The Facts and Fictions Behind Treasury Technology

Technology has much to offer the treasury community, but the idea that it presents a silver bullet for all woes is to be viewed with a great deal of caution, warns Jukka Sallinen, CEO, Nomentia. He offers TMI a timely reality check on the promise of bank connectivity and real-time treasury systems.

The idea of real-time account visibility, and clear snapshots of cash, often finds a counterpoint in the sheer complexity and system fragmentation that such a view requires. In short, while some treasurers do have that capability, most don’t because it’s currently just too hard to achieve.

This is not to undermine the power of existing technology to provide an up close and personal view of enterprise cash – Sallinen is clear that this is entirely possible. But it does highlight the at times frustrating technological disconnect between certain corporates and their banks. It also acknowledges how each treasury, faced with a unique set of financial circumstances, must find a way to respond to those demands.

Not all connections are equal

“The ecosystem is fragmented, but in a way that some of the largest corporates might not recognise,” notes Sallinen. “If they’re operating only with certain very advanced banks, and in key commercial regions, they probably have access to high-functioning technology, and consider that their cash view is actually just fine.”

However, he notes that while other organisations may be able to access all they need in the majority of their operations, they may be struggling to find usable connections to their bank accounts in a few important settings. “In such cases, they may be unclear as to whether to use host-to-host, EBICS [Electronic Banking Internet Communication Standard] or something else. And when they do eventually receive data, it may only be accessible in a format that is not compatible with their legacy ERP systems.”

It’s the combination of all the above elements that can serve to create connectivity complexity and frustration for many companies. It’s a struggle that persists, acknowledges Sallinen. It makes the pursuit of multi-bank cash visibility seem a rather distant goal, even with the advent of APIs.

Chaos out of order

As an enthusiastic proponent of the principles of physics, Sallinen draws an analogy between bank connectivity and the second law of thermodynamics. The law states that all natural closed system processes that are left to their own devices face increasing, but never decreasing, disorder (or entropy).

When ice melts, its ordered structure becomes more disordered. The removal of this randomness requires some kind of work or energy to be applied to that system. A freezer can restructure water into ice, but if it stops freezing, ice will revert to its natural disordered watery state.

In banking connectivity, Sallinen explains that without standardisation – derived from industry-wide collaboration and co-operation between players such as banks, vendors, regulators – system entropy increases. “There is some fantastic work being carried out in this space, delivering increased order in the form of XML or the move towards API standards, for example. But the energy being applied to the overall system of connectivity is currently less than is required to bring full harmonisation, and therefore the complexity, and disorder it brings, just keeps increasing.”

As things stand, Sallinen sees the complexity as “here to stay”, with more layers added as new tools and processes are delivered into the treasury space. While there will be “no overnight fix” presented to treasurers frustrated by inefficient connectivity and cash views, he has seen vendor offerings improve in recent times in terms of system and network compatibility.

However, he adds that treasurers are rarely “in the driver’s seat” when it comes to corporate strategy and key service decisions. “The financial supply chain needs to have the flexibility to service the shifting strategic aims of the business. This is why treasury often finds itself one step behind. When, for example, the business decides that customers will be offered a new delivery channel, it will be treasury’s task to source, implement, and integrate the appropriate payment capabilities.”

API oversell

With vendors, banks and various treasury media outlets talking up the potential value of APIs, Sallinen admits that the message has been rather too positive. APIs are perfectly capable of delivering on their promise, he states, but only in the right circumstances. “The reality is that we’re dealing with a highly fragmented ecosystem that cannot yet fully support client expectations.”

So, while it has been frequently suggested in recent times that APIs would not just solve the connectivity issues between banks and corporate clients but also add considerable value to these connections, they remain nowhere near as common as they could or should be. 

For Sallinen, the reason is simple: the marketing of financial APIs has focused too much on being a rip-and-replace solution for every connection, and this has been counterproductive in terms of uptake. “Treasurers have solutions that already work well. There is not a huge problem with bulk payments nowadays, for instance. These are very easy channels to set up and manage, and as the saying goes, ‘if it ain’t broke, don’t fix it’.”

However, Sallinen sees plenty of new use cases for APIs, citing new verification of payee (VoP) services, FX financing, and single payment execution as possibilities. With more corporates and their banks seeking a single channel of connection, many will be replacing old models over the coming years, and APIs will be the way forward. As he comments: “It’s a universe that just keeps growing.” That other great panacea, blockchain, is likely to see less interest in the treasury space though, he suggests.

While blockchain is an essential companion in areas such as tokenisation, and in other areas where tracking and transparency are key, Sallinen argues that treasury technology investments are heading more towards the simplification offered by open banking and APIs once the use cases have been properly established.

Similarly, he feels that AI is coming under closer bank and corporate scrutiny as the opportunites to more efficiently manage financial activities reveal themselves. His conclusion is that he does not see “a huge potential for blockchain” in the treasury world.

Layer upon layer

While new technologies always promise great leaps forward in terms of process simplification (at least in the minds of those marketing them), the reality can be somewhat different, comments Sallinen. Indeed, new tools sometimes have the unintended consequence of adding new layers of complexity when looked at from a systemic perspective.

This is not in any way a denigration of the efforts of the creators, nor indeed the purpose of these tools. “I do believe that they all exist for a reason. We are living in an open market, and every new solution is responding to a perceived pain or potential gain.”

In many cases, Sallinen knows it may be precisely what is needed. API bank connectivity, for example, may facilitate a simple view on cash and  cash flow forecasting, and payment capabilities, all through one solution. If this is sufficient, and it means not having to implement a “monolithic TMS”, then it becomes “a fast track to success” for all parties.

But the point remains that each new tool, as yet another part of an expanding technological ecosystem, unavoidably adds an extra layer of complexity. The real issue arises if these tools do not integrate easily, or at all, and for this he reiterates the current lack of a “silver bullet”. This creates its own tension.

While the situation is perhaps marginally clearer for smaller companies, Sallinen explains that typically it is complex and large organisations that require multiple solutions. “These now need to choose between a ‘best-of-breed’ approach, and the complexity that this implies, or the compromise of a single integrated system that is potentially a jack-of-all-trades yet master of none.”

The devil is in the detail

System integrability is improving, but slowly. Sallinen first entered the industry some 20 years ago and remembers how outdated batch processing, for example, felt back then. “APIs already existed so I wondered why we weren’t using them. But even now we’re still not fully embedded with them.” While he made the point earlier that ‘if it ain’t broke, don’t fix it’, he nonetheless muses that, for technically minded people such as himself, “adoption of some technologies has been painfully slow”.

Technology in banking and finance is under constant development – the number of new offerings amply demonstrates that – but it’s not just the threat of mounting complexity that dissuades investment, notes Sallinen.

“The devil is in the detail,” he suggests. “A business may not be on the latest iteration of its ERP system. It may be waiting for a global roll-out before it upgrades and can integrate the new tools. Organisations are upgrading their landscapes, but such changes just take time.” The good news is that with most TMSs “connecting very well with ERP and bank systems today”, he believes that this at least is “no longer an obstacle for adoption”.

Better brakes, sharper controls

There is however a fundamental challenge for many companies when considering deeper connectivity with the outside world, especially if the aim is real-time: faster connectivity is often equated with faster risk. “Real-time does carry with it increased risk, and that risk must be mitigated. In the same way that a fast car needs upgraded brakes, so real-time connected system controls must be upgraded to match the speed of transmission.”

Regulatory interventions, such as VoP, are helpful, but it’s the controls that companies put in place that have the biggest impact. Mechanisms to avoid simple keying errors and double payments, for example (both improved by automation), are beneficial at all times. But the need to align bank account access, payment approval, and fraud prevention and detection systems, increases with the adoption of real-time connectivity.

And with many regulators hardening their approach to sanctions and watchlist screening, penalties being imposed are increasing in terms of the severity of potential punishments and the scope of enforcement. “There is still a false belief in some companies that sanctions screening is the bank’s job,” cautions Sallinen. “They do check, but it’s fully the company’s responsibility. If a sanctioned payment reaches their bank, they have already broken the law.”

With this in mind, he urges companies with international business and global supply chains to pay more attention. But just as real-time transactions may trip up the unwary, so affordable real-time technology can be used to detect and prevent such errors. It thus becomes part of the real-time system vendors’ duty to alert clients to this challenge, pointing them in the direction of preventative tools, whether in-house or third-party.

Part of that process, Sallinen explains, requires the corporate buyers of these systems to ensure that all users are aware of the risks and are trained to use the systems securely. “But I believe as an industry we also have responsibility not just to ensure the technology is as robust as possible but also that we inform and educate our clients about the risks and how they can tackle them,” he says. “If we don’t, we’re an industry selling fast cars without proper brakes!”

One way that client education is tackled at Nomentia is through webinars, bringing experts to panel discussions on key topics. This has helped establish effective protocols for mandatory processes such as sanctions screening. However, the education process begins during the implementation, when the team will not only instruct and guide client users but also share best practice drawn from their own extensive day-to-day experience in the field. As Sallinen notes: “We implement these types of tools every day, the client usually does it only once.”

With some technologies sold as ‘plug-and-play’ solutions, the intended impression is that connectivity into a functioning treasury ecosystem is quick and easy. Sallinen suggests that most treasurers are aware of and can usually see through vendor hype, but while genuine cases of plug-and-play do exist, when it comes to bank connectivity, there are too many variables to make such a claim.

“I avoid that phrase and instead explain that we can establish smooth processes, sometimes even in minutes or hours, which for me, would fall into the plug-and-play experience. But then the same solution might take a couple of days, which to me is not plug-and-play. It all depends on the complexity and degree of fragmentation within the ecosystem.”

Tackling obstacles together

Local and less well-resourced banks that necessarily sit outside of the main panel, a long-awaited ERP upgrade over which treasury has no control, other systems that are required to meet the demands of a new business strategy, varying levels of skill within the team, and budgetary constraints can all conspire to frustrate smooth connectivity.

“Even though the cash management is fundamentally the same for every business, it’s the combination of these – and many more – parameters that ultimately determine the nature of connectivity,” states Sallinen.

Because there are many moving parts in every organisation, and no two are exactly alike, each treasurer will need to work through these differences, and tackle the connectivity issues, in order to establish a major structure such as a global cash management set-up.

“This is why it’s always good to have someone with experience alongside you from the beginning,” stresses Sallinen. “It’s also why we don’t consider ourselves just as a software vendor but also as a partner when navigating through this complexity.”