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4 top Questions and Answers about Cash Management
| 25-2-2020 | by Kendra Keydeniers |
Cash Management is one of the three primary disciplines of Corporate Treasury. (Risk Management and Corporate Finance are the other two.) Cash management is often described as monetary logistics management. This analogy works quite well. It is the discipline of Treasury that is devoted to the management of planned expenditures, so it is highly focused on operational efficiency and process optimisation. It is about optimising the flow of money coming in from customers, some money going into savings, and other money going out to pay the bills. Since this is such a vital process to any organization, it is not hard to understand how cash management can make or break a company.
Here are 4 top questions and answers about Cash Management
1. Why should a company have more than one bank account?
Historically, large companies have used multiple bank accounts to gain insight into the activities of their local subsidiaries. In an extreme example, a retail chain might have held a different bank account for each local shop, so that a large retailer could easily hold over 500 accounts! Today, such unnecessary complexity is considered unprofessional. Insight into local activities can be achieved through proper bookkeeping, and extra bank accounts cost extra money. Modern bank accounts also tend to feature more extensive payment capabilities than in the past. A single European bank account, for example, will allow you to send payments within most European countries. Nevertheless, the operations of global businesses still often require multiple bank accounts. In addition, many companies like to hold accounts with banks that are widely recognized by customers in the local market.
2. Why is cash management separate from bookkeeping?
In small companies, cash management need not be separate from bookkeeping. The two activities may be done within the same department. In larger companies, though, these activities are specialised. This is because the skill set required for bookkeeping is different from that of cash management. Furthermore, in larger companies it is important to segregate duties for purposes of operational control: the one sending the invoice should not be the one who processes the related payment. Lastly, it is important to mention that in larger companies a distinction is made between cash flows, on the one hand, and income and expenses, on the other. In the financial accounts of a large corporation, revenue is booked when a sale is made. However, it might take some time before this revenue actually reaches the company in the form of cash. Until it does, booked revenue is generally irrelevant to the cash manager. The same is true for expenses. An expense may be booked, but from a Treasury perspective, until an expenditure is disbursed, it is still considered cash on hand.
3. Do cash managers also do foreign exchange (FX) management?
In smaller companies, cash managers also manage foreign exchange, but FX management is a separate field of expertise. It might be the role of a cash manager to set up bank accounts in various currencies. By doing this, the cash manager lowers operational costs by preventing repetitive transactions between the same currency pairs, which can generate unnecessary fees; but, this is not FX Management. (The FX Manager researches market developments that have an impact on Treasury operations, and often plays a more analytical or strategic role.)
4. For cash managers, what was the impact of the introduction of the international bank account number (IBAN)?
When the IBAN was introduced a few years ago, this new standard for bank account numbers made international electronic payments easier. In theory, it allows companies to work with fewer bank accounts, making cash management easier and cheaper. However, some companies argue that doing local business requires having a local bank, so they maintain multiple international bank accounts, despite the convenience of the IBAN.
Read more about Cash Management and check out these treasury topics as well:
What is Treasury?
What is Corporate Finance?
What is Risk Management?
What is Working Capital Management?
Community & Partner Manager at treasuryXL
Do Androids dream of Electric Spreadsheets? A Beginner’s Guide to AI in Treasury – Part I
| 24-02-2020 | treasuryXL | Cashforce |
Do Androids Dream of Electric Sheep by Philip K. Dick, adapted to the movie Blade Runner in 1984 (yes, it’s that old), ponders the question whether technology can replace humanity in every aspect of life. Whether advanced technology could attain a comprehensive cognitive interpretation of dreaming is a philosophical conundrum that I’ll leave for the brightest among us. However, while this doomsday scenario in Hollywood movies in which robots rise against their human creators is far from happening, the reality is that a computer has already surpassed the level of strategic thinking of a human being. This rise of artificial intelligence carries the potential to disrupt any industry, including treasury, but often leaves you wondering if the hype lives up to reality.
[Spoiler alert] In the dystopian world of Blade Runner, the protagonist called Deckard, a bounty hunter or “blade runner” hunts outlawed androids or “replicants” while feeling no remorse due to them being machines. An interpretation endorsed by the iconic unicorn dream sequence hints that his human memories might have been artificially implanted, implying he might be an android himself. Is this the course artificial intelligence will eventually take us to?
Man vs. Machine – A Boardgame Evolution
In 1997 IBM’s computer Deep Blue beat Gary Kasparov, the world champion at that time, in a game of chess. Deep Blue was able to analyze thousands of high-level chess games that were stacked into its system. When proposed with a move, it would choose the best outcome out of different scenarios. By basic number-crunching it was picking out the move that would lead to the best position on the board. This milestone was heralded as a boon for technology and viewed as almost exclusively disruptive for many industries.
Go, an abstract strategy board game invented in China, has simpler rules than chess, but many more moves at each point in the game. Just to give you an idea, the size of possible outcomes is larger than the number of atoms in the universe. Looking too far ahead in the game, or considering all possible moves and counter-moves is therefore nearly impossible. In 2016, distinguished Go player Lee Sedol was put up for the task to beat the next high-tech invention, named AlphaGo. Created by the sharp minds at Google’s DeepMind, its intelligence is based on its ability to learn from millions of Go positions and moves from previous games. Once again, machine triumphed over its human equivalent when it came to strategic thinking.
AlphaZero, released in 2017, is a version of the same program that takes it a step further. It can play chess, Go and other games and is only given the rules of the game, nothing more. By playing millions of games against itself without any previous knowledge of plays, tactics or strategy, it was able to master these games on its own. So how much time went by from the moment they launched AlphaZero to the moment where it achieved a superhuman level of playing Go? Less than 24 hours. Even more baffling is, while humans have been playing it for the past 2500 years, it came up with brand-new strategies that have never been seen before. While it is ‘only’ about fun and games, this sheds a new light on technological concepts that seemed at first like far-out fiction.
Artificial intelligence systems can dazzle us with their game-playing skills and lately it seems like every week there is a baffling breakthrough in the field with mind blowing results. It is almost unthinkable that the finance sector would be untouched by the rise of AI, any sector for that matter. Nonetheless, with the present hype around it, many of the used concepts and terminology seem to be used carelessly, which makes it hollowed and deprived of any meaning. You have probably heard of the terms “machine learning” and “deep learning”, sometimes used interchangeably with artificial intelligence. As a result, the difference between these concepts becomes very unclear. To understand this distinction and why AI will disrupt current technologies, we have to understand where it comes from.
Let there be l(A)ight – A brief History
Simply put, AI involves machines that can perform tasks that are similar to human tasks. A very broad definition which can go from simple solutions such as automated bank tellers to powerful and complex applications such as androids, which inspired the movie Blade Runner.
Surprisingly, the script on AI arises from a time when James Dean was rocking the screen and Elvis was celebrating his first “Blue Christmas”. While the statistical framework is based on the writings of French Mathematician Legendre from 1805, most AI models are based on technology from the 50’s.
1950, the world-famous Turing test is created by Alan Turing (who will soon be commemorated on the new £50 note). The test reflects on the question whether artificial intelligence is able to appear indistinguishable from a human in terms of thought and behaviour.
1951, the first artificial neural network was created by a team of computer scientists: SNARC (Stochastic Neural Analog Reinforcement Computer). They attempted to replicate the network of nerve cells in a brain. It imitated the behaviour of a rat searching for food in a maze. This was largely an academic enterprise.
SNARC computer
In the same way, 1952 rouses the birth of the first computer learning program or machine learning by Arthur Samuel. The program played checkers and improved at the game the more it played. Machine learning, a subset of AI, is defined as the ability to learn without being explicitly programmed what to “think”. It enables computers to learn from their own mistakes and modify to an altering environment. Machine learning also includes other technologies such as deep learning and artificial neural networks. Nowadays this technology can, among other things, use data and statistical analyses to predict possible future scenarios such as for Cash flow forecasting.
The Dartmouth Summer Research Project was a 1956 summer workshop and widely considered to be the starting point of artificial intelligence as a scientific field. With this uprising of technology there came a lot of excitement for the potential of automation in finance and treasury. It was believed to help accountants and bankers speed up their work. But if wishes were horses, beggars would ride. And in this case, androids would be riding along with them. Unfortunately, a reduced interest in the field and many failed projects leave artificial intelligence stranded in what is called the ‘AI winter’.
Luckily humans are not one trick ponies, so our story doesn’t end here. After a period of economic & technological proliferation in the 1980’s, Expert Systems found their way into the world of finance. These are computer systems that are capable of decision-making on the level of a human expert having been designed to solve complex problems. But when push came to shove, the technology wasn’t mature enough and didn’t meet client’s demands.
In 1991 the World Wide Web was opened to the public. It’s the start of the data revolution. In 2005, it reached 1 billion people and today more than half of the world’s population is connected to the internet.
Coming back to our first example, it was in this period (1997) that Deep Blue challenged the capacity of the human brain and proved it could think more strategically than a human being.
Today AI is demanding so much computing power that companies are increasingly turning to the cloud to rent hardware through Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings. That’s why around 2006, players such as Amazon Web Services (AWS) opened up its cloud environment to broaden the capacity of AI even further.
In the same year, Geoffrey Hinton coined the term “deep learning”, helping the progress of operating AI applications in the real world. This brought the world one step closer to bridging the fuzzy gap between humans and androids.
2015, AlphaGo is introduced to the world. Two years later in 2017, its successor AlphaZero sees the light of day.
2019, the first picture of the black hole M87 the constellation Virgo is rendered through artificial intelligence opening the door to new knowledge in the universe. The path of AI took us a giant leap forward, but we’re far from the finishing line. Roughly 90% of the universe exists of dark matter or dark energy that leaves us in confusion. Accordingly, a similar percentage of untapped dark data, the fundamental building block to understand a company’s future, isn’t being used.
Source
Central bank digital currencies: towards a global approach
| 21-2-2020 | Carlo de Meijer | treasuryXL
In one of my earlier blogs, I mentioned that Facebook’s efforts to launch its Libra cryptocurrency triggered intense debates over who would control money in the future. It has also forced Central Banks to think about and explore their own digital currency.
According to recent research, at least 18 central banks are currently developing digital currencies. But up till recent that was just done on an individual stand-alone basis. The most effective way to counter private digital currencies however is via a collaborative approach.
This year we are seeing more collaboration between central banks, aimed to think about the impact of such a digital currency for monetary policy and financial stability and what could be the optimal design of such a currency.
Why a central bank digital currency?
There are various reasons why central banks may introduce their own digital currency. First of all as a defensive move. The rise of crypto currencies like the Libra could create tensions among central banks and regulators as these can make it difficult for central banks to manage their foreign exchange controls and implement a sound monetary policy.
Another reason is the optimisation perspective. Current central bank operated money systems work well, but could certainly benefit from improvements e.g. in settlement. They see this technology as ‘optimizing or improving the rough edges on a system which is already great, and which they have no desire to fundamentally change’.
Central Bank Digital Currencies versus Crypto currencies
While central banks recognize digital money may be an improvement over physical money, a central bank designed digital currency will not resemble a decentralized cryptocurrency.
Though both CBDCs and cryptocurrencies, to a varying degree, are based on blockchain technology, CBDCs are – fundamentally – different to cryptocurrencies. CBDCs are traditional money, but in digital form, issued and governed by a country’s central bank, whereas cryptocurrencies are decentralised. The Central Bank consensus is that decentralization is not a desirable property in a CBDC as it could aid tax avoidance and enable criminal payment systems. Cryptocurrencies are neither recognised as legal tender – which CBDCs, by definition, would be. And unlike central bank money, both traditional and digital, the value of cryptocurrencies is determined entirely by the market, and not influenced by factors such as monetary policy or trade surpluses.
BIS Survey
Early this year the Bank of International Settlement (BIS) published a paper that presents the results of a survey that asked central banks how their plans are developing in the area of central bank digital currency (CBDC).
It shows that a wide variety of motivations drive extensive central bank research and experimentation on CBDCs. According to the survey about 80% of the central banks are engaging in some sort of work in this area, with half looking at both wholesale and general purpose CBDCs. About 40% of central banks have progressed from conceptual research to experiments or proofs-of-concept while another 10% have developed pilot projects.
Every central bank that has progressed to development or a pilot project is an institution in an emerging market economy. Globally, emerging market economies are moving from conceptual research to intensive practical development, driven by stronger motivations than those of advanced economy central banks.
Nonetheless, plans of central banks in advanced economies appear to be accelerating compared with earlier expectations.
Central banks need to collaborate
The BIS survey also showed the urgent need for collaboration by central banks on CBDCs. To find an optimal design of a central bank digital currency cooperation between these institutions is a must. Collaboration through international vehicles, such as the BIS Innovation Hub, will be necessary to avoid any unforeseen international consequences.
The collaboration on understanding the impact of CBDCs need to intensify. The survey shows that more central banks should be looking at the risks outside the financial system while also exploring ways to improve the system with CBDCs.
Collaboration initiatives
Since this year we see a shift from more stand-alone projects towards working with other central banks in the CBDC field. It is seen as critically important for central banks worldwide to join the discussions and take part in a more global coordinated approach for CBDCs.
1. Group of six leading central banks
Last month the Bank of International Settlements (BIS) announced that it had created a group involving six leading central banks including Bank of Canada, Bank of England, Bank of Japan, Central Bank of Sweden, Swiss national Bank, as well as the ECB.
The group will be co-chaired by the Head of BIS’ Innovation Hub, Benoît Cœuré, and the Deputy Governor of the Bank of England and chair of the Committee on Payments and Market Infrastructure, Jon Cunliffe. Senior representatives of other bank members will also be included.
These central banks have joined forces to explore digital currencies, assess the potential for central bank digital currency (CBDC) in their respective jurisdictions, share experiences as they assess the potential cases for CBDC in their home jurisdictions and look at ‘cases for central bank digital currency’. The members will thereby work closely with the Committee on Payments and Market Infrastructures (CPMI), an international standard-setter for payments and clearing, and the Financial Stability Board (FSB).
“The latest decision [by the six central banks] is not just about sharing information. It’s also an effort to keep something like Libra in check.” “Something like Libra would make transactions costs much cheaper. Major central banks need to appeal that they, too, are making efforts to make settlement more efficient with better use of digital technology.” Yamaoka, Bank of Japan president
2. World Economic Forum CBDC Toolkit
The World Economic Forum (WFO) and a community of over 40 central banks, international organizations, academic researchers and financial institutions have created a framework to help central banks evaluate, design and potentially deploy CBDC. The framework, dubbed the “CBDC Policy‑Maker Toolkit”, is intended to help accelerate critical and rigorous analysis of CBDC.
The framework provides a guide for central banks around the world. The toolkit provides information on retail, wholesale, cross-border and “hybrid” CBDCs, for all sizes of emerging and developed countries.
It is aimed to help policy‑makers within central banks confidently evaluate whether CBDC is the right fit for their economy and guide them through the evaluation, design and deployment process. It describes a step‑by‑step evaluation process for CBDCs, including potential benefits and challenges, could help “identify trade-offs between benefits from the use cases and their associated risks across different dimensions.” For those who are already researching, it helps them “make progress quickly”.
“Given the critical roles central banks play in the global economy, any central bank digital currency implementation, including potentially with blockchain technology, will have a profound impact domestically and internationally.” “The toolkit can serve as a springboard as central banks progress with their CBDC investigation and development.” “The intricacies of implementing CBDC are complex and the implications are wide‑reaching. As a result, policy‑makers may find themselves in uncharted waters when attempting to evaluate the potential benefits and trade‑offs.” Sheila Warren, Head of Blockchain and Distributed Ledger Technology at the World Economic Forum
3. European Central Bank Task Force
At the end of 2019 the ECB created an expert task force to look into and analyze the feasibility and potential outcome of establishing a central bank digital currency (CBDC). Central banks should consider the merits, which may include public goals such as financial inclusion, consumer protection and payment privacy.
The group is a result of efforts by Christine Lagarde, the new ECB president, who has pushed the European Central Bank to dedicate significant resources to studying the merits of CBDC. She explained that this task force was aimed at ensuring the European Central Bank plays an active role in fostering cheap and speedy payment transactions, likewise exploring the benefits of having a CBDC. With this development, Europe would join the rest of the world in their pursuit of having a central CBDC.
“In terms of the road ahead, the ECB will continue to assess the costs and benefits of issuing a central bank digital currency (CBDC) that would ensure that the general public remains able to use central bank money even if the use of physical cash eventually declines”. Christine Lagarde
The task force will work closely with the EU national central banks to study the feasibility of a euro area CBDC in various forms, covering all the practical aspects, including how to minimise possible unintended side-effects.
Lagarde agrees that pursuing a CBDC is a legitimate goal for the ECB but does not rule out competitive solutions that may come from private companies pursuing platforms that utilize digital currencies to expedite cross-border and domestic transactions.
“We are looking closely into the feasibility and merits of a CBDC, also because it could have major implications for the financial sector and for the transmission of monetary policy”. Lagarde
Optimal CBDC design
Interesting question is: what is the most optimal CBDC design? Certainly, a digital central bank currency has the potential to impact the financial system in a significant way. But for an optimal design one need a good cost-benefit balance and mitigate – as far as possible – potential unintended side-effects.
In this blog the focus is on so-called general purpose CBDCs accessible to the broad public. Wholesale CBDC are seen as of more limited scope and does not really question the established structure of the monetary base. General purpose CBDC could be implemented in two alternative ways: they could be offered in the form of deposit accounts with the central bank to all households and corporates. Alternatively, the central bank could offer a digital token currency that would circulate in a decentralized way without central ledger.
But for security and privacy reasons this latter alternative is not the favourite of central banks especially in the well developed countries.
Opportunities and challenges of CBDCs
Central banks have started to analyze intensively the benefits and negatives of introducing central bank digital currencies (CBDC). They are especially looking at what is their potential impact on monetary policy, financial stability and the financial system. It is imperative that central banks thereby proceed cautiously, with a rigorous analysis of the opportunities and challenges posed.
Opportunities
In various studies a number of quite diverse benefits of CBDCs have been put forward.
More efficient payments
CBDCs could address problems like inefficient payments that cryptocurrencies seek to solve, while maintaining state control over money. Central banks think CBDCs could make payments systems more efficient, reducing transfer and settlement times and thus promoting economic growth. Other advantages could include making available efficient, secure and modern central bank money to everyone, and strengthening the resilience, availability and accessibility of retail payments. This is especial true for the countries with underdeveloped banking systems, and/or without a secure and efficient payment system.
More security
A widely adopted CBDC would allow better control of illicit payment and saving activities, money laundering, and terrorist financing. It would thus place users at less risk of violent crimes that target holders of cash, and potentially reduce security and insurance costs associated with keeping cash on business premises. This however would requires the discontinuation of banknotes (or at least of larger denominations). Obviously, this motivation of CBDC would not apply if CBDC circulates as anonymous token money even for high amounts.
Improve overall effectiveness monetary policy
CBDCs could provide significant competition for traditional monetary instruments. Such a competition would present monetary policy with challenges but also with opportunities. Central bankers fear that Libra and other crypto currencies could quickly erode sovereignty over monetary policy. CBDCs could counter the rise of cryptocurrencies issued by the private sector.
Next to that CBDCs could allow relaxing the so-called zero-lower bound constraint on nominal interest rates as negative interest rates can be applied to CBDC. If digital cash is used to completely replace physical cash, this could allow interest rates to be pushed below the zero-lower bound, which could promote macro-economic stability. CBDC could also widen the range of options for monetary policy. Variable interest rates on CBDC would provide for a new, non-redundant monetary policy instrument that would allow improving the overall effectiveness of monetary policy.
Improve financial stability
CBDCs could also improve financial stability and macroeconomic stability and reduce so-called “moral hazard of banks“ by downscaling the role of the banking system in money creation via sight deposits, as CBDC would take over to large or full extent sight deposit issuance by banks. By providing competition for bank deposits, the adoption of a CBDC could limit the practice of fractional reserve banking, thereby strengthening financial stability.
Safer financial system
A CBDC could have profound implications for the banking sector, either positive or negative. CBDC can also make the financial system safer as. Under a central bank digital currency scheme, citizens and business would be permitted to open and hold interest paid accounts with the central bank. It would allow individuals, private sector companies, and non-bank financial institutions to settle directly in central bank money (rather than bank deposits). A CBDC, therefore, would compete directly with commercial bank deposits, likely inducing a partial shift of deposits away from commercial banks towards the central bank.
This may significantly reduce the concentration of liquidity and credit risk in payment systems, resulting in a safer financial system, with less scope for impairment in monetary policy transmission.
Potential costs of CBDCs
Most of the proposed advantages of CBDCs however are not that straight forward and are mostly subject to controversial debate. Overall, one may conclude from reviewing the arguments in favor of CBDC that the merits of CBDC i.e. contribute to an efficient, resilient, accessible and contestable payment system seem relatively uncontroversial, without this per se being sufficient to justify CBDC. But that is not the case for other arguments.
Disintermediation of the banking sector
It remains uncertain to what extent and in what direction a sovereign digital currency would impact the banking sector and financial stability. Different outcomes are conceivable, with different policy implications, but with no clear indication as to which is most likely. Some warn against the structural disintermediation of banks that could be caused by CBDC. This disintermediation has been considered as one of the major drawbacks and risks of CBDC.
De-funding of the banking sector
Too widespread a substitution of bank deposits by CBDC could lead to a significant de-funding of the banking sector. If CBDCs replace private deposits, that could erode commercial banks’ credit channels, having negative spill over effects on credit creation and economic activity. Another danger associated with CBDC, is that it would facilitate runs out of bank deposits into central bank money in times of financial crisis situations.
Impact on financial stability
A substitution of bank deposits by CBDCs could also weigh on growth prospects if it compromised bank lending activity. First, even if banks were both willing and able to attract alternative funding, the adoption of a CBDC as a very easily safe asset could make credit supply more volatile, facilitating a flight to safety. It might act as a vehicle for bank runs, undermining financial stability. Second, the de-funding risks of banks associated with a CBDC might push the private sector into shadow banking activities.
Forward looking: are CBDCs close to becoming reality?
There is growing consensus that central bank digital currencies have a big chance to become a reality. But it is still guessing when and how it will look like. Most CBDC projects are still in very early or conceptual stages.
While the creation of the group of six leading central banks in the developed economies demonstrates that central banks are moving forward in their research on the costs and benefits of digital currencies at the global level, present findings are not (yet) enough to justify a central bank digital currency. It is still too early to say what would be the optimal design for CBDCs.
There are still many open questions such as, what will be the effect on monetary policy? How will it impact financial stability? And what about the position of financial institutions?
For that there are still too many controversies in the various arguments pro and con. It remains uncertain to what extent and how CBDCs would impact the banking sector and what that means for financial stability. It is also unclear how CBDCs really impact monetary policy.
More research should be devoted to better understanding and assessing the pros and the cons associated with the use of such a CBDC. Only than balanced decisions can be made.
Carlo de Meijer
Economist and researcher