What Impact will Exponential Technology have on

Corporate Treasury? October, 2017

In collaboration with the AFP, Zanders has written this white paper on how treasury is fast becoming the digital command center of the organization.

1

CONTENTS

1 Executive Summary 2

2 Exponential Technology 3

2.1 Definitions 3

2.2 The Wider Impact on Multinational Corporates 4

3 How will Corporate Treasury be Impacted? 6

3.1 Robotic Process Automation – Replacing Manual Efforts 7

3.2 Machine Learning – Self-Improving Processes 7

3.3 Big Data & Analytics – A Treasurers Toolkit 8

3.4 Distributed Ledger Technology – The Internet of Value 8

3.5 APIs & FinTech – The New World of ‘Open Banking & Systems’ 11

4 Conclusions – The Corporate Impact Tree 12

4.1 Potential Internal & External Impact 12

4.2 Final Remarks & Conclusions 13

5 Acknowledgements 14

6 About the Authors 14

7 Bibliography 15

2

1 Executive Summary

Continuing the annual series of white papers that the AFP and Zanders have published together over the past several years, we have collaborated this year on the topic of ‘Exponential Technology’. We wanted to capture the thoughts and opinions of Corporate Treasurers around the world and to understand what will be the impact of advances in technology. Exponential technology such as Artificial Intelligence, Data Analytics, Distributed Ledger Technology and APIs are impacting corporate treasury from both internal and external angles. As

evidenced by our conversations with Corporate Treasurers the once termed ‘ivory tower’ is fast becoming a ‘digital command center’ full of data analytics, algorithms and self-improving processes.

Figure 1. Key messages

Speed The world around us is changing in every possible way. Nowadays the concept of a robot supporting your

everyday life is not so far-fetched. We have robots cutting our grass, hoovering our dining rooms and driving our cars so why not have a robot to manage our treasuries! Over the last two decades, we have witnessed gradual changes in the treasury technology landscape. However all this evolution will become a whole lot faster. The new wave of technology is moving exponentially and will change the face of corporate treasury.

Driver There have always been new treasury system functionalities and this is continuing in today’s environment as

we have the treasury technology vendors developing real-time information, data analytics and integrated solutions to support the entire financial supply chain. However contrary to earlier days where business requirements were driving vendors to create new functionality, now exponential technology is predominantly driving the functionality agenda.

Response Corporate treasury lends itself to exponential technology. The treasury function and processes will be improved, redesigned or replaced. So taking advantages of these new technologies is a key requirement of management.

Change in general can be difficult to cope with; corporate change is even harder to manage. Some will delay and be left behind whereas others will embrace the tidal change and excel with vision.

Priority There are many ideas, thoughts and blueprints of how new technology can improve corporate treasury

activities. In the recent past, these have been converted into actual use cases adding value by improving, redesigning or replacing some activities of a corporate treasury. The situation is however that every corporate needs to ‘jump on the band-wagon’ before it is too late and they truly are left behind.

Cost Over the past decade, the cost and delivery structure of treasury technology has changed. The high priced on premise models are being replaced with cloud or Software-as-a-Service (SaaS) solutions where pricing models are shifting towards subscription. All of this spreads the investment and offers more affordable Total Cost of Ownership (TCO) to corporates.

The treasury ecosystem is experiencing significant change brought about by fast moving technological developments. Each of these changes on its own would significantly impact treasury, however as they are all happening together, the impact is more momentous. With this in mind, Zanders is pleased to partner with the

AFP to produce this white paper. We hope you will find this white paper informative and useful.

Laurens J.A. Tijdhof Thomas Hunt

Partner Director Corporate Treasury Practice, Zanders Treasury Services, AFP

3

2 Exponential Technology

2.1 Definitions

Exponential technology is an area which can cover a vast array of topics and for this white paper we have classified Artificial Intelligence, Big Data & Analytics, Distributed Ledger Technology and APIs to be included as our scope for exponential technology.

Artificial Intelligence (AI)

In a very broad sense, Artificial Intelligence (AI) is the ability of computers to behave like human beings by performing all cognitive tasks associated with them. The term is associated with the latest advancements and innovations in computer science and encompasses such fields as Machine Learning (ML) and Robotic Process Automation (RPA). Advancements in technology resulted in computing power and processing speeds beyond human capabilities. Computers can take over complex tasks and do them quicker, cheaper and with fewer errors.

Figure 2. Exponential Technology

Robotic Process Automation (RPA)

In simple terms, RPA is a software that mimics worker’s actions while performing routine tasks. Therefore, RPA on its own does not introduce any new functionality to the existing processes. Instead, its primary goals are to automate and speed up manual routine processes. Software can do repetitive operations more rapidly, precisely and untiringly. Often these are boring, uninteresting, or even annoying processes. Freeing humans from these tasks gives them more time to focus on ‘intelligent’ or ‘value-added’ work.

RPA proponents saw through this problem and found a niche for a robot – a ‘lightweight’ robot who can copy every single step in the process and can conduct them in the same way repeatedly. RPA software does not require interfacing with other systems. Effectively, other systems will not even understand that a robot is

behind the actions (with the exception that actions are much faster). No programming skills are needed as

robots are configured by recording steps. RPA can work with multiple systems - just as a human worker does. Consequently, there is little risk to disrupt the regular course of business. Users can build processes and workflows for their own tasks without prior programming experience. Therefore, lower implementation costs are justified. RPA software works well with repetitive rule-based processes. All these features make RPA software attractive to departments dealing with routine daily tasks, regardless of number of systems in use.

Machine Learning (ML)

Machine Learning is another branch of computer science related to AI. ML gained a new momentum due to advancements in technology: powerful computing capabilities, inexpensive data storage and abundance of data of all sorts. The iterative nature is the key feature of ML algorithms. They are built in such a way that the outcome of data analysis is recorded and then taken into account in the future. With time machines accumulate “knowledge” from previous computations, they adapt their analysis model independently and provide results

that are more accurate and reliable. By now, numerous ML algorithms have been developed. Although different,

most of them rely heavily on statistics. They ‘digest’ large amounts of data to identify patterns and similarities. Then new data is scored to make predictions. Apple, Google, Amazon and Facebook are examples in the consumer space where big data analytics is resulting in these companies being able to predict our behavior.

4

During supervised learning a computer receives inputs as well as outputs and tries to figure out the general pattern. Unsupervised unlearning is used to discover patterns and similarities in unstructured data. Often these

inferred patterns are not known in advance; therefore, the results are re-used for further classification and categorization. Reinforcement learning algorithms develop themselves by performing a particular task and receiving feedback. ML enables building models that can learn independently and quickly. By leveraging such models in business, companies have better means to exploit profitable opportunities or avoid unnecessary

risks.

Big Data & Analytics

Today new data is produced and stored faster than ever before and we live in a world of real-time connectivity. Data exists in many different forms and the volume of available data is growing rapidly. Analyzing data is not

a new phenomenon; corporates have for decades invested in business intelligence and financial planning tools to optimize their analyses. However, ‘business warehousing’ still remains a challenge. These tools often rely on old technologies that pre-determine the dimensions of data discovery. Big Data analytics are used both for forecasting purposes and to predict unexpected events through real-time analysis. This can be done through algorithmic forecasting, where machine learning and artificial intelligence are applied to Big Data collections.

The data which flows through the largest corporate treasury is considered large amounts of small data rather than Big Data, per se. Nevertheless, treasury can apply similar Big Data principles by employing data analytics

and predictive data analytics to leverage the vast amount of information in data form which passes through their ‘digital command center’.

Distributed Ledger Technology (DLT)

A Distributed Ledger Technology emerged in 2008 with the creation of Bitcoin, which was enabled by a

blockchain infrastructure. DLT confronted the systems that prevailed for centuries by offering an entirely new approach to record keeping. Instead of being supervised by one body, DLT is a decentralized ‘crypto-ledger’ that is accessed and shared across a network by many parties. DLT is represented by consensus opinion of a group of peers who own the responsibility for preserving the ledger. Identity and integrity of the ledger is ensured via joint decisions. Access to a DLT, depending on a purpose, can be restricted to certain users or remain open to everyone. Limiting update rights to authorized entities promotes protection from malicious users. It is important to note that there is no single authoritative copy of a distributed ledger. All new records

are submitted to all peers of a group and in a similar fashion, every reading from the ledger is represented by the consensus of a group.

Application Program Interface (API) & FinTech

Due to the recent developments around PSD2 and open banking, APIs have become very topical to the

corporate treasurer; however they have been around for years. APIs address common technology difficulties in the corporate treasury world such as long software implementation timelines and complicated integrations by being a connection which can link together applications (ERPs, TMS, bank applications) more easily than ever before. APIs deliver an easy, self-service means to essentially let software applications communicate with each other. The urgency of the PSD2 initiative has spring-boarded APIs into the corporate treasurer’s lexicon and should enable a more speedier execution of areas such as payments and account management even more so when banks have APIs between each other not just between their own clients. A common example of API

usage is that of Uber and how they used APIs to grow as fast as they did. Uber employs several Google APIs,

one of which is the Google Maps API to find customers and inform drivers. Uber also has created its own API and offered this externally to leverage its own services to others.

2.2 The Wider Impact on Multinational Corporates

In 2015, less than 5% of the Fortune 500 companies had an official role for the Chief Digital Officer (CDO). Now around 20% of these same global companies have a designated CDO role. Even industrial giants such as GE, ABB and Bombardier have all created a CDO position in the last two years. Jeff Immelt, Chairman and CEO

of GE, in a recent interview, claimed that it will transform itself into one of the top 10 ‘software’ companies by 2020 and believes that GE’s future viability depends on the digital transformation it is currently undergoing. This is reflected across the entire corporate spectrum.

5

David Felton, VP & Treasurer, Discovery Networks International, says “as Discovery is expanding digital, it means we are receiving payments by digital on-line customers to subscribe for particular services either as apps or on-line. That’s a big change for Discovery and one which is expanding significantly”.

Banks too have realized they need to have a ‘digital’ strategy, with the emergence of so-called digital banks in the consumer sector. As society turns more ‘on-line’ the idea of visiting a bank branch is fading. These new challenger banks are providing consumers with a full digital solution in retail banking and gradually encroaching into the wholesale space. Other companies such as M-Pesa in Kenya run by Vodafone’s subsidiary Safaricom offer financial services (once the exclusive domain of the traditional banks) to local businesses and consumers.

Additionally the ‘open banking’ concept is developing rapidly enabled by the use of application programming interfaces (APIs) and this becomes more and more common not just among the tech community but among the banking, financial and corporate treasury communities.

According to IBM’s CEO, Ginni Rometty, “cyber-crime is the greatest threat to every company in the world” making it the biggest area of concern as with the advance of technology is the parallel advance of digital fraud and deceit. Consequently, there have been many high profile events recently such as the SWIFT Bangladesh

breach, the WannaCry ransomware cyber-attack, the Big 4 Accounting data security breach and more recently the Equifax breach. According to Jean Furter, VP & Treasurer of Brocade Corporation, a global leader in network storage, “the thing that concerns me the most is not FX & Interest rate volatility it’s actually that I come to the office and suddenly somebody has swept all my cash overnight, so cyber-security is a big issue for the treasury of today”.

As a business one of the key things Discovery is concerned with is also cyber-crime especially as they have the European television rights for the next 10 years of Olympics with the first being the Winter Olympics in South Korea. David Felton wonders if similar businesses have looked into the potential of blockchain to enable a more secure platform to protect against signal disruption by rogue nations and hackers.

Although the ‘cypher-punks’ of the late 80s first developed cryptography to bring sophisticated security and anonymity to the process of sharing data, there is a renewed focus on the capabilities of cryptography and what it can do for financial transactions. A primary component of blockchain and DLT is indeed cryptographics. Biometrics also add an additional layer of security for treasury processes as far as payment approvals can be made more secure. Digital identities using passports, social security numbers and birth certificates can all be safely used in newly designed processes involving blockchain in treasury.

Since the last decade FX dealing platforms are standard applications in most corporate treasuries’ technology

landscape. These platforms delivered real-time competitive pricing, improved control and a higher degree of

STP. The viability and degree of acceptance of these platforms once questioned is now widespread. The asset-class offering has broadened to include money market and interest rate instruments and the product has developed to include confirmation, matching and settlement capabilities.

Acceptance of new technologies becomes faster and with the drive by vendors to offer more and more functionality this trend will continue for corporate treasuries. SAP for instance has invested billions into their SAP S/4HANA offering and more recently, launched SAP Leonardo which brings together AI, ML, blockchain, analytics and the Internet of Things (IoT) all onto one platform. SAP’s co-founder Dr Hasso Plattner, calls it ‘a set of tools to build a system with machine learning algorithms to find insights’ - also termed ‘platform-as-a-service’.

Algorithms enabled the emergence of high-speed trading in financial markets over the last decades, where we have seen traditional bourses and pits fade away into redundancy. Now, written in code by self-educated programmers and smart university students, algorithms can do almost any calculation required. This is enabled

by more advanced computing capacity, newer technologies and an appetite from these same university students to code. The algorithms are further enhanced today with machine learning capability where the algorithm learns from its own output and improves on this for the next cycle. Speaking to Julia Kirby of Harvard

6

University Press about her own research, she says, “It is where even the process of how the task needs to get done continues to evolve and the machine’s ability to bring in feedback information and then tweak its own

performance is superior to what the human mind can do.”

3 How will Corporate Treasury be Impacted?

Considering the wide breadth of treasury activities and tasks, the multiple parties involved (internal and external), the extensive volume of data and number crunching (daily, weekly, monthly), the multiple sources from where information is to be collected and the sensitive and confidential nature of the underlying operations, it’s an understatement to say corporate treasury will be impacted. Jean Furter maintains that “there are many

functions and treasury processes we are doing today in a corporate treasury department that I can easily visualize as being taken over by technology, there is absolutely no question in my mind about this. This can take 2-4 years but it will happen. Much of the operational work we do today is going to disappear.”

Figure 3. Treasury Impact Matrix (example)

Zanders believes that this new wave of exponential technology will impact corporate treasury in one of three ways. A corporate treasury function or process will either be improved, redesigned or replaced. A non-

exhaustive selection of treasury activities and processes have been identified and the subsequent impact scale on them highlighted in Figure 3. above and elaborated upon in the subsequent sections. Where the impact we

feel will be low and the process will improve to some degree we have allocated a green traffic light. Where we deem the impact slightly higher, moderate and a change in design of the process will develop, we have allocated an orange traffic light. For the processes where we envisage a total replacement or redundancy, we have allocated a red traffic light. This exercise is somewhat arbitrary and the results of which will vary from company to company, however corporate treasuries would do well to undertake such a treasury impact assessment.

7

3.1 Robotic Process Automation – Replacing Manual Efforts

Replacement of routine processes

Some highly routine processes can be improved or completely replaced by RPA whereas other more strategic management, input decision making type of processes benefit more from smart machinery or ML. Robotic process automation (RPA) is enabling companies to do more with less. Processes that are considered standard operating procedures which are complex and repetitive are candidates for RPA. These include activities such as risk exposure identification, cash flow forecasting, static data management, general ledger posting and balance reporting. RPA is enabling rules based processing that crosses multiple systems to be automated 24/7.

Benefits are being realized through head count elimination or head count avoidance through attrition. Shared service organizations, where the execution occurs, are areas where these benefits are becoming visible.

Treasury Analytics

The corporate treasury of HP Inc. also makes use of robots for the generation of treasury analysis on KPIs and reporting. Zac Nesper, Vice President & Assistant Treasurer, mentioned in recent discussions that ‘they have a robot working at Treasury for simple, routine tasks such as the generation of their daily cash visibility report,

counterparty exposure reporting and compilation of Dodd-Frank-EMIR data. Data needs to be pulled from various systems, this is then compiled into the report and basic analytics are conducted on it. He expands further saying “it saves 520 hours of the team’s time annually as well as allowing more frequent reporting including the ability to run certain reports multiple times per day instead of once a day”.

In a conversation with a group treasurer of a global industrial company, he says, “Robotics becomes an enabler. It allows us to think about our business differently. We’re looking at anything that is a run process as a candidate for RPA”. Proof of concepts are being seen within Balance Reporting. RPA is enabling directories to

be scanned for the presence of files, identification of missing files or accounts, verification of postings and if errors exist. The same process is being extended to eliminate the manual pulldown of files within online portals.

Intelligent RPA

In the area of payments, RPA already exists when looking at determining the least cost method of payment. Mark O’Toole, Vice President, Openlink believes “it’s a combination of both robotic process automation and

elements of AI, since it’s not doing the exact same thing every time, which is the flavor of AI and then combines the automatic process for payment.” He goes on to explain that it is only a flavor because classic AI deals with

taking unstructured data and learning from the patterns found within the data.

3.2 Machine Learning – Self-Improving Processes

Machine Learning is a subset of AI and ML methods are often used in AI solutions. The main difference between

RPA and ML is that RPA requires rules and structured information to be input whereas true ML allows machines to learn from structured and unstructured data to resolve answers. Until ML has been fully integrated into the financial applications, corporate treasuries will need to rely on humans with the mindset for data analytics and financial analysis. The impact of ML on the corporate treasury world will be more to improve processes rather than a wholesale disruption and replacement. ML can help to enhance a treasury operative process by self-improvement as the process goes through cycle after cycle.

Cash Flow Forecasting

Cash flow forecasting is the foundation of many elements of corporate treasury, leading to cash positioning, liquidity actions and risk management decisions. In addition, to be completely confident in all components of the forecast is an optimal position for any corporate. ML will enable a treasurer to reach this optimal state. The cycle of learning inherent in ML allows for self-improving forecast so much, so that not only will ML impact the capturing and analyzing of subsidiary forecasts but also it will facilitate predictive and even prescriptive models for analysis.

Risk Management

Spotify was EuroFinance’s 2016 winner of the ‘Award for Treasury Excellence’ and won this award for being innovative in how they operate. In an initiative with one of its treasury banks, Spotify built a cloud-based FX solution using an algorithm to power hedging decisions on specific FX transactions without any manual intervention. They also created a totally new hedging program which utilizes advanced data insights to

accurately forecast financial exposures.

8

3.3 Big Data & Analytics – A Treasurers Toolkit

There are many tasks completed by treasury today, such as consolidating information or developing some basic financial models, which are purely logical. However when it comes to input for decision-making there is a situational assessment which also requires a lot of time-consuming work e.g. financial planning, long and short-term forecasts which involves people sourcing vast amounts of information and modelling this information. In the future, this is going to be done much better and more comprehensively with systems because all this information can be found in ERPs, TMSs and consolidation systems. Intelligent software will be able to collect this information in a much better way and provide statistical analysis quicker and more

accurately.

In corporate finance and treasury departments the use of ‘data analytical’ solutions has great potential in areas such as working capital management, financial risk management, credit exposure analysis and cash management. Being at the forefront of applying data analytics treasury departments will (i) optimize the

current data heavy or data sensitive operations by streamlining the analytical process and (ii) add to the strategic position of treasury within the organization as the treasurer quickly can respond to any data request

from the business. Conducting analytics on business related data combined with external market data analytics will give treasurers a unique strategic insight into the relationship between the two.

Liquidity Planning

For Zalando, the German e-commerce merchant company, Big Data offers important advantages for liquidity planning. They have established a well-integrated platform that consolidates data from different in-house

teams. The platform is continually learning and updating itself. In addition to internal data, the firm also integrates external data to boost the learning process, such as the impact of weather on sales.

Treasury Analytics

When systems will replace people, people will have to step up and understand how the systems work, how

they coordinate with the other systems and what sort of assumptions are being taken. As a result, there will be a lot of data analytical intelligence required. The topic of managing systems and understanding better the algorithms and the rationale around statistical modelling is still an area for which the human brain can be

responsible.

With the influence of Big Data on all areas of business the extension into data analytics and treasury data

analytics is also experiencing rapid evolution. So much so that according to Julia Kirby “things are going way beyond analytics now as this new layer of smart machines are able to take that kind of data and act and decide on the basis of it with new levels of autonomy.”

KYC & Compliance

As every treasurer knows only too well, there is a lot of documentation involved when it comes to bank account opening and ‘Know Your Customer’ (KYC) from a bank’s perspective. This area similar to the ecosystem of trade finance (i.e. it has multiple counterparties and the huge amount of documentation involved) lends itself to blockchain as well as Big Data. Additionally there is duplication of documentation with different banks.

3.4 Distributed Ledger Technology – The Internet of Value

DLT is a major new technology to emerge and it’s potential across all industries and in all areas of business is being investigated with vigor.

Trade Finance

Given its increasing global nature, multi-layered participant involvement and the overall complexity in the age-old processes it comprises, international trade finance seems a perfect candidate for DLT. Bringing the parties

(exporters & importers, banks, insurers, logistic companies) of the wider ecosystem all together on a global platform, technically built on DLT, would enable significant inefficiencies to be eliminated. It would increase the level of trust across the spectrum, reduce the time it takes for end-to-end processing and possibly eliminate (or digitize) the traditional paper aspect of the operations and potentially reduce the number of parties required in the chain.

9

Ornua, formerly the Irish Dairy Board company, undertook what many consider the world’s first global blockchain trade finance transaction when they teamed up with Barclays and Israeli start-up company Wave.

The Barclays Accelerator program supports Wave and they have developed a platform based on connecting all members of the supply chain to a decentralized network and allowing them a direct exchange of documents. The Wave platform facilitates the transfer of ownership of title documents on the blockchain, which eliminates disputes, fraud and unnecessary risks.

According to David O’Rourke, Group Trade Finance Manager of Ornua, the key benefits are the time reduction, fraud risk reduction, getting documents to the customer in time and eliminating potential demurrage fees for late presentation of documents due to discrepancies. “With Wave’s platform it’s possible to electronically take out your document and have it amended and then give it back in [to the platform] so everything is very

transparent and that is key. And you don’t get that with the entire myriad of processes in trying to push through paper documents”. He further points out that when documentation is delivered into the banks’ back offices they can turn them around much faster through the Wave platform. Under UCP rules for documentary credits, banks have a maximum of five banking days to determine if a presentation is complying. As all the individual steps are conducted on the WAVE platform, security and encryption are key to facilitating this. Additionally, he

feels it’s “purely where we see the efficiencies that it brings. The changes are transformational.”

Microsoft treasury department, in partnership with Bank of America Merrill Lynch, began to analyze their own trade finance processes and found that the number of steps that parties needed to conduct a Letter of Credit issuance was high at 15. These steps ranged from handwritten notes to phone calls and faxes (i.e. 15 steps conducted by 4 counterparties, including a customer, a beneficiary and each of the counterparty banks). From beginning to end, the application process took about five business days, with an error rate as high as a 50%

due to factors such as poor data entry and illegible handwriting and this all resulted in a cost per Letter of Credit of between $2,500 and $15,000 depending on the number of errors. A DLT prototype, built on Microsoft’s own Azure technology, simplifies the standby L/C process from 15 to four steps. With a 0% error rate, it cuts the time down from 5 days to between 5 and 10 minutes.

Trading & Settlements

Another area to benefit from DLT will be trading and settlement. CLS is the largest multi-currency cash

settlement system, known for reducing settlement risk for over half of the worlds FX payment instructions. Four of the world’s biggest banks have teamed up to develop a new form of digital cash that they believe will become an industry standard to clear and settle financial trades using DLT. Settlement risk is the danger that a bank could lose the principal amount it pays out in a derivative transaction. Utility Settlement Coin (USC) aims to let financial institutions pay for securities and derivatives, without waiting for traditional money

transfers to be completed. Instead they would use digital coins that are directly convertible into cash at central banks, cutting the time and cost of post-trade settlement and clearing. A form of digital cash is needed on a distributed ledger in order to get maximum benefit. This allows elimination of the time post-trade settlement processes take, such as waiting for payments to arrive, which frees up capital trapped during the process. Similar to CLS, large corporates could potentially join this system as well as benefiting from the opportunity to store excess cash directly at the central bank (i.e. USC digital wallet).

Cross-Border Payments

Cross-border payments are currently slow, expensive and opaque. Ripple (a DLT FinTech) offers sub second

efficiently priced payments using a DLT variant (Inter-Ledger Protocol or ILP). In response, SWIFT has launched GPI (Global Payment Initiative) which improves cross-border payments by increasing the speed, transparency and end-to-end tracking of cross-border payments. Cross-border payments go through the correspondent

banking system (constrained by KYC and AML regulation), facilitated by SWIFT messages (e.g. MT101 and ISO20022 pain). This payment process requires the connection of six players – payer, payer’s bank, payer’s bank’s correspondent, beneficiary bank’s correspondent, beneficiary bank and beneficiary. Since messages (generally) flow sequentially, and not all banks provide STP (Straight Through Processing), this can take a while and additionally banks have the habit of sitting on money (float). The banks along the chain also charge arbitrary and often material deductions (lifting fees). Ripple payments are nearly instant: their model removes credit and liquidity risk from the process, thus lowering bank costs considerably.

Speaking to Julian Cafolla, Treasurer at Copenhagen based UNOPS; he says that they are piloting a cross-border payment program using Ripple. Essentially they will use their existing banks and infrastructure however RippleNet will be the platform on which UNOPS’ banks will transfer between each other speeding up the

payment transaction significantly from several days to instantaneously.

10

Crypto-Currencies & ICOs1

Currency management is a primary task of most corporate treasuries in the world and as such, crypto-

currencies and their potential impact cannot be ignored. The landscape of crypto currencies is evolving fast and we see the foundation and development of four different approaches; i) anonymously issued ii) issued by central banks iii) issued by incumbent banks and iv) issued by corporates.

Bitcoin, ether and other crypto-currencies are examples of the first approach, where the digital currency can

be used as a payment means worldwide both on- and off-line through independent channels such as mobile payment apps.

A number of central banks2 have expressed interest in developing their own centrally controlled digital currency. The Bank of England (BoE) has worked together with University College London to develop their version of a digital currency: RSCoin. In a working paper from July 2016, the BoE defines digital currencies

issued by central banks as: “By CBDC3, we refer to a central bank granting universal, electronic, 24x7, national-

currency-denominated and interest-bearing access to its balance sheet.” In short, the Bank of England would use DLT not only to transfer RSCoin efficiently around the world, but also to control the blockchain, meaning that unlike Bitcoin, supply of RSCoin is managed by and centralized in the Bank of England.

UBS together with Deutsche Bank, Santander and BNY Mellon have made developments in the third approach, by launching ‘Utility Settlement Coin’, with the aim of introducing this digital currency as a tool to enable faster

transfer and settlement. Described as the “Digital cash equivalent of each of the major currencies”, each USC equivalent of the major currencies is convertible at parity with a bank deposit, meaning the dollar version of USC would be fully backed by dollars held in a central bank.

As some corporate treasurers, especially in B2C environment, could confirm that the request from customers and the demand from suppliers to pay in crypto-currency is beginning to emerge, there is a growing awareness and appreciation for crypto-currencies among corporate treasurers. Today there are hundreds of crypto-currencies trading on on-line exchanges. The total ‘market value’ of these currencies is $160bn of which Bitcoin

holds around $70bn. Bitcoin’s attractiveness is it’s trustworthiness and if one considers the lack of trust some residents have in their own national currency then one can see the disenfranchised resident looking to a Bitcoin as an alternative to the hyper-inflationary domestic currency. However before a corporate treasurer begins hedging crypto-currencies there are still many hurdles to overcome.

Recently Chinese regulators have decided on a comprehensive ban on platforms that allow people to buy or sell crypto-currency in China also in light of the emergence of the ICO trend. They also plan to shut down the

exchanges on which these currencies trade. JP Morgan’s CEO Jamie Dimon made public comments against Bitcoin recently referring to the unregulated nature of the currency and comparing it to the Tulip craze that swept Holland in the 17th century. The volatility of these crypto-currencies also leads people to be skeptical about their long-term viability. However, the SEC published a report in August that gave a balanced tone of acceptance and caution. This optimistic signal by such a governmental agency as the SEC is welcome news to the crypto-currency community and an encouraging sign. In addition, as China decides against, their Japanese neighbors are cementing their place as a driving force for Bitcoin with the recent announcement of the Japanese

financial authorities supporting 11 Bitcoin trading houses.

In a conversation with Gabriel van de Luitgaarden, Royal Philips’ Deputy Treasurer, he expects that within 2-3 years’ time an internal crypto-currency could be introduced at this global HealthTech company. Interestingly in the early 2000’s Philips was one of the first companies globally to set-up an In-House Bank and Payment

Factory and they might now be again one of the first companies to leverage new concepts and technologies to replace their IHB/PF concept. Philips has many intercompany flows due to their business model that create many intercompany cash flows in many different currencies. One of their ideas is to introduce an internal

crypto-currency based on blockchain technology to reduce this transactional foreign exchange rate risk. Treasury would still control and set the boundaries, but the execution would effectively be ‘peer-to-peer’ and so the IHB may not be needed anymore.

Debt & Capital Markets Finance

Daimler, the German auto manufacturer completed an external financing round and used DLT for a €100m portion of this. In collaboration with LLBW, a German Landesbanken, the company has developed a platform

using blockchain technology. All parties, the borrower, the bank and the investors receive access to a decentralized customer portal. On the portal smart contracts (a computer protocol intended to facilitate the

1 Initial Coin Offering 2 Bank of England, Peoples Bank of China, Dutch Central Bank, Reserve Bank of Australia 3 Central-Bank-Issued Digital Currencies

11

negotiation of a contract) automate the management of the order book. A digital token is generated on the blockchain once the loan contract is signed. The smart contract then allocates a number of tokens to investors

and the entire process is conducted with the highest levels of encryption and much more efficiently than traditional methods.

3.5 APIs & FinTech – The New World of ‘Open Banking & Systems’

The FinTech phenomenon knows no bounds and especially in the payments domain there has been significant continued growth of payment related start-ups. This is strongly enabled by new regulations such as PSD2.

PSD2

PSD2 is a new European regulation (as of January 2018) that states that banks have to allow a secure way for customers to authorize third-party aggregators direct access to their accounts and transactional data; as well as allowing them to make and authorize payments on their behalf.

This new regulation enables bank customers, both consumers and businesses, to manage their finances through third-party aggregators. These cloud-based aggregators will receive access to banks’ customers’ account information. Access is granted after authorization by the account holder, through open APIs (Application Program Interfaces). This will become obligatory according to the new regulation, which will enable these parties to build financial dashboards and services on top of the banks’ data and infrastructure.

Ed Adshead-Grant, General Manager for Payments & Cash Management at Bottomline Technologies shares this view. Ed opines, “The classic multi problems start to disappear. By that I mean multi-protocols, multi-currency

and multi-banks all that complexity that can build up in a corporate treasury department start to be consolidated, improvised by a smart presentation layer.”

Open Banking, FinTech & RegTech

Open banking lowers the barrier for new entrants and should enhance the level of competition in the payments landscape. The goals of the directive are to improve innovation, reinforce consumer protection and improve the security of internet payments and account access within the EU and the EEA.

Essentially, APIs will be the driving force behind the implementation of PSD2. An API can be defined as a

standardized set of requirements that governs how one piece of software can talk to another. However, in combination with PSD2, an API from a third party provider can make a request with standardized input towards another application and get that second application to perform an operation and deliver a standardized output back to the first application. There will be many benefits from this combination namely the approved initiation of payment transfers directly, increased access to data and analytics around working capital, also analysis and benchmarking of bank fees and easier management and overview of cross-border accounts.

12

4 Conclusions – The Corporate Impact Tree

Exponential technologies are impacting corporate treasury from both internal and external angles. As evidenced by our conversations with corporate treasurers the once termed ‘ivory tower’ is fast becoming a ‘digital command center’ full of data analytics, algorithms and self-improving processes.

Figure 4. The Corporate Impact Tree

4.1 Potential Internal & External Impact

The potential impact to corporate treasuries are both challenging and opportunistic. Challenging internally and opportunistic externally. Now with the advancement of technology corporate treasurers will need to look at both in order to navigate going forward.

According to Julia Kirby, Harvard University Press, “the practice of management itself is also going to be hugely disrupted. Management is now going to be defined by the constant need to re-examine the mix of work between

humans and machines and always be directing that freed up human capacity into areas of even higher value. Management is going to have to make this huge paradigm shift to thinking much more about ‘exploration’ than

‘exploitation’ of opportunities and imagining the possibilities for how to innovate in the best way.”

The human impact is becoming more apparent. Skills once a necessity for treasury are being replaced with RPA. New skills are being required causing internal challenges for organizations in ‘up-skilling’ while creating opportunities.

Julia Kirby maintains the threat [to jobs] is real. However in her research (in cooperation with Tom Davenport)

they do not see huge job losses, but they see people adjusting to these encroachments by changing their job content in a variety of ways. She goes on to say that “If you are going to invest in these tools, the most important consideration is how your people are going to be leveraged by those tools and how your people are going to be, more than ever, the source of your advantage.”

Zac Nesper, Vice President & Assistant Treasurer HP Inc., believes that technology will enable increased productivity, advanced analytics, and new insights that will profoundly change the nature of treasury. By reducing the amount of time the team spends compiling data and creating reports, he maintains “there is a lot

of value that can be created by better leveraging technology to unleash the skills of our treasury team on

analyzing the results and taking action”. This is reflective of many other large corporate treasuries and the potential for process improvements, redesigns or replacements is significant.

13

Externally, the slow to change financial service organizations are being challenged by regulators, RegTech and FinTech companies. Regulators, although geographically different are all striving for the same end result,

greater transparency in order to protect stakeholders such as clients or investors. As a result, new challenges and opportunities are starting to appear.

The ecosystems of FinTechs are creating tremendous opportunities for corporate treasuries. The offerings are both complimentary and new. Treasurers need to evaluate these advancements relative to their own

operational processes. Dashboards, trading platforms, trade finance, supply chain financing and bank account reconciliation solutions are becoming available over the internet. All of this is putting a new light on the meaning of ‘Straight-Through-Processing.’

4.2 Final Remarks & Conclusions

Digital transformation is happening all around corporate treasuries. We are seeing the speed of technology becoming more exponential than linear as in the past. FinTech companies are predominately driving this by creating ecosystems that are pushing functional limits beyond legacy applications. As innovative technology

continues to expand, control, transparency and efficiency will increase with those treasury organizations that embrace the change. Total cost of ownership will also become less for innovation as the pricing and delivery models evolve.

Treasures can no longer ignore the disruption that is beginning to occur. They can no longer operate in isolation but need to be digitally connected. Treasurers need to respond to challenges with a visionary attitude having the highest priority for digitization. They need to effectively be proactive and transformational in their approach.

In speaking with treasury professionals, 2017 is proving that exponential technology is already having a positive impact on multinational corporates. Internal mundane operational tasks are being replaced with robotic processing thus increasing efficiency by lowering the margin of error while lowering costs through reduction in

head count due to automation. Treasury organizations have also begun to look for different skillsets outside of finance. Treasury and risk professionals are starting to consist of individuals who are data scientists. The combination of knowledge between data and financial analysis has begun to enable corporate treasuries the ability to focus more on the strategic part of the business and less on the operational part. ‘Digital Treasury

Individuals’ will process data analytics, develop financial tools and compile predictive and even prescriptive financial reporting.

Internally treasury organizations will continue to evolve while they continue to be impacted by the external

forces at hand. Regulators are striving for greater transparency and are managing to break down the communication silos and barriers that have existed for decades. FinTech companies are offering innovative B2B and B2C platforms. They are speeding up payments and offering solutions that complement existing bank solutions. All of this is having a positive impact on corporate treasury.

2018 and beyond will continue to see innovative technology expand exponentially. Corporate treasurers who welcome and embrace the challenge for change will excel. They will need to evaluate the manual processes and identify those that are candidates for improvement, redesign and replacement by these technologies. They

will also have to assess the human element and the qualifications needed to achieve their strategic objectives. In achieving this, corporate treasurers will have to look to both external and internal influences for solutions in order to deliver much sought after strategic value.

14

5 Acknowledgements

Zanders would like to express their gratitude to the following people who offered their time and their personal

opinions in contributing to this paper:

- Julian Cafolla, Treasurer, UNOPS

- David Felton, VP & Treasurer, Discovery Networks International

- Jean Furter, VP & Treasurer, Brocade Corporation

- Julia Kirby, Senior Editor, Harvard University Press

- Gabriel van de Luitgaarden, SVP, Deputy Treasurer, Royal Philips N.V.

- Treasurer, Treasury Operations, global industrial

- Zac Nesper, Vice President & Assistant Treasurer, HP Inc.

- David O’Rourke, Group Trade Finance Manager, Ornua Co-operative Limited

- Mark O’Toole, Vice President, Treasury & Commodities Solutions, OpenLink

- Ed Adshead-Grant, General Manager, Payments & Cash Management, Bottomline Technologies

6 About the Authors

Laurens Tijdhof is a Partner responsible for Zanders’ international offices and jointly responsible for our global advisory services in the corporate market. He joined Zanders in 2000 and has advised many leading global multinationals (MNCs), non-governmental organizations (NGOs) and utility companies from ‘ideas until implementation’ in the field of treasury strategy, organization, systems & processes, financial risk management and corporate finance. Laurens studied at Tilburg University in the Netherlands and holds three

master degrees in Economics and Business Administration (MA), Fiscal Economics (MSc) and Tax Law (LLM). He is a regular conference speaker, moderator of roundtable sessions and author of articles in specialist treasury and risk publications.

Liam Ó Caoimh is a Director at Zanders Switzerland. He joined the company in 2010 as a founding member of the Zurich office. He supports corporate treasuries across the broad spectrum of treasury subjects. Previously he spent 6 years at Bank of Ireland advising corporate clients on treasury and risk topics and worked with Avery Dennison’s European

Treasury Centre as Treasury Risk Manager. Before joining Zanders, Liam worked with PwC Zurich as a Treasury Consultant. He holds a BSc in Finance & Computers and graduated with Distinction with the ACT’s treasury qualification, the MCT. He is a regular conference speaker and has published several white papers on corporate treasury related topics. Keith Bergman is a Director at Zanders US where he is responsible for the corporate treasury

and finance practice. Prior to joining Zanders, he was the Founder and Managing Director at The Ledgewood Advisory Group. Keith has over 25 years’ experience working with multinational corporation domestically and abroad. He has advised in the areas of system review, selection and implementation as well as helped implement hedge accounting. Keith has been an International Treasury Accounting Controller for a $60B multinational corporation where he helped improve operational efficiencies, managed the supply chain and debt financing accounting operations and oversaw the TMS application. He holds a BS

degree in Accounting and a MBA degree in finance.

15

7 Bibliography

In the preparation of this white paper, we have researched the following:

Aguinaldo, J. (2017). Dubai begins blockchain trade finance project. Middle East Business Intelligence (Feb 7th, 2017)

Association for financial professionals. (2017). Strategic Role of Treasury Service. Report of Survey

Results.(2017)

Association of corporate treasurers.(2017). The business of treasury 2017: From finance specialism to strategic partnering. (2017).

Carey, S. (2017). What is SAP Leonardo? Everything you need to know about SAP’s Leonardo platform. From the website: http://www.computerworlduk.com/cloud-computing/everything-you-need-know-about-saps-new-look-leonardo-platform-3659277/ (Jul 11th,2017)

Cornell, B. (2017). Robotics and AI: the future of cyber security. From the website:

https://www.gtnews.com/author/bethanycornell/ (May 23rd,2017)

Eurofinance.com/sites/default/files/TP1617-Online_pdf

Evans-Greenwood, P., Harper, I., Hillard, R. ,Williams. (2017). Bitcoin, Blockchain & distributed ledgers: Caught between promise and reality. Centre for the Edge (2017).

Ford, R.,& Lobo, I.(2017). Digital disruption: Development unleashed Multiply innovation, collaboration and impact through digital in international development (2017)

Hall, P., Phan, W., & Whitson, K. (2016). Evolution of Analytics: Opportunities and Challenges for Machine Learning in Business (Apr 22nd, 2016)

He, D., Leckow,R.,Haksar,V. & others (2017). FinTech and Financial Services: Initial Considerations. IMF Staff Discussion Note (Jun, 2017)

https://www.cnbc.com/2017/09/29/bitcoin-exchanges-officially-recognized-by-japan.html

Miko Matsumura: Why He's Bullish on Cryptocurrency and Blockchain at https://www.afponline.org/trends-topics/discussions/afp-conversations/miko-matsumura-why-he's-bullish-on-cryptocurrency-and-blockchain

Mills, David, Kathy Wang, Brendan Malone, Anjana Ravi, Jeff Marquart, Clinton Chen, Anton Badev, Timothey Brezinski, Linda Fahy, Kimberly Liao, Vanessa Kargenian, Max Ellitshorpe, Wendy Ng, and Maria Baird (2016). “ Distributed ledger technology in payments, clearing, and settlement,” Finance and Economics Discussion Series 2016-095. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2016.095

Mulholland, J. (2017). Why Artificial Intelligence sustainability is set to become a byword for good business. From the website: https://mylo.lombardodier.com/ (Apr 28th,2017)

Pinna, A.& Ruttenberg, W. (2016). Distributed ledger technologies in securities post-trading: Revolution or evolution? (Apr, 2016)

Security and Exchange Commission. (2017). Report of Investigation Pursuant to Section 21(a) of the Securities

Exchange Act of 1934: The DAO (Jul 25th, 2017). Release No. 81207

Securities & Capital Markets on Bloomberg Laws. (2017). SEC confirms certain ICO’s are securities offerings; Regulators Renew focus on cryptocurrencies. From the website: https://www.bna.com/sec-confirms-certain-

n57982088024/ (Sep 15th, 2017)

Son, H., Levitt, H., Louis, B.(2017). Jamie Dimons slams Bitcoin as a fraud. From the website : https://www.bloomberg.com/news/articles/2017-09-12/jpmorgan-s-ceo-says-he-d-fire-traders-who-bet-on-fraud-bitcoin ( Sep 13th, 2017)

Taylor, C. (2016). Ornua involved in groundbreaking blockchain transaction. Irish Times (Sep 7th, 2016)

Trentmann, N. (2017). Daimler Uses Blockchain to Issue Bonds. From the website: https://blogs.wsj.com/cfo/2017/07/12/daimler-uses-blockchain-to-issue-bonds/ (Jul 12th, 2017).

Zanders white paper on ‘The Future of Corporate Treasury’ Laurens Tijdhof & Liam Ó Caoimh, Zanders (2016).

16

About the Association for Financial Professionals®

Headquartered outside Washington, D.C., the Association for Financial Professionals (AFP®) is the professional

society that represents finance executives globally. AFP established and administers the Certified Treasury

Professional® and Certified Corporate FP&A Professional™ credentials, which set standards of excellence in

finance. The quarterly AFP Corporate Cash Indicators® serve as a bellwether of economic growth. The AFP

Annual Conference is the largest networking event for corporate finance professionals in the world.

General Inquiries: AFP@AFPonline.org

Website: www.AFPonline.org

Phone: 301.907.2862

17

Zanders Netherlands | Brinklaan 134, 1404 GV Bussum | T:+31 35 692 8989

Zanders Belgium | Schutterhofstraat 9, 2000 Antwerp | T:+32 35 020 710

Zanders UK | 26 Grosvenor Gardens, London, SW1W 0GT | T:+44 20 7730 2510

Zanders Switzerland | Gessnerallee 36, CH-8001 Zurich | T:+41 44 577 7010

Zanders Germany | Stafflenbergstrasse 44, 70184 Stuttgart | T:+49 711 722 0820

Zanders US | 230 Park Ave., 10th Fl., New York, NY 10169 | T:+1 212 551 1400

Established in 1994, Zanders is recognized as

the leading consulting firm in treasury

management, risk management and

corporate finance. From our offices in the

Netherlands, Belgium, the UK, Germany,

Switzerland and the US, a team of over 150

qualified professionals offers global services

to corporates, financial institutions,

organizations in the public sector and NGOs.

Copyright © 2017 Zanders

www.zandersadvisory.com

All rights reserved. This material is not be

disseminated, reproduced or redistributed, in

whole or in part, without the written prior

consent of Zanders.