildings, installation of air pollution control systems and etc. Most green bonds issued are “use of proceeds” bonds, which determine a range of eligible green project categories for which capital raised can be used.  These bonds are also backed by the entire balance sheet of the issuer. Project bonds are another popular type of green bonds for which the proceeds are earmarked for specifically identified projects and are exclusively backed by the project’s assets. While green bonds might be more relevant for large public companies, private companies may still add ESG debt in their capital structures by arranging green loans which serve the same purpose as their public market bond equivalents. 

 

Another type of ESG debt is sustainability-linked loans (SLLs), which are even more popular than green bonds and loans. The rise in popularity of SLLs may probably be explained by higher flexibility when it comes to the use of debt proceeds. Hence, the proceeds from SLLs can be spent on general corporate purposes but not exclusively earmarked for environmental projects. Moreover, SLLs are normally structured in the form of revolving credit facilities, which enables companies to fund their daily liquidity needs if they encounter a working capital deficiency. The purpose of SLLs from an ESG perspective is to encourage companies to achieve sustainability as quickly as possible. This is done by linking loan margin to a borrower’s sustainability performance. At first, sustainability performance targets (SPTs) for the borrower are established. After that, the borrower’s progress toward SPTs is monitored on annual basis via Key Performance Indicators (KPIs). If the targets are achieved, the loan’s margin will be reduced, enabling the borrower to benefit from lower interest payments. If the targets are missed, a step-up provision applies, increasing the loan’s margin and, thus, interest payments. Such an ESG Margin Ratchet provision incentivizes the borrower of SLLs to not only achieve but also maintain a certain level of ESG performance. The public markets equivalent of sustainability-linked loans is sustainability-linked bonds (SLBs) whose coupon payments are reduced (increased) if SPTs are met (missed). 

 

On top of ESG-related loans and bonds, hybrid instruments such as green convertible bonds are becoming more and more popular. Thus, in 2020, Neoen, a French producer of renewable energy, issued €170M of the first ever green convertible bonds in Europe. This year, the company launched another €300M offering of green bonds convertible into new shares and/or exchangeable for existing shares.

 

Finalizing the topic of ESG debt, it is worth mentioning that when it comes to the EU’s finance providers, and particularly credit institutions who will soon have to disclose the percentage of green assets on their balance sheet under the EU Taxonomy, it is reasonable to expect that sustainability-linked debt will be favored by creditors. Specifically, being an underwriter of ESG debt could add prestige, and improve reputation and market positioning. In contrast, non-ESG debt may experience a pricing premium since such loans are likely to worsen the “greenness” of capital providers’ balance sheets.

 

A few words on FX Trading, Derivatives and ESG

Although currently ESG is not widely incorporated in foreign currency trades, some banks have already started to develop FX products that have a similar structure to SLLs. Such FX products will be linked to sustainability KPIs that will measure a company’s sustainability performance against pre-defined SPTs. If SPTs are successfully achieved, then a company may receive a rebate on its FX trades or a reduction in the required FX margin.

 

Sustainability-linked derivatives (SLDs) are another instrument that can be adopted by Treasurers to facilitate a transition of businesses to greener operations. SLDs are particularly relevant for companies, operating in “high-impact climate sectors” such as energy and agriculture. Cash flows of SLDs are connected to the sustainability performance of counterparties that is monitored via KPIs. Having met KPIs, a counterparty in a derivative transaction may receive a higher incoming payment, or be able to make a lower payment if the transaction results in a cash outflow. SLDs are OTC derivatives, meaning that counterparties can customise the derivatives’ terms and, thus, embed other ESG incentives, i.e. reduction in margin/spread, or payment of rebate upon achievement of pre-agreed sustainability targets.

 

Sustainable Supply Chain as an ESG trend

Sustainable supply chain is one of the current ESG trends, particularly among retailers whose total carbon footprint mainly consists of Scope 3 emissions, which are essentially emissions of suppliers. That is why, more and more companies are trying to encourage procurers to reduce their emissions and, hence, decarbonize the supply chain. Corporate Treasurers can make a substantial contribution to this objective by arranging sustainable supply chain finance programmes. Programmes are based on early-payment principles. As a first step, a company sets up sustainability KPIs to monitor the ESG performance of its suppliers. The performance of suppliers may be measured once or twice per year. After meeting at least one of the established KPIs, a supplier is paid earlier than originally agreed. Hence, highly sustainable procurers will effectively receive better payment terms, which should encourage more suppliers to improve their sustainability performance.

 

Sustainability Objectives and KPIs

Almost all the above-mentioned ESG products require the establishment of sustainability targets and KPIs. This unfortunately cannot be done by Treasurers on their own but instead should be done at the strategic level by company management. Sustainability targets must be ambitious, meaning that their achievement would require a substantial transformation of business models, e.g. switching to more sustainable suppliers; divestment or restructuring of high-carbon footprint units. Practice shows that not all management teams are capable of setting ambitious targets relevant to the business. Thus, the least Treasurers could do, besides the arrangement of ESG debt or other sustainability-linked products, is to question the adequacy of the chosen sustainability objectives within their organisations. In other words, Treasurers could make sure that the answer to the question “Why did your company set up its net-zero objective?” is not “Because everyone does it” but “Because it is relevant for our core business operations”.

 

Thank you for reading!

 

 

Anastasia Kuznetsova

 

 

 

What will be the Treasury Trend of 2023?

30-11-2022 | treasuryXL | LinkedIn |

As 2023 is approaching, we explored what Treasurers are particularly looking forward to in treasury for next year. What will be the Treasury Trend of 2023? Are treasurers curious to know what is going to happen in the area of Market and FX Risk Management, or just what the developments are going to be in e-commerce related to Treasury? Or will the understanding of APIs in Treasury be the story of 2023, or the role of Treasury within companies? We sought it out!

We thank Huub Wevers and Kim Vercoulen for sharing their views with us.

What will be the Treasury Trend of 2023?

As 2023 is approaching, we explored what treasurers are particularly looking forward to in treasury for next year. What will become the trends in treasury management next year?Are treasurers curious to know what is going to happen in the area of Market and FX Risk Management, or just what the developments are going to be in Ecommerce related to Treasury? Or will the understanding of APIs in Treasury be the story of 2023, or the role of Treasury within companies? We sought it out! This topic was also the subject of discussion during the last webinar together with Nomentia, you can find the recording here.

Question: What are you particularly interested in that will develop in 2023 in treasury?

treasury trends 2023

First observation

We see that Market and FX Risk Management stands out a little, and that there is less focus on trends in e-commerce and Treasury. What do those within treasuryXL say about this, and what are they looking forward to for next year?

View of treasuryXL experts

Huub Wevers (Nomentia)

Huub is especially interested in the developments in APIs for Treasury for in 2023.

“My personal interest is in the focus on APIs, which is good, as APIs offer new functionalities and convenience for treasurers”

With the current political and economic turmoil, it makes sense that market risk is back on the agenda. Interest rates are rising and emerging markets are becoming riskier. My personal interest is in the focus on APIs, which is good, as APIs offer new functionalities and convenience for treasurers. However, it is a jungle because everyone promises APIs, but few deliver on them, and the few that do make them have no standards.

We also see APIs that are ‘disguised’ file connections. This makes sense, because an API means linking two applications and this can be done through authentication, security and then exchange of a file. We see this a lot with Payment Service Providers. Getting reporting files for matching purposes, for example.

The webinar the other day was interesting because Niki and I represent two different areas of treasury that are important to Patrick, a very experienced treasurer, namely market risk and technology. Together with Pieter as moderator, it was fun to hear the different perspectives and experiences!

Kim Vercoulen (Treasurer Search)

Kim is especially interested in the developments of Market and FX Risk Management for in 2023.

” Important question for the treasurer will remain what to do about this.”

I chose for Market and FX Risk Management. I think especially with inflation and higher interest rates, this is going to have an impact on the treasurer’s work within the treasury department.

This is obviously all going to play through on companies’ costs, and pressure on selling prices will also increase. Important question for the treasurer will remain what to do about this.

How this will affect the treasury market compared to the current year remains to be seen. That is what we are going to witness at Treasurer Search.

The 3 Fundamental Treasury Concepts: Bank Relationships

29-11-2022 | Vasu Reddy | treasuryXL | LinkedIn |

The 3 fundamental treasury concepts being discussed currently include Working Capital Management, Bank Relationships and Treasury Transfer Pricing which are pivotal pillars for effectively and efficiently optimizing cash, liquidity,  funding and managing risk for any Treasury function to support the achievement of the organizations business objectives and strategy. In the second blog of a series of 3, Vasu Reddy explains the best practices and benefits of Bank Relationships.

Strong Bank relationships (including Central Banks) are key to operating successfully in any country- locally, regionally or Globally.

When selecting and maintaining bank relationships, it is key to include partners with strong track record including:

  • Strong Bank Credit rating  – BBB+ to  AA+
  • Strong Bank Balance sheet, assets size and Cash Reserves,
  • Strong Ethics, Governance, Compliance
  • Bank Geographical Footprint
  • Huge Product knowledge, expertise and offering
  • Strong Service capability and rapid response times
  • Competitive Pricing and transparency
  • Being a trusted advisor – including investment banking, FX, etc.
  • Advanced  technology and systems and Project support
  • Managing confidentiality of information and conflicts of interest
  • Strong Relationship with Central Bank for Advocation
  • Going above and beyond for client during drastic times– providing credit sufficient lines
  • Accepting Clients standardized documentation in different countries due to regional      relationship
  • Ease of doing business – bank account opening, KYC onboarding, Projects, system implementation,  integration with  ERP, TMS, RFP’s, RFQ’s , legal issues, etc.

More key considerations are:

– Size of Corporate/business

– Credit rating/balance sheet size

– Growth Plans – M&A, etc.

– # of bank relationships

-# of bank accounts

-# of Legal Entities

-Bank interaction, performance and evaluation

 

“Maintain a good central bank relationship is key”  Vasu Reddy

What are the benefits of good bank relationships?

  • Smooth Business operation with no disruption resulting in improved cash flow, profits and reduced costs
  • Management able to focus on business growth and sustainability
  • Minimal bank law compliance risks
  • Able to pivot easily during macro-economic cycles – surviving recessions, political risks, etc.

 

Thank you for reading!

 

Vasu Reddy

Corporate Treasury, Finance Executive

Recording Panel Discussion | Treasury Trends for 2023

28-11-2022 | treasuryXL | Nomentia | LinkedIn |

Recently, we had a panel discussion about a few major treasury trends for 2023 together with Nomentia and experts Pieter de Kiewit, Patrick Kunz, Niki van Zanten, and Huub Wevers. If you didn’t get the chance to attend the webinar, you can find the recording here.

During this interactive live discussion we covered some of the following topics:

  • Market and FX Risk management in current times of uncertainty.
  • Top treasury technologies to consider for 2023. Will APIs deliver their promises?
  • Building the bridge between Ecommerce and treasury.
  • The rapidly changing role of treasury to facilitate business success
  • Treasury technology visions beyond 2023.
Watch the recording

 

 

[WEBINAR] FRTB – Are Banks Ready To Be Compliant?

23-11-2022 | treasuryXL | Refinitiv | LinkedIn |

Join experts across the industry for this complimentary webinar to explore how to prepare for – and comply – with the Fundamental Review of the Trading Book (FRTB) regulation in 2023.

DETAILS:

  • Webinar: FRTB – are banks ready to be compliant?
  • Date: Tuesday, November 29
  • Time: 09:00 EST / 14:00 GMT / 15:00 CET
  • Speakers:
    • Hany Farag, Senior Director and Head of Risk Methodology and Analytics, CIBC
    • Fausto Marseglia, Head of Product Management, FRTB and Regulatory Propositions, Refinitiv, an LSEG Business
    • [Moderator] Lisa Regan, Head of Sales, EMEA, Enterprise Data, Refinitiv, an LSEG Business\
    • Volker Wellmann, Risk and Resource Manager at BNP Paribas, BNP Pariba



 

 

Register today

 

Why you need to automate swap execution

22-11-2022 | treasuryXL | Kantox | LinkedIn |

Do you struggle with having a perfect match between your currency hedging position and the cash settlement of the underlying commercial exposure? We’ll let you in on a secret: most treasurers and finance teams do. But how can you simplify this time-consuming and resource-intensive task? In this article, we show why you need to automate swap execution and how you can do it.

We reveal why this is an essential issue for treasurers, how it’s typically handled, and why automated swap execution can help finance teams play a more strategic role in the business. 

Setting the scene

Treasurers know that it is practically impossible to have a perfect match between the firm’s currency hedging position and the cash settlement of the underlying commercial exposure. That’s especially the case if those hedges were taken long before. This is why swapping is so essential.

Let us briefly see an example. If you have a ‘long’ USD forward position with a given value date and you need, say, 10% of that amount in cash right now, a swap agreement allows you to perform that adjustment.

With the ‘near leg’ of the swap, you buy the required amount of USD in the spot market while simultaneously selling —with the ‘far leg’ of the swap— the same amount of USD at the value date of the forward contract. And that’s how you adjust your firm’s hedging position.

Pain points: a resource-intensive activity

Swapping can be extremely time-consuming and resource-intensive, particularly if many transactions, currencies and liquidity providers are involved. We recently saw how a large European food producer was struggling mightily with manual swap execution, a dreadful situation faced by many, if not most, companies.

Among the most common pain points, we can cite the following three:

  • Operational risk. Many tasks are manually executed: retrieving incoming payments, selecting liquidity providers and confirming trades. The entire workflow relies on emails that circulate back and forth with spreadsheets carrying potential data input errors, copy & paste errors, formatting errors, and formula errors.
  • Lack of traceability. Lack of proper traceability hinders the process of assessing hedging performance, as swap legs are manually traced back to the corresponding forward contracts.
  • Risk of unethical behaviour. Understood as the risk that early mistakes that are not immediately reported may lead to severe losses down the road, it is prevalent throughout.

Traceability and automated swap execution

Traceability is when each element along the journey from FX-denominated entry to position to operation to payment has its own unique reference number. But how can we apply this concept to solve the problem of manual swap execution?

The answer is automated swap execution, a solution that is embedded in Currency Management Automation software. It relies on the perfect end-to-end traceability between the different ‘legs’ of a swap agreement and the original forward contract. Meanwhile, FX gains/losses and swap points are automatically calculated. It’s dead simple!

Swap automation is a powerful tool for the treasury team. At the company level, it opens the way to:

  • According to recent surveys, increasing the efficiency of treasury operations is the No. 1 expectation in tech for CFOs.
  • Using more currencies in the business to take advantage of the profit-margin enhancing possibilities of ‘embracing currencies’.
  • Taking a concrete step toward the ‘digital treasury’ is a concern voiced by many CFOs and treasurers.

At a personal level, in terms of the daily workload of members of the treasury team, automated swap execution means:

  • More time to concentrate on high-value-adding tasks such as fine-tuning and improving cash flow forecasts.
  • Reduced stress levels.
  • Increased productivity at work.

And that’s no small achievement! 

Interview | 9 questions for Kurt Smith, Seasoned Treasury Expert

21-11-2022 | treasuryXL | Kurt Smith | LinkedIn |

 

Meet our newest expert for the treasuryXL community, Kurt Smith.

Kurt is a Director of Marengo Capital, a corporate advisory company specialising in treasury, financial markets, corporate finance and private equity. Marengo Capital has a track record of, and passion for, creating and managing for long term enterprise value by aligning corporate strategy, finance and risk.

Kurt is also the Vice President and Technical Director of the Australian Corporate Treasury Association, a member of the Australian Payments Network Stakeholder Advisory Council, and a member of FX Markets Asia Advisory Board.  His career includes senior positions across fund management, bank derivative trading, Fintech, private equity and corporate treasury.  He has a Ph.D in Finance and is a graduate of the University of Cambridge.

Kurt is an engaging and compelling public speaker with substantial experience in presenting, being a panellist and master of ceremonies, for intimate and large audiences in Australia, Asia, Europe, and the United States.  He is well known for providing unique insights into new and well-worn issues, balancing contrarian thinking with informed judgment, and communicating highly technical issues to non-technical audiences.

 

We asked Kurt 9 questions, let’s go!

INTERVIEW

 

 

1. How did your treasury journey start?

I started in financial markets, firstly as a portfolio manager with a macro fund, and secondly as an FX option trader and Head of Derivative Trading for a commercial bank.  While I enjoyed the excitement, spontaneity, and commercial pressure of each day, I wanted something more fulfilling.

 

I became a Director in two FinTech companies commercialising option valuation and risk management technologies, one for the interbank exotic option market and the other for retail investors.  Sourcing capital for product development was a constant challenge but also very rewarding.  By this stage I was hooked on corporate treasury.  Treasury allowed me to direct my passion for financial markets to create, operate and scale businesses by funding growth and making them financially sustainable.

 

I then moved to a $10B+ corporate to run their treasury, corporate finance and insurance businesses.  My main responsibility was developing and implementing capital management and financial risk management strategies to ensure that the company target credit rating was achieved, while obtaining funding, allocating capital to investments, and hedging market exposures to reduce earnings volatility.

 

I am now a Director of Marengo Capital which specialises in creating and managing for value in corporate treasury and corporate finance.  I am still involved in FinTech as the Group CFO of a cash flow securitization company; and I am also the Vice President and Technical Director of the Australian Corporate Treasury Association, which is engaging with and improving the treasury community in Australia.

 

2. What do you like about working in Treasury?

 

I like that the success of the company is in your hands.  The company can formulate exciting corporate strategies and business plans, but those strategies and plans will not be delivered unless capital is sourced, structured and allocated properly, and financial risks are hedged to provide corporate resilience to business cycle downturns and adverse economic conditions.

When you think about it, it is a massive responsibility.  However, I prefer to think of it as a fantastic opportunity to make an impactful contribution.

 

3. What is your Treasury Expertise and what expertise gives you a boost of energy?

 

My specialist expertise is in creating and managing for long term enterprise value.  Increasing value is critical to increasing the capital funding capacity of the company and delivering into the main goals of Executives and the Board.  Most treasurers consider treasury a cost centre and do not have ambition to add value.  To me, that makes treasury a tax on the business, an overhead to be recovered by everyone else.  I believe that there are a large number of ways that treasury can add substantial value, by increasing cash flow not just forecasting it, managing the capital structure to reduce the cost of capital, and evaluating the allocation of capital to investments to ensure value accretive and efficient returns.

 

While I get a kick out of applying commercial acumen to improve businesses, I really get a kick out of convincing others to do the same, from decision-makers to operational teams.  I get very enthusiastic – but I truly believe that value is the key to financial sustainability, which is necessary for companies to do more of what they want to do.

 

4. What has been your best experience in your treasury career until today?

 

I built a very high-functioning treasury and got team members to work on several projects simultaneously in small multi-disciplinary teams.  Team leadership was based on expertise not the hierarchy, and it not only provided all team members with rapidly growing CVs to support their careers, it also provided opportunities for, and the most satisfying discovery of, junior employees with real talent fast tracking into leadership succession planning.  This way of working was new to all of us, and we created a lot of value and had a lot of fun doing it!

 

5. What has been your biggest challenge in treasury?

 

I worked for a capital-intensive company that had rapidly growing capital expenditure to be funded predominantly by debt, during an expected aggressive interest rate tightening cycle.  The rates market had already factored five sequential monetary policy tightenings into the yield curve, such that fixed rates for term debt were very high.  Our analysis showed that in most foreseeable scenarios floating rates would outperform fixed rates, even during sharp tightening cycles.  We went with the maximum allocation to floating rates, and over the next five years interest rates decreased markedly, and we used those decreases to gradually re-weight floating rate exposure back to their neutral weight.

This was a real risk management lesson for me, that is applicable now.  One has to take emotion out decisions, especially fear, do the analysis and trust your instincts.  Worked for us!

 

6. What’s the most important lesson that you’ve learned as a treasurer?

 

Communication is crucial, especially verbal communication.

Executives, Boards and operational teams do not understand treasury and corporate finance.  Treasurers need to be able to communicate complex technical information in a persuasive and compelling way to non-technical audiences.  For example, I prepared a 35-page capital management strategy working paper that I turned into a six-page Board paper, and my presentation to the Board was a single diagram on one slide.  If they were not convinced in the first few minutes, all that work would have been wasted.  Communication is key, and I believe it is a defining characteristic between the best and the rest.

 

7. How have you seen the role of Corporate Treasury evolve over the years?

 

Corporate treasury was formerly a satellite of the business that was involved at the end of the value-chain, to be engaged only when funding of spend and hedging of exposures was required.  As a result, treasury did not influence decisions, it just implemented them.

Good corporate treasuries today are deeply integrated with, and embedded into the DNA of, their businesses; and, as a result, are involved at the beginning of the value-chain where they can influence outcomes.  This is a much more interesting space to play in.

 

8. What developments do you expect in corporate treasury in the near and further future?

 

Everyone is focusing on using technology, digitalisation and data rich environments to reduce operational risk, release resources and gain insights.  This is understandable given the change in the technology landscape and eco-system.

However, I believe that we will have to focus increasingly on our human resources as we re-examine whether the treasury operating model, governance architecture, people, processes and systems are fit-for-purpose not only now, but for the future.  Are our selection processes biased towards technocrats with limited ability to engage and communicate?  Do we hire and / or cultivate businesspeople with commercial acumen?  Do we encourage out-of-the-box innovation or do we effectively enforce the status quo through a relentless drive for efficiency?  I see treasury as a business within a business, and that it should be run as such.

 

9. Is there anything that you would like to share with our treasury followers that they must know from you?

 

As a community of treasury professionals we all have a responsibility to improve the standard of the profession, and to contribute to the recognition of the profession as a profession!  In this regard, treasuryXL is doing a fantastic job of bringing us all together and giving us opportunities to share, learn, explore and discuss treasury.  Let’s make sure that we contribute more than we take out, so that we add value overall.

 

Want to connect with Kurt? Click here

 

Thanks for reading!

 

 

Kendra Keydeniers

Director Community & Partners, treasuryXL

What’s the difference between a neobank and a challenger bank?

19-11-2020 | treasuryXL | XE |

The biggest difference between neobanks and challenger banks is the presence or absence of a banking license, but it’s not the only difference.

Most banks began looking into online services shortly after 9/11 brought air travel to a sudden and screeching halt. They wanted a way to move money which did not involve placing paper checks on airplanes. Internet-based banking, or mostly internet-based banking, was the next logical step. According to some recent market research, neobanks and challenger banks will be worth over $470 billion USD by 2027. Frequently, people use these terms interchangeably. However, there are some significant differences between neobanks and challenger banks. Challenger banks are mostly online, and neobanks are exclusively online.

Neobank vs Challenger bank

But while the presence of physical locations (and lack thereof) is an important distinction between neobanks and challenger banks, it isn’t the only difference between the two bank types. There are several differences to note, as these differences often have a direct bearing on which one is best for your family or business.

Difference #1: physical presence

Think of it like this. Many retailers, like Walmart, have both a physical and an online presence. Other retailers, like Amazon, are exclusively online. Challenger banks and neobanks are basically the same. But the Walmart comparison only goes so far. Most challenger banks only have a handful of physical locations, as their online services are their main draw. Furthermore, most of these physical locations are in the UK. After the 2008 financial crisis, the government opened the market to new banks.

Neobanks, on the other hand, first appeared in 2017 as a way to fill the niche between traditional banks and FinTechs. Less than four years later, there are hundreds of these institutions in the UK, U.S., and worldwide.

Difference #2: accounts, products, and services

There are some other differences as well. Typically, challenger banks offer both personal and business accounts. Moreover, challenger banks streamline their products and services, so they can be more internet-friendly. Challenger banks are small institutions which “challenged” the Big Four UK banks (Barclay’s, Lloyd’s, HSBC, and RBS). Their technology-based services and commitment to markets traditionally under served by the Big Four quickly attracted legions of customers.

While neobanks do offer some personal accounts and services, they usually target small and medium-sized businesses (SMEs) and business startups. They present themselves not just as banks, but as online financial technology firms, and typically appeal to more tech-savvy customers.

Difference #3: banking license

What’s the difference between a psychiatrist and a psychologist? It’s not their sense of humor, or lack thereof. Psychiatrists can prescribe medication, and psychologists can only provide therapy.

That’s also the major difference between challenger banks and neobanks. Most challenger banks have such a limited physical presence that they are essentially 100 percent online. But challenger banks have banking licenses and neobanks do not. So, only challenger banks can offer a full range of financial services. That includes things like issuing credit cards and loaning money. Neobanks can offer these services as well, but only if they are tied to a licensed institution.

There is some overlap. Many neobanks essentially began as FinTechs. Then, once regulators approved their banking license requests, they became challenger banks.

Some examples of top challenger banks and top neobanks

Formed in 1995, Richard Branson’s Virgin Money is one of the oldest challenger banks in the UK. It also has locations in Australia and South Africa. Between 2007 and 2010, Virgin Money also operated in the U.S. A private equity group began Aldermore in 2009. The online institution bought Ruffler Bank a few months later, so the neobank became a challenger bank almost overnight. Aldermore is also the poster boy of this sector’s growth. South African financial conglomerate FirstRand recently bought Aldermore for a staggering £1.1 billion.

Durham, England’s Atom Bank was the UK’s first online financial institution to tailor its platform to tablets and smartphones, as opposed to PCs. It was also the first 100 percent digital bank to receive a banking license. Shortly thereafter, international banking giant BBVA acquired a large stake in Atom Bank. As a result, it expanded its financial services to include residential mortgages, competitive savings accounts, and secured business loans.

Founded in 1996, First Internet Bancorp was one of the first FDIC-insured, state-chartered financial institutions in the United States with a 100 percent online presence. It mostly offers retail services, like checking accounts, and securities investments. Customers also have access to installment loans, personal lines of credit, and other financial services. Chetwood Financial Services is an example of a limited challenger bank. It offers most financial services, with the exception of residential mortgages. Regulators do not allow CFS to issue any buy-to-let residential mortgages. Civilised Bank, which is now known as Allicia Bank, is in the same boat. It offers a single financial product, a twelve-month savings account, by virtue of a limited Part 4a UK license.

In 2010, General Motors Assurance Corporation, GM’s financing arm and a free-standing financial services company, became Ally Financial. Not surprisingly, Ally focuses on auto leasing and financing. It has close to five million such customers. In 2016 and again in 2019, the company significantly expanded its mortgage lending business. Ally is affiliated with Via, an online vehicle auction site.

San Francisco-based Good Money sends half its profits to social justice and environmental preservation groups. Accountholders cast ballots to decide where Good Money invests. The bank offers a range of FDIC-insured products, mostly DDA checking and savings accounts. As of January 2019, there was a waiting list to be a Good Money customer. All new customers also have the option of purchasing a stake in the company. Credit Suisse X is the online arm of the venerable Zurich-based investment bank. Its online banking services are targeted to individuals with high incomes. Online financial institutions are more able to go after specific market segments.

Use Xe to make international money transfers

Neobanks and challenger banks are good options for customers who want an all-online or mostly-online experience. But they are not a very good option for international money transfers. Traditionally, bank fees are rather high in this area, and you may not get the best exchange rates for your transfers.

Money transfer providers, such as XE, are neither neobanks nor challenger banks. Xe does not try to be all things to all people. Instead, we focus on electronic funds transfers in general, and international electronic funds transfers in particular. We have worked very hard to develop a platform that’s both convenient and secure. As a bonus, we are also able to offer fast money transfers (some taking just a few minutes) and competitive exchange rates.

 

Get in touch with XE.com

About XE.com

XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.

Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.

Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.

Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.

 

 

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