We can all recall the ‘golden age’ of treasury, where the treasurer was in control of the cash and risk management of the company and managed relationships with banks, often trying to centralise cash and risk as much as possible.
Treasurers and banking partners were mostly exclusive and long-term partners, while cross-sell by financial institutions was fairly normal, meaning many corporates’ cash management was handled by the financial institutions that financed it.
But then came the rise of e-commerce and sales moved from traditional point-of-sale (POS) and bricks-and-mortar stores to online.
For some companies it was a side business, while for others it was a growth model where they could differentiate themselves from the rest. And then a smaller group solely relied on e-commerce and made it their business model.
Banks had to keep up with these trends, developing different business models driven by more digitisation. As POS shifted online, clients wanted to make it as easy as possible to pay.
In the early days of e-commerce this usually meant online payment via credit card, which back then was a product with limited spread across various territories, making it a barrier to growth.
As a result, new payment methods came on the market, making it possible for consumers to pay via their bank account or bank account-linked service. Think PayPal and the rest.
The rise of the payment service providers (PSPs) had begun.
Fast-forward to the 2020s: we now have a whole range of globally connected PSPs offering a whole array of e-commerce payment options. And while treasurers still need bank accounts, their needs have changed – now they need to receive the money their customers already paid via the PSPs.
And while there are benefits to that system, it still makes the life of the treasurer more complex: if they only look at cash at bank, they miss out on a big chunk of cash that is already confirmed via the PSP but not yet received at the bank-account level.
In some cases, that means cash in transit can grow to levels above what’s desired.
And this is crucial for accounting. Waiting for the money to hit the bank to confirm a sale would take way too long. Positive acknowledgement of the sale is done by the PSP by creating a non-reversable reservation against the customer’s payment method of choice (debit or credit card).
Of course, at that point the customer has paid and expects the vendor to initiate the delivery of the product as soon as possible. Accounting therefore needs to book against payment acknowledgement and not against physical payment receipt – even though cash has not yet been received.
Imagine a food-delivery company where time is crucial. The order needs to be paid first before the food is prepared. Therefore, an instant acknowledgement of payment is crucial. And that means actual settlement of the funds on the bank account one day later by the PSP becomes irrelevant for sales.
All of that means that ‘real time’ is the new information – but not necessarily real-time cash. The treasurer needs to know their total cash position not only in cash, but also in virtual and near-cash; the money at PSPs, wallets or virtual credit cards. All these sources feed into the total cash (and risk) position and they need to be managed.
The same is true on the payout side. Traditionally, vendors are paid via bank transfer. Once a payment is done, it’s a done deal for treasurers. The bank has debited the bank account and accounting will book it as paid, then one day later reconciled with the bank statement.
However, vendors still had to wait sometimes one to three days to actually receive the money, as banks needed time to settle, convert and route it to the correct beneficiary banks – sometimes via intermediary banks.
It’s a very cumbersome process – and considering information is sent around the whole world in a second, it seems strange that cash settlement can take so long. In a world where vendors demand more speed and flexibility to receive money, it’s even more baffling.
Paying out to virtual credit cards or a wallet-type platform can make an instant payout to a vendor, without the need to have banks involved.
This can even be currency independent, as some virtual credit card (VCC) companies offer currency compensation or conversion. In this example again the settlement/payout is done first, then later an actual cash settlement follows to make the VCC company whole for their positions.
Settlement is faster than the cash. Acknowledgement arrives before the traditional bank transfer.
What will this mean for the treasurer? Principally, it will demand more oversight from treasury teams, as they not only have to check cash at bank, but also monitor more sources of (near) cash. And while that may sound inefficient, companies looking to develop more e-commerce models must adapt their payment structure.
Because make no mistake: customers will demand it – even for those products not traditionally linked with e-commerce. Nowadays, you can buy cars online without the need to go to a store. Click, buy and collect it all in a few days – all based on trusting the vendor-provided information online and making it easier to pay for the car.
To facilitate this, treasurers must understand the whole e-commerce process and not simply follow the cash flow. The treasurer needs information earlier – and in some cases may even be the person that makes payment innovation possible for the company.
In short, a digital treasury is the future and must play a fundamental role in the success of the company.
Christian Doherty is editor of The Treasurer
