Treasury Convergence:Technology-driven business model transformation

Today, more than ever before, corporate treasurers play a critical role as they help their firms implement strategies and transform their business models amidst an increasingly unpredictable and complex environment.

The world is in flux, and businesses and the finance departments that support them, have to create order, e�ciency and clarity so that opportunities can be identified and captured. From the convergence of geopolitical and demographic shifts, to regulatory change and rapid technological developments, the challenges facing today’s finance professionals require them to be more deeply embedded in their organisations, collaborating with colleagues in other business divisions, and driving innovation.

While change and complexity are not new for the seasoned finance professional, what is new is the pace and acceleration with which the change is taking place. These fast-paced shifts are resulting in a continually evolving set of liquidity and cash management needs, even as more and more of the treasurer’s time is spent on addressing the business’ long-term strategic plans. Needless to say, it is an exciting time to be in treasury!

Personally, this has been a particularly invigorating period for me as I reflect on the developments that I have witnessed in my last two decades in the banking industry. My experience in varied roles in relationship management, global markets, trade finance and cash management across North America, Europe, Asia, Australia and the Middle East has provided me with invaluable insight into my clients’ diverse and evolving challenges, as well as their winning strategies. More recently, together with my colleagues at HSBC, I have had the

opportunity to speak with clients all over the world –in their o�ces, at conferences, and at the events we at HSBC host around the world. The message I have received from clients is clear – with so much happening at such pace, they need banking partners that are committed to both support them as they manage through today’s challenges and help them transform their businesses for the future.

I am fortunate to be working for an organisation that is dedicated to responding to these imperatives. HSBC is embarking on a plan to invest USD15-17 billion1 in growth and technology over the next two years, demonstrating our commitment to helping our clients’ businesses thrive through digitisation and automation. We will do this while continuing to o�er HSBC’s sector and market expertise, connecting our clients to opportunities in both the emerging and developed markets.

This report aims to bring together the insights we have gathered while speaking to clients, and to explore the changing expectations on the modern corporate treasurer amidst an unprecedented velocity of change. We hope that it provides you with insight into the converging trends that are driving business model evolution, and how we at HSBC believe treasurers can cope with these changes and ultimately make a significant impact on your organisation’s strategic agenda.

Lance Kawaguchi,Managing Director, Global Head – Corporates, Global Liquidity and Cash Management, HSBC

Treasury Convergence Technology-driven business model transformation

1 HSBC Strategy Update: Return to Growth and Value Creation, Investor Presentation, June 2018

Treasury Convergence Technology-driven business model transformation2

Section 1: IntroductionWe live in a world where businesses face an unprecedented amount of change in the macro environment within which they operate. The Greek philosopher Heraclitus noted that ‘change is the only constant in life’. This rings even more true today.

The imperative to manage through a constantly changing macro environment is not new for businesses. What is remarkable however, is the velocity and degree of discordance of many of today’s changes, all converging to create a highly contradictory and ambiguous environment, rich with both challenges and opportunities that businesses must navigate.

Equally, finance and treasury departments, tasked with supporting their firms as they execute on their strategies, have to adapt, plan and operate in a world of converging, yet often seemingly conflicting priorities. They have to manage global financial value chains amidst globalisation and protectionist policies. They have to harness the benefits of technology while ensuring cybersecurity and data privacy. They have to maintain competitive advantage while participating in increasingly collaborative business ecosystems. And they have to drive game-changing innovation while mitigating risks to established revenue streams.

In this report, we explore these converging and conflicting trends, and discuss how treasury management needs to evolve in order to support their firms’ changing business models. To operate e�ectively and e�ciently in a world where boundaries are both being broken down and put up, and where the quest for simplicity often creates more complexity, corporate treasuries are leveraging new technology and techniques, while also increasingly amalgamating their own siloes of financial operations and data in order to gain greater central visibility, control and insight.

Section 2: Convergence across the macro environmentIn this section, we explore some of the macroeconomic, geopolitical and demographic trends that are converging to create the imperative for businesses – and consequently, treasuries – to adapt their models in order to succeed.

Globalisation dampened by protectionism

While globalisation has been breaking down geographical, financial, trade and information barriers and driving world economic growth, the recent wave of populism and nationalism is giving rise to protectionist policies aimed at safeguarding local industries and interests. For instance, on one hand, a number of significant markets such as China, Mexico, Myanmar and Saudi Arabia2 are striking trade agreements with new trading partners to open up their economies to the rest of the world, albeit often at a controlled pace. In contrast, other major economies are looking internally or taking protectionist stances in a bid to create what they perceive as a fairer playing field for their constituencies.

For example, the United States, in an e�ort to ‘make America great again’ is looking to protect its domestic industries by potentially putting in place higher tari�s on old and new trade partners. Countermeasures are expected, potentially sparking a trade war. And this is even before the ongoing, protracted debate on the trade environment for the UK and the EU post-Brexit is factored in. The resulting uncertainty presents a potential fragmentation of economic and financial markets that businesses need to plan for.

2 www.reuters.com, EU and Mexico agree new free trade pact, 22 April 2018; www.china-briefing.com, China and Mexico: Developing Trade, Investment for the Future, 26 December 2017; www.mmtimes, Cross-border transport agreement makes progress, 13 July 2018; Myanmar-China to ink MOU on cross-border trade, 31 May 2018; www.straitstimes.com, China, Saudi Arabia sign agreements worth about $91 billion, 16 March 2017

3

This balkanisation will have signifi cant impact on fi rms’ global supply chains and their underlying fi nancial value chains. From threatening the stability and consistency of supply of goods and services, to creating uneven regulatory regimes, and driving unpredictability of interest and foreign exchange rates, market fragmentation creates even greater complexity for fi rms and their treasury departments.

Corporates, therefore, need to assess the impact of potential trade wars - whether they are fl uctuating foreign exchange and interest rates, the need to identify alternative sources of supply, or consider new markets for their products and services. Consequently, treasuries will need to embed e� cient processes to establish visibility, control and mobility of cash across new counterparties – partners, suppliers or customers - and new geographic markets.

Rapid regulatory changeAlongside the redrawing of trading lines and shifts in policy comes the complexity of conducting business amidst a rapidly changing regulatory landscape. Regulatory complexity does not just come from di� erent regulatory regimes from market to market, but also from varying regulatory approaches across industry sectors. And as industry sectors converge and business models change, so do the regulations that fi rms need to comply with.

Take privacy and personal data for example. In a digitised world, more and more information is being generated and shared – both knowingly and unwittingly – online. In response, the European Union has introduced the European General Data Protection Regulation, which came into e� ect in May

20183. The GDPR does not just impact European domiciled businesses – it applies globally to any organisation collecting, storing and utilising EU persons’ personal data.

And with non-compliance seeing the threat of signifi cant fi nes, business models need to be adapted to ensure the compliant processing of personal data. Gartner, a research and consultancy fi rm estimated that over 50% of companies a� ected by GDPR would not have been compliant by the regulation’s implementation date4.

Applicable across the fi rm, GDPR also poses specifi c challenges for the corporate treasurer. Corporate treasuries hold signifi cant amounts of transaction information – including names, addresses and bank details of counterparties, as well as data of employees. Treasury will, therefore, need to ensure that they meet GDPR requirements themselves, as well as ensure that their vendors are also treating data in compliance with GDPR.

GDPR is but one example of new regulations coming into force due to the changing digital environment.

Another example is the ongoing debate between businesses and legislators on the very defi nition of what constitutes a ‘worker’ in today’s business environment. With the rise of the gig economy and new business models created by platforms such as the transportation app Uber, when a worker becomes a permanent employee has become a grey area. Proponents of the gig economy value the freedom to work as and when they choose, while those looking more closely at workers’ rights are pushing for clearer regulations.

Battle lines – Trade in goods, 2017

The potential extent of proposed tari� s on American exports to China, and American imports from China

Source: The Economist, Blow for blow, A trade war between America and China takes shape, 7th April 2018

3 https://ec.europa.eu4 www.gartner.com, Gartner Press Release, 3 May 2017

Cotton

Chemicals

Plastics

Cars

Aircraft

Other

SoyaBeans

Propane

CerealCrops

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1.0

1.7

1.3

2.1

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12.4

16.3

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2.8

1.8

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0.4

Televisions and displays

Electronics

MedicalEquipment

Other transportequipment

Other

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Goods covered by proposed tari�s

American exports to China, 2017 $130bn

American imports fromChina, 2017 $506bn

4.5

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2.8

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Televisions and displays

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Other transportequipment

Other

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Goods covered by proposed tari�s

American exports to China, 2017 $130bn

American imports fromChina, 2017 $506bn

4.5

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26.9

Treasury Convergence Technology-driven business model transformation4

Individual industry sectors are also experiencing regulatory fl ux driven by macroeconomic and technology developments – from debates within the tourism and hospitality sector on how to address o� erings like Airbnb, to the Net Neutrality issue in the telecommunications industry. As more and more industries go digital, the regulations governing these sectors will also shift to respond to new risks.

Corporate treasuries must, therefore, take these new risks into consideration, building agility into their systems and processes to enable swift compliance with changing regulations. Working with banking partners that are sector experts will also enable treasuries to have foresight into developments and how these may potentially impact their treasury management approach.

Diversifying for long-term economic growthDespite the uncertainty on the geopolitical and regulatory front, global economic growth remains stable.

Supporting this sustained economic growth are a number economic reforms and investment programmes that remain in play, particularly in markets that have identifi ed a need to diversify and reposition themselves on the world stage.

Economic diversifi cation has often been discussed as a means for underdeveloped nations to foster economic development and create jobs. However, today it is also high on the agenda of other more developed nations, such as China and a number of Gulf Cooperation Council countries.

For example, China is seeking to diversify away from the perception of being low-end, cheap manufacturers, and to move further up the value chain. Before 2012, China was positioned as ‘the world’s factory’. While it still produces more than $2 trillion of goods per annum, China is now diversifying into the services sector and cleaner energy5.

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China’s diversifi cation into the services sector has seen the contribution to GPD from services increase from 48.1% in 1Q2008 to 56.56% in 1Q2018

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Source: PWC, China Economic Quarterly, 1Q 2018

Saudi Arabia’s 2030 strategy also aims to create signifi cant economic diversifi cation6. While the Kingdom notes natural resources will still play a signifi cant role in their economy, they aim to reduce their dependence on oil, and instead leverage rich natural resources in gold, phosphate, and other valuable minerals.

Saudi Arabia is also seeking to diversify away from being as heavily dependent on natural resources. Their Public Investment Fund aims to become the world’s largest sovereign wealth fund, encouraging corporations to expand across the globe. Further economic transformation will take place for the Kingdom, in the form of manufacturing half of their military needs in-country and expanding digital services.

The diversifi cation of signifi cant economies, such as China and Saudi Arabia will present opportunities for corporations to export new skills to these markets, and establish new sources within their own supply chains.

Adapting to demographic shifts: the millennial generationCorporations are also adapting their business models to respond to demographic changes occurring across the globe. In particular, the millennial generation, those born between 1981 and 1996, is expected to steer the world’s economy in the years ahead7. Millennials are now the world’s largest generational population, with 1.8 billion people, having overtaken Generation X and the Baby Boomer generation some 22 years ago. By 2020, millennials will represent 35% of the global workforce8.

The millennial generation is also skewed towards emerging markets, with 9 out of 10 living in emerging economies. For example, there are currently not only more millennials in China than in the United States, millennials in China outnumber the entire US population9. And while in a post-fi nancial crisis world, millennials in established economies tend to feel worse o� and less optimistic than their parents, this is not the case for emerging market millennials10.

Source: The Financial Times, The Millennial Moment, June 2018

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5 Forbes, March 20186 Vision 2030 Strategy Paper, Kingdom of Saudi Arabia7 The Financial Times, “The Millennial Moment”, 6th June 2018

8 The Financial Times, “The Millennial Moment”, 6th June 20189 The Financial Times, “The Millennial Moment”, 6th June 201810 IPOS Mori, “Millennial Myths and Realities”

5

Technology plays a significant role in the lives of millennials, more so than any other generation. The youngest of this generation would have been 11 years old when the original iPhone was released in 2007. They have grown up online, and now communicate and purchase mainly using technology.

While technology plays such a critical role, authenticity of products and services is also important for this generation. This preference for organic and natural products has led established corporates to acquire new brands. Unilever, for example, is reported to have spent more than €9bn on about 20 acquisitions since 2015, mostly on small companies, including Dollar Shave Club, Pukka organic teas, and Seventh Generation

eco-friendly laundry products11. Technology has also not completely replaced a need for face-to-face interaction and a sense of community within the millennial generation. This is contributing to the rapid expansion of shared workspaces. WeWork, for instance, is currently valued at $20bn and now has around 220,000 members across the globe12.

While job security is a priority for this demographic, they are also more likely to participate in the emerging gig economy. They will no doubt become a significant focus for corporates, who are already beginning to adapt their business models to tap into millennials spending power, which is expected to increase and overtake generation X by the year 202013.

11 The Financial Times, “How millennials’ taste for ‘authenticity’ is disrupting powerful food brands”,19th June 2018 12 The Financial Times, 15th June 2018 13The Financial Times, “The Millennial Moment”, 6th June 2018

Treasury Convergence Technology-driven business model transformation6

Section 3: New business models: The convergence of technology and consumer demandsMacroeconomic, geopolitical and demographic drivers aside, one of the most signifi cant features of our time is the rapid pace of technological development and the profound impact it has on our lives.

Throughout history, technology has impacted many aspects of society. The convergence of new technology and changing consumer demands has been transforming the way we consume goods and services, conduct our work, and ultimately, how we go about our daily lives. Today, we are seeing an even more deliberate and discernible integration between technology and business models across a wide range of sectors.

In the automotive sector, the drive to ‘connected cars’, or cars that are able to connect to external networks or online platforms, facilitating communication while mobile, is also resulting in new revenue streams and payments for treasurers to manage. Even before

more fundamental shifts in consumer attitudes are considered, as is the case with the move from vehicle ownership to ‘pay to use’ models of ‘shared ownership’ including ride-sharing and car clubs, how consumers purchase and use products and services is changing, and with it, how treasury needs to operate is changing.

For example, within the aviation sector, changing consumer demand and purchasing patterns have led to the need for a more online and real-time consumer experience. From searching and booking fl ights online, to on-the-ground services and in-fl ight purchases, the way airlines generate, collect and consolidate revenues is changing. Combined with the ongoing requirements of paying suppliers, employees and occasionally, customers, across multiple geographies, aviation cash management has become even more complex.

Digital payments play a key role in enabling fi rms to implement new business models both in the B2C and B2B spaces.

The 2017 Capgemini World Payments report notes that while cash payments still remain dominant in the low-value transaction space, non-cash transaction volumes continue to grow, particularly in Asia and CEMEA.

The report further expects that so-called ‘e-payments’ or digital payments (made online for e-commerce activities) and ‘m-payments’ (payments where a mobile phone is used as a payment method) will make up 32% of total global non-cash transaction volumes between 2015-2020. The report also predicts that by 2019, around half of card transactions will be made online or via mobile phone.

While e-payments and m-payments made up around 31.2% of card transactions in 2015, by 2019, this is expected to grow to 45%.

It is also expected that mobile payments will expand into branded mobile wallets from retailers, or mobile wallets from credit card issuers or banks14.

Growth in E-Payment and M-Payment transaction volumes

Source: Capgemini, World Payments Report, 2017

14Capgemini World Payments Report 2017

28.6

E-Payments Transactions (Billions)

30.2 40.0 47.7 56.5 66.3 76.5

24.6 35.0 49.5 59.7 70.4 87.6 108.8

M-Payments Transactions (Billions)

28.6

E-Payments Transactions (Billions)

30.2 40.0 47.7 56.5 66.3 76.5

24.6 35.0 49.5 59.7 70.4 87.6 108.8

M-Payments Transactions (Billions)

7

Online marketplaces One clear example of convergence between technology and new business models is seen in the evolution of the retail and consumer goods sector. In addition to e-commerce retailers and traditional bricks and mortar sellers with an online e-commerce platform, online marketplaces such as Alibaba, Amazon, eBay and Rakuten, o� er a single platform that facilitates transactions between multiple buyers and sellers.

A recent report notes that global online marketplaces accounted for roughly 50% of online retail sales globally in 2017. This share is forecast to grow to about two-thirds of retail sales in the next fi ve years15. And just like individual e-commerce platforms that have opened fi rms up to new global customer bases, as online marketplaces continue to

extend their reach globally, they are having to manage an increased number of cross-border digital micropayments in multiple currencies.

The “sharing economy”The principle of online marketplaces has been a contributing factor in the rise of what is now commonly known as the “sharing economy”. In a recent report, the World Economic Forum (WEF) noted that the emergence of digital platforms has enabled sharing on a scale that could not have been achieved by o² ine mechanisms16. Whether it is to capitalise on unused resources, such as what Airbnb is doing with accommodation, or to match buyers and sellers (or riders and drivers) in an Uber-like business model, the “sharing economy” is opening up both new opportunities and challenges for fi rms.

Capacity within the sharing economy, or asset-sharing economy has rapidly increased, with $23.4 billion of investment during 2016

Source: BCG, Hopping Aboard the Sharing Economy, August 2017

15“Global e-Commerce Marketplaces 2018”, yStats , March 201816 “Collaboration in Cities: From Sharing to ‘Sharing Economy’, World Economic Forum Report, December 2017

Funding growth has taken o� since 2013

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Ride Sharing Accommodations Vehicle sharingWorkspace, storage, delivery and logistics

Fashion B2B (including machinery and equipment Other

Cumulative funding for asset-sharing startups ($billions)

The sharing economy creates complex challenges for treasury departments that have to manage increased transaction volumes of lower value payments to more suppliers and even more refunds to a larger number of customers. The number of customer accounts and receivables also exponentially increase, creating greater complexity in accounting, reconciliation and general management of accounts.

Treasury Convergence Technology-driven business model transformation8

17 www.money.cnn.com, “Intuit: Gig economy is 34% of US workforce”; May 2017 18 McKinsey Global Institute, “Independent Work: Choice, Necessity and the Gig Economy”; October 2016

The “gig economy”Similarly, finance departments in many firms are tasked with developing new ways of managing payments for a new category of worker in today’s gig economy. The gig economy, where work is conducted by independent individuals on a project-by-project basis, is another example of how technology has radically changed the interaction between businesses and their workers. According to Intuit, the gig economy was estimated to be about 34% of the US workforce in May 2017, and may make up to 43% of the workforce by the year 202017. An earlier report by McKinsey, estimated that in 2016, there were up to 162 million independent, gig economy workers in the United States and the EU-15 (20 to 30% of the population), with 15% using a digital platform to find their next gig18.

Companies participating in the gig economy provide a platform that connects businesses, end consumers, and gig workers. For example, Deliveroo, a fast-growing UK restaurant delivery service, signs up all three to its platform, with independent scooter drivers ferrying food from the restaurant to the end consumer’s home or o�ce, all with a couple of clicks online.

However, delivery, courier or taxi-style services are not the only ones available in the gig economy. Personal services such as cleaning, skilled manual work, administrative work, and creative and professional work are all available. Examples include Udemy, an online teaching marketplace, and Freelancer.gig, o�ering web designers, virtual assistants and graphic designers.

There are a wide range of services being provided by gig workers in the gig economy (UK gig economy data shown)

Source: RSA, Good Gigs, A fairer future for the UK’s gig economy, April 2017

Personal Services, such as cleaning, moving, or DIY tasks, through a website or app like Hassle or TaskRabbit

Skilled manual work, such as plumbing, building, electrics, or carpentry, through a website or app like MyBuilder or RatedPeople

Administrative work, such as data entry or ‘click work’, through a website or app like PeoplePerHour or Clickworker

Creative or IT work, such as writing or graphic design, or web development or app like Upwork, Freelancer, or Fiverr

Professional work, such as consultancy, legal advice, or accounting services, through a website or app like Upwork, Freelancer, or Talmix

Delivery or courier services, through a website or app like Deliveroo, UberEATS or Just Eat

Driving or taxi services, by finding passengers through a website or app like Uber

Breakdown of services provided by GIG workers

50%

While these platforms provide businesses with lower fixed costs, and flexible conditions for workers, allowing the millions of independent workers to accept work at the times and places that suit them, as mentioned above, critics feel the gig economy has started to blur the lines on the definition of a ‘self-employed’ versus ‘permanent worker’.

The rise of the gig economy also has several implications on business models and treasury management. Those providing their service seek to be paid as soon as possible. Whereas in the more traditional labour market, sta� were paid in a standard batch each month, or at the end of a longer-term fixed contract, the gig economy worker often demands to be paid weekly, if not daily, and for a variable, fluctuating amount each time based on the volume of work completed.

Clearly, this makes previously straightforward functions such as payroll significantly more complex. And as platforms o�ering similar services, such as Just Eat, Deliveroo, and UberEats spring up, the ability to more quickly make payments can become a competitive advantage in attracting drivers to a particular platform.

Consequently, faster, real-time micropayment solutions such as digital and mobile wallets are gaining traction to meet this need.

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2013 2014 2015 2016 2017 YTD

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The estimated number of unique active users of cryptocurrency wallets has grown significantly, since 2013 to between 2.9 million and 5.8 million in 2017

Source: University of Cambridge Centre for Alternative Finance, Global Cryptocurrency Benchmarking Study, 2017

19 www.uk.businessinsider.com; Accessed 25 June 2018. 20 www.investing.com; Accessed 25 June 2018. 21 www.cnbc.com, “For some workers, that paycheck could be in cryptocurrency sooner than later”; Accessed 25 June 2018. 22 www.cmegroup.com

CryptocurrenciesWhile many firms are just beginning to incorporate digital or mobile wallets, and are seeing an increase in digital payments due to the adoption of mobile and other new technologies, others have already gone a step further and have incorporated cryptocurrencies as an accepted form of payment.

Firms such as Microsoft, Expedia, Overstock.com, Shopify and even some Subway franchises in Buenos Aires, have been accepting bitcoin as payment for some of their goods19. With current estimates of over 1,900 digital currencies as of June 201720, firms are under pressure to explore if – and how – they should be managing cryptocurrency receivables. Equally, firms are increasingly finding themselves asked to make payments to employees, freelancers and independent contractors in cryptocurrency. For example, workers at Netflix, Airbnb, Starbucks and a number of other large companies can reportedly now ask for a portion of their pay check in Bitcoin21.

The rise of cryptocurrencies has not been limited to payments and receivables. With the opening up of bitcoin exchanges, businesses can also explore using cryptocurrencies as an alternative asset class. From straightforward foreign exchange trading to commodities futures exchanges, cryptocurrencies are beginning to attract institutional liquidity with high risk appetites. The CME Group, one of the world’s largest derivatives marketplaces, opened up its bitcoin futures exchange in December 201722.

Treasurers are adapting to these new business models and opportunities on an almost continuous basis, re-assessing their own treasury operating models to align with rapid customer-demand-led changes in revenue streams and opportunities from the ever-changing technological landscape. The convergence of digital payments methods and currencies is happening at pace, and while still in very early stages, forward-

thinking treasuries are starting to explore how each can enhance and support their firms evolving business models.

Smart cities: The convergence of technology and citiesA prime example of the convergence of multiple industries is smart cities. Smart cities are, by definition, the convergence of digital technology, innovation, and urban environments. They form a hub where multiple industries work together, blurring the boundaries between what were traditionally separate sectors. These developments are seen as an integral component of the transition towards a digital economy. As more of the world’s population converge on urban areas, smart cities also aim to create sustainable economic growth and a higher quality of life for their residents.

There are many examples of how digital technology and innovation are changing the way we operate and live in cities during the course of a normal day, creating exciting, dynamic areas.

Let us imagine what some aspects of life could be like in a smart city, and the impact this could have on how businesses manage new revenue streams built on dynamic pricing and multiple payment models and methods.

To start with, smart mobility. From smart car parking to assist with locating available spaces and paying fees, to the potential of shared self-driving cars requiring riders to pay for their share of the journey, how people pay for their daily commute would change significantly.

Having completed their smart commute, residents of smart cities will be working from smart buildings. Here, a number of building management functions will be conducted based on usage data. From smart refilling detecting the optimal time to automatically refill paper towels or co�ee, to usage-based cleaning, where sensors instruct teams of people or robots to clean particular areas, one could envision a ‘pay-per-use’ model for building facilities firms.

These types of revenue models will require a change in the way that treasury predicts and manages cash flows.

Once they have returned to their smart home, residents will monitor their electricity usage with smart metering, enabling changes to power usage, and the recording of consumption in interviews of less than an hour. Those that drove to work will plug in their smart electric vehicles overnight. These two examples will also result in more dynamic charges to the resident, and therefore more variable revenue streams for power and utility companies.

With all the examples of how smart cities are being developed, there is one common element. Each generates valuable data. In isolation, these pools of data may not be of significant benefit. However, the collection and consolidation of various sources of detailed smart city data enable visibility and insights into the functioning of society. A truly converged smart city arises from using technology and innovation to combine data in ways not previously possible.

Treasury Convergence Technology-driven business model transformation10

Section 4: The treasury convergence agendaConvergence of the treasury function, at its core, is a means for the corporate treasury function to gain control and visibility across revenue streams, subsidiaries and geographies. It provides a diverse range of benefits – from cash optimisation via pooling techniques, a rationalisation of bank accounts, to consolidated data on cash flows across the firm.

And with more firms conducting business internationally, whether through physical market entry or through trade, (63% of firms in the US$0.5-1.0 billion turnover range already take advantage of opportunities in 11 or more countries23), convergence of data on a wider range of currencies and payment corridors is needed.

In addition, when managing financial operations across multiple currencies, treasury convergence breaks down these siloes, enabling more e�ective management of foreign exchange exposures, and more e�ective hedging strategies. And with the increased complexities of managing finances across di�erent regulatory requirements, such as Sarbanes-Oxley, treasury convergence significantly aids in achieving regulatory compliance.

As is the case with smart cities, treasury convergence is not just about the generation of data as an end. Treasury managers are increasingly seeing that analysing data in isolation creates financial risks and missed opportunities. With siloes between financial operations and disparate use of data, it proves di�cult to gain visibility of overall positions or to deploy of liquidity where it is needed most.

23 The Future of Payments – A Corporate Treasury Perspective (EuroFinance and SWIFT)

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Section 5: Innovations and solutions empowering treasury convergenceFor treasurers looking to gain control over cash flows, minimise risks and costs, process e�ciency and real-time visibility are pre-requisites. If underlying processes are streamlined, standardised and automated, the data and insights provided to the central treasury will be timely, accurate and actionable. To this end, many treasurers are keen to simplify account structures and refine pooling and concentration capabilities.

Next generation virtual accountsIncreasingly, these operational and liquidity challenges can be overcome via virtual account structures, which allow cash flows to be channelled and grouped for easy identification and optimisation. Further, holding firms can make collections and payments on behalf of subsidiaries, which also helps to improve central control and oversight as well as minimising reconciliation processing errors. When applied across multiple markets, such technology-enabled innovations o�er significant benefits to multinational firms. They provide both through operational savings and additional strategic flexibility, especially if linked to automated investment capabilities. HSBC has recently enhanced its Virtual Accounts proposition with the release of its Next Generation Virtual Accounts (NVGA) solution. NVGA is currently live in the UK with further enhancements in several countries through to 2020.

FX hedging & execution solutionsPayments along extensive supply chains and high volumes of low-value in-country receivables need no longer present multinational firms with a painful cost and convenience dichotomy. Manual conversions are highly labour-intensive at high volumes, while foreign currency pricing or periodic price adjustment in local currency can be inconvenient. But by separating and outsourcing the execution and conversion process from FX exposure management, it is possible to provide flexibility to customers and partners, while also benefiting from process e�ciency, thus supporting auditability and cost certainty. At HSBC, this level of integration between FX and payments capabilities also extends to advice on FX hedging strategies across multiple jurisdictions.

Payment initiativesCritically, e�orts to ease the movement of cash are being supported by initiatives to enhance accompanying data flows, bringing the treasurer insights and analysis needed for accurate decision-making. Industry infrastructure providers, such as SWIFT, continue to launch innovative solutions. SWIFT gpi, for example, leverages the combination of APIs, new open banking legislation and collaboration with global banks such as HSBC, to enable greater speed, flexibility and customisation in the distribution and presentation of cash flow data.

These new innovations result in more advanced ‘payments plumbing’ which is enabling new treasury structures and techniques. The ability to more easily consolidate data across business units and geographies means treasurers can now implement and benefit from notional pooling, shared service

centres, payment and receivables factories, in-house banking structures, and the integration of foreign exchange, payments and hedging across multiple jurisdictions.

Beneficiary self-management Today, there are already a number of scenarios where a business may need to issue a one-o� payment to a beneficiary – whether it is an occasional supplier, as part of marketing initiatives such as incentives or prizes, or commissions and claims. As businesses increasingly engage with gig workers, the number of one-o� payments can also be expected to rise correspondingly. It is thus critical that treasurers address today’s process, which can be onerous and costly for the company initiating the payment, with the need to gather and input static information on each new beneficiary into their ERP systems. This is often even more costly than the actual funds to disburse, and can also result in long waiting times for beneficiaries. To avoid this, companies often resort to using cheques for these one-o� payments: still a relatively expensive process over-all, with the potential for reconciliation issues, and inconvenient for the beneficiary.

HSBC’s beneficiary self-management solution aims to address these issues. Businesses can now provide beneficiaries with self-service tools on HSBCnet, enabling them to register with appropriate country-specific information and payment details. Businesses can then easily initiate payments through flat file with as little information as an email address. Once payments are made, beneficiaries can receive real-time notifications via SMS or email, improving their experience, while also enhancing productivity and reducing operational costs for the initiating party.

HSBC Liquidity Investment Solutions (LIS)Optimising cash balances while retaining access for cash flow purposes is a common challenge for today’s treasurers. Managing large, dispersed cash balances in a period of record-low interest rates, to a reducing range of on balance sheet investment options due to regulation has resulted in treasurers looking for new ways to manage their excess liquidity. It is often a complex, time consuming and manual task.

Providing alternatives to bank deposits, LIS automates the flow of cash within defined parameters, between on- and o�-balance sheet investment solutions. With LIS treasurers can automatically allocate cash balances above an agreed level into a range of o�-balance sheet solutions, being AAA-rated Sterling, US Dollar and Euro Money Market Funds, on a daily, weekly or monthly basis. If cash levels in the single operating account dip below the defined amount, cash balances will be automatically divested to balance the account.

LIS alleviates operational burden, enabling treasury managers to focus on adjusting their investment policies and the more strategic aspects of their roles.

Treasury Convergence Technology-driven business model transformation12

eBay and HSBC’s Liquidity Investment Solution

Situation ® Management of short-term liquidity at eBay was traditionally a very labour-intensive process. ® Cash was swept from multiple accounts into an operational account for payroll and other working capital needs. ® Any excess cash could not be put to work in an e�cient and e�ective way. Rather, it was manually pushed from operating accounts into savings accounts with less-than-favourable yields.

® A solution was needed that would better suit eBay’s cash management and short-term investment requirements.

Solution ® HSBC LIS automates the daily, weekly or monthly allocation and investment of excess cash by automatically investing cash balances above an agreed level from an operational account into a range of o�-balance sheet solutions – AAA-rated Sterling, USD and Euro Money Market Funds.

® HSBC LIS enabled eBay to leverage the pre-existing relationship and SWIFT connectivity on which the solution is built. ® Implementation took just one month, so eBay’s treasury teams were able to quickly use the solution to automate the investment of surplus liquidity.

® HSBC LIS allowed eBay to configure the solution to their specific needs, entering various risk parameters, cash trigger levels, and the selected funds in which surplus liquidity would be invested.

® After an initial period of monitoring cash levels on a consolidated basis via HSBCnet to ensure the configuration was the best fit, eBay was able to take a hands-o� approach, and let LIS e�ectively run in the background, from investment allocation to reporting.

® The results were a significantly reduced volume of manual interventions, reduced e�ort to provide analysis reports for investment policy committees, improved yields from more favourable returns from Money Market Funds, and a rationalisation of complex account structures into a single operational account.

® In addition, these generated time savings within the treasury team to enable a greater focus on value-add strategic treasury issues and opportunities.

OceanaGold: Future proofing growth

Situation ® OceanaGold, a multinational gold producer headquartered in Melbourne, Australia, was looking to grow their business internationally, expanding their existing mining operations in New Zealand, the USA and the Philippines.

® Given the scale of their international operations, and with future expansion planned, OceanaGold needed a single global cash management partner that could o�er them a single, consistent banking platform, and help them streamline day to day treasury operations. They also wanted to gain e�ciencies and cost savings, by avoiding the need to establish additional banking relationships to support international acquisitions in the future.

® To support this expansion, the firm initiated a review of their existing cash management banking relationships, seeking a partner that could o�er them the consistency, scale and yield they needed to support their growth ambitions.

® Their incumbent cash management provider at that time required them to use two di�erent cash management platforms, which while from the same provider, were not compatible, requiring separate logins.

® OceanaGold also maintained cash balances across their business in di�erent currencies. A part of their selection criteria was, therefore, a partner that could o�er interest compensation reflecting the level of all balances globally, regardless of currency.

® In addition, the firm wanted to head o� the potential implementation challenges that usually come with global projects in globally-dispersed firms in the natural resources and utilities sector, looking for a partner that could seamlessly implement a multi-geography programme.

Solution ® For e�cient implementation, HSBC leveraged their on-the-ground presence, appointing a single point of contact global implementation manager in Melbourne, who coordinated with colleagues in HSBC o�ces in New Zealand, Canada and the Philippines. This avoided OceanaGold needing to coordinate with multiple HSBC contacts.

® HSBCnet o�ered OceanaGold visibility and transaction capabilities across their international bank accounts and currency balances, without the need to use multiple platforms.

® HSBC’s Interest Enhancement Facility (IEF) provided OceanaGold with preferential credit interest rate terms based on global balances, across USD, NZD, AUD, PHP and CAD currencies. IEF requires less physical movement of cash, allowing OceanaGold to maintain local currency balances in all countries to meet operational expenses, while still being able to maximise yields on global balances.

® HSBC also provided OceanaGold with travel and expenses cards, enabling control, flexibility and convenience in the day-to-day payables made by their teams in various countries.

® In evolving the ongoing relationship with HSBC, OceanaGold also elected to transfer its banking to HSBC to further leverage the benefits of IEF and a single HSBCnet login following their acquisition of the Waihi Gold Mine in New Zealand, and the Haile gold mine in the US. As production increased from these acquisitions and credit balances grew, HSBC reviewed interest rate tiers for OceanaGold, providing further benefit from IEF’s approach to providing interest on global balances.

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The increasing importance of cybersecurityIn many ways, technology is both the driver and enabler of treasury convergence. However, the increased dependency on technology solutions also brings with it the increased risk of cyber-attacks.

In a recent risk survey conducted by the Association of Finance Professionals (AFP), 75% of corporate practitioners reported that cybersecurity risks have emerged in their businesses as a result of the increased use of technology24.

New or increased risks being managed as a result of increased use of technology (Percent of organisations)

Cyber-attacks are no longer just focused on diverting funds; rather, sophisticated cyber criminals are targeting the entire payments life cycle. In many cases, they are now also targeting something of potentially greater value than the funds themselves – data. And with a significant amount of financial data being shared between business units and external counterparties, the value of data, and ensuring appropriate controls are in place, must be top of mind for today’s treasurer.

The more parties involved in a transaction, whether internal or external to a firm, the greater the potential of operational silos creating points of vulnerability. Convergence of business lines, operations and security teams across geographic borders will enable a more coordinated means of preventing, detecting and responding to attacks25.

Section 6: ConclusionFour-fifths of treasurers believe they have a mandate to serve as a strategic partner to the business26, while 71% are charged with creating a scalable treasury organisation to support company growth. In this context, the treasury must not only be operationally robust and e�cient, but it must also have the insights and resources to support business flexibility and market access, even strategic transformation.

To deliver on their mandate, the greater convergence of treasury enabled by new technology and techniques is both a pre-requisite and a launch pad for growth. Banking partners are enabling treasurers to utilise technology and portals, such as HSBCnet, to provide a more comprehensive real-time view of liquidity, regardless of the geographic spread or complexity of a company’s underlying operations.

For treasury convergence to be successful, treasury needs to work with banking partners with a combination of a depth of experience across sectors, and presence in a wide range of markets, as well as a focus on digitalisation and innovation. HSBC o�ers this powerful amalgamation of a sector-led approach, emerging and developed market expertise, and a commitment to developing holistic digital solutions that will support treasuries in a converging world.

Cybersecurity is the greatest new or increased risk to be managed by finance professionals as a result of increased use of technology

Source: Association for Finance Professionals (AFP), Risk Survey Report, 2018

24 Association of Finance Professionals 2018 Risk Survey Report 25 “The heightened threat of cyber-attacks is fuelling payment losses — how should your business respond?” – EY.com, April 2018 26 2017 Global Corporate Treasury Survey - Deloitte

75%

47%

41%

36%

35%

32%

29%

28%

Treasury Convergence Technology-driven business model transformation14

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Published: August 2018

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All information is subject to local regulations.

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