Since the Association of Corporate Treasurers (ACT) was established in the UK in 1979, treasurers in the US have trodden a similar development path to their European colleagues in terms of investment vehicles, technological development and regulatory changes. There have been challenges and opportunities on both sides of the Atlantic; formative experiences brought about by interest rate highs and lows, and government-initiated regulation. Corporates and treasurers, by force of necessity, have adjusted along the way.
The history of treasury in the US, however, has its roots in the 1960s. In the US, banks were not permitted to branch across state lines and, in some states they could not have any branches at all. The result: nearly 15,000 banks, with each town having one or two of its own ‘major’ banks. Most bank operations were beginning to automate, the majority with IBM data processing and cheque-processing equipment.
Most corporate treasurers needed to have a bank in every town in which they did business to handle receivables collections, local vendor payments and payroll. The situation was unwieldy, to say the least. A treasurer’s goal was to balance their bank accounts monthly. Bank services were free as part of the ‘relationship’ and banks kept relatively high balances to compensate. In reality, they had no easy way of knowing their balances or moving the money. Interest was prohibited on chequing accounts.
The payments system was cheque-based with most cheques clearing in three days or less. Capital markets were out of reach for all but a couple of dozen of the very largest companies. Bank credit was the only game in town for 99.9% of treasurers.
The early 1970s brought bank-processing automation, which led to the establishment of the earliest treasury management services. Lockbox, controlled disbursements, account reconcilements and cash concentration were the first to emerge. Banks began charging for these services and also providing a shadow interest rate on chequing, generally the 90-day treasury-bill rate minus reserves, known as the earnings credit rate.
The world for treasurers was getting complicated. Now faced with fees for services, every major company began doing cost-benefit analyses to determine which services to use. This was the forerunner of many treasury-consulting groups, including Treasury Strategies. The early commercial paper market began to develop for top-rated companies and banks – the first time treasurers had an alternative to bank debt. The First National City Bank of New York (now Citibank) had first issued a commercial paper in 1966, but the market really formed in the early 1970s.
Money market funds (MMFs) came on the scene in 1971 with the Reserve Fund, which was followed by many others, including Federated, which pioneered many institutional uses for MMFs. With banks prohibited from paying interest on demand deposits, MMFs provided an alternative, but growth initially was slow.
Interest rates skyrocketed, which dramatically increased the value of treasury management services, since these services helped treasurers improve the utility of their working capital. That in turn drove banks to expand their services and allowed them to increase their fees.
Treasury management had finally become a real business. Treasurers formed associations in their home cities. One of the very first was the Cash Management Practitioners Association of Chicago, now the Treasury Management Association of Chicago. The concept of local associations spread rapidly and worldwide. By 1980, the forerunner to the Association of Financial Professionals (the NCCMA, as it was known at the time) was forming along with equivalent professional bodies around the world, including the ACT.
In the US, with interest rates in the high teens, the federal government (the Carter Administration) became interested in improving the payments system. Federal government’s war on float may well be the first-ever national payments initiative. The aim was to reduce float by improving cheque clearing and reducing settlement times that could extend for several days.
Congress passed Regulation E (electronic payments), which settled a lot of legal uncertainty around automated clearing houses and led to the rapid development, first of regional automated clearing houses (ACHs) and then the National ACH, NACHA.
The story of the late 1970s into the 1980s is the story of treasury technology. Since most banks were well along on the path of automation, the foundation was set for treasury information services.
Incredibly, in the mid-1970s, banks had actually debated whether or not to provide same-day balance-reporting services to their customers. Even for a substantial fee, many bankers saw this as a losing proposition, since treasurers might be tempted to move their excess balances elsewhere. Chemical Bank was the first to break ranks and offered an automated balance reporting service called ChemLink. Within two years, many larger banks followed, most notably First Chicago with FirstCash, Chase with InfoCash and Bank of America with Bamtrack. Initially, a treasurer had to sign on to each bank’s system and could only retrieve information for domestic accounts at that bank. Soon, banks began allowing cross-data access and multi-bank balance reporting became widespread during the 1980s.
Treasurers of the largest companies were gaining access to personal computers and, as forerunners to treasury workstations, banks began providing treasury software to their customers. Manufacturer Hanover was an early and most sophisticated market entrant with its Interplex product. In the early 1980s, more than a dozen US banks offered treasury workstations to customers, but eventually ceded the space to technology firms.
Two of the first non-bank treasury workstations were provided by ICMS and by ADS in 1980 (both now part of SunGard). Dozens of treasury management system providers sprung up, ranging from the very small shops to Control Data and General Electric at the high end.
However, many treasurers felt their needs were unique and built their own internal workstations.
By the 1990s, the fragmented market began to consolidate and by the 2000s began to globalise.
Regulation and markets set the tone for much of the 1980s, and Paul Volcker was central. MMFs, barely a decade old, provided great utility and value to both investors and borrowers, but took some market share away from banks. Federal Reserve chairman Volcker was determined to reduce their influence and imposed draconian requirements that destroyed their utility. The outcry was so loud that Congress reversed the restrictions within three months and MMFs continued their great ride. Ironically, 28 years later, with the financial crisis as the excuse, Volcker himself returned and this time succeeded in limiting the utility of MMFs for corporate treasurers.
Ten-year treasuries reached 15% in 1980, raising liquidity fears on the part of corporate treasurers. They responded by improving their cash forecasting (elementary by today’s standards) and adopting both bank-provided and third-party treasury technology. Volcker’s monetary policy beginning in 1980 addressed the higher rates and set off a 25-year bull market in bonds. This began a golden age for treasurers in leveraging their companies’ balance sheets.
The Monetary Control Act of 1980 is probably the single-most important regulatory event in the evolution of US treasury management. This act mandated the Federal Reserve to return a 15% profit on the transaction services provided to banks. The ramifications were immense and ultimately filtered through to corporate treasurers, creating the landscape we have today. The Act also ended certain limitations on interest that banks could pay, leading to the savings and loan crisis of the 1980s.
This savings and loan crisis of the late 1980s resulted in the failure of more than 1,000 institutions – one third of the total. However, the silver lining was the recognition that limits on branch banking were tantamount to limits on deposit gathering, which, in turn, were limits on liquidity and accelerants of the crisis. The upshot was a rapid move towards branching across state lines and, ultimately, nationwide banking.
In the nationwide banking race, the winners were banks located in the states, which provided the most conducive branch banking regulations, especially New York, California and North Carolina. The losers were states that retained the most restrictive branching laws like Illinois and Texas.
The new decade heralded in an entirely new way for treasurers to invest: sweep accounts. These accounts facilitated the overnight investment of cash at a decent return. Earlier versions of these accounts swept into government securities and offer below-market returns. But the 1990 version, pioneered by Wells Fargo and Security Pacific, with consulting help from Treasury Strategies, utilised MMFs as underlying sweep investment. The industry took off and within the decade, MMF sweeps were the investment of choice for most corporate treasurers.
It's no coincidence that two west coast banks would lead the way. Companies headquartered in the west needed a way to deploy excess cash, long after New York markets had closed. MMF sweeps did exactly that.
This decade also began the rapid development of global supply chains and corporate treasury practices evolved to accommodate them. Generations-old trade finance practices and bank trade services gave way to a new wave of trade and supply chain finance products. These were first used by the largest global companies and global banks.
One upshot of global trade and global supply chain management was finally the globalisation of corporate treasury. Prior to 2000, most companies had a domestic treasurer (primary) and an international treasurer (reporting to the domestic treasurer). After 2000, they had a single treasurer with global responsibilities. Many developed regional treasury centres for better decision-making closer to customers and suppliers. Many also developed shared service centres to handle the mass production of routine activities such as disbursements, receivables management, and so on.
Then came the crisis of 2008, bank crises and the strangle hold of regulation, which is still inhibiting sound treasury practices a decade later. The effects of the Global Financial Crisis, Frank-Dodd and other punitive crisis era regulations will be felt for a while yet.
Anthony J Carfang is a partner with Treasury Strategies