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Transitioning from Crisis Liquidity Management to a Digital Business as usual

by Olle Malmgren, Executive Director, Structured Solutions Development, Cash

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New digital sales and distribution models have created and accelerated domestic and international growth opportunities including business to consumer (B2C), business to business (B2B), and business to distributor (B2D). To support these ambitions, treasurers and CFOs are managing more complex cash and liquidity management requirements, exacerbated by unpredictable supply and demand patterns during the COVID-19. As companies look ahead beyond the pandemic, the era of digital commerce is not over; rather, it is just starting. This article explores some of the challenges and opportunities of international growth in a digital age, drawing on the findings of Standard Chartered’s Borderless Business study.

Changing liquidity priorities during the crisis

When the COVID-19 crisis first started to unfold, treasurers and CFOs were particularly concerned about the impact of supply chain failures or disruption on liquidity. According to our Borderless Business research in June 2020, 22% said this was their top liquidity concern, while 52% placed supply chain failure or disruption in their top three issues. At that time, this fear was well-founded, with three out of four companies experiencing an adverse effect on their supply chains. As a result, 49% of treasurers and CFOs were concerned that access to existing credit facilities could be interrupted or constrained, or that they could face additional collateral requirements. We therefore saw treasurers drawing down on revolving credit facilities to boost cash buffers and reviewing liquidity structures, such as cash pools and other intercompany financing mechanisms to ensure that surpluses in cash-rich entities could be used to finance deficits in others.

As the crisis wore on, liquidity markets recovered, and in some industries, treasurers’ and CFOs’ immediate concerns around access to financing were alleviated. However, banks’ credit appetite was reduced, and certain industries, such as mobility, tourism and hospitality continued to be severely impacted. By December 2020, mitigating the liquidity impact of supply chain failure or interruption continued to be top three priority for 50% of treasurers and CFOs, but mobilising cash across the business was a similar priority by that time. While companies were therefore still inclined to maintain higher levels of liquidity than pre-crisis, they also turned their attention to working capital and credit risk, with managing delayed collections a top three priority for 48% of respondents.

A digital response to the crisis

Given treasurers’ and CFOs’ responsibility to secure access to sufficient liquidity, and lessons learned from the 2008-9 global financial crisis, it was natural that liquidity concerns dominated their thinking during the early stages of the crisis. What is more noteworthy, however, was the unprecedented role of digital tools through this period. Remote working accentuated every inefficient and manual process, so treasurers and CFOs needed to shift to digital technologies at pace. Company boards and senior management teams needed regular, if not daily access to timely, accurate and complete liquidity and risk data to support decision-making. Ensuring digital tools were in place to achieve this was amongst the top three liquidity priorities for 43% of senior treasurers at the end of 2020, including the use of artificial intelligence (AI) and robotics to streamline and automate processes, and improve decision-making.

Digitisation to compete in the new economy

The digital trend has been even more pronounced, however, in the adoption and acceleration of new business models. Treasurers are fast adopting technologies, such as in payments and collections, to equip the business to compete in the digital economy, both at home and overseas. With online marketplaces and the sharing economy becoming ubiquitous for both consumers and businesses, new ecosystems are developing, resulting in new flows of transactions and data. For example, a flower producer in the Netherlands that used to sell through distributors may now sell direct to consumers and small businesses on a subscription basis. This creates new relationships with shippers, packaging companies and marketing agencies to support the new sales model.

Supporting eCommerce models creates new, and in some cases unfamiliar, challenges for treasurers and CFOs. Companies can sell through either their own websites or third-party marketplaces. In the former instance, they control the collection process, timing and customer payment methods. When using third party marketplaces, however, there is some credit risk to the marketplace operator, and there may be a delay in receiving payments.

The shift to B2B and B2D also creates different liquidity dynamics and risks. Previously, a company may have bought and sold against invoices, often in a hard currency. The drawback was the period of credit extended to the buyer; however, cash flows were relatively predictable, and hedging the resulting FX risk, if it existed at all, was straightforward. Today, collections may be instant, creating a working capital advantage, but incoming flows are less predictable, and more likely to be in local currency, creating potential FX risk and complexity.

An evolving landscape

Treasury functions are now working with their banks and technology vendors to further automate some of their daily processes, such as execution of FX transactions and hedging, to reflect the changing cash, liquidity, credit and FX risk issues of the digital economy. In many cases, the technology already exists to overcome these challenges; however, the challenge is to balance automation with the need to ensure appropriate controls and governance, such as competitive bids on FX execution.

However, new business models continue to emerge, so solving for new challenges is an ongoing process. Treasurers need to be engaged early on to understand the cash, liquidity and risk implications and work with their banks and technology vendors to help overcome them. For example, buy now, pay later (BNPL) continues to gain market share, and is expected to double from 2.1% in 2020 to 4.2% by 2024. This is attractive to consumers as an alternative to credit cards, and to avoid risks around paying for goods before receiving them. However, many treasurers are concerned about the potential credit risk, particularly where programmes are directed at consumers and/or small retailers (B2D). As a result, they are looking to their partner banks to offer BNPL financing solutions to mitigate the risks.

Likewise, we are seeing more pay-per-use and subscriptions-based models emerging. These create new business risks, the balance sheet treatment of the asset, and valuation of potentially irregular cashflows.  For B2B, reseller model-based marketplaces are becoming more common. Under this model, when a buyer wishes to purchase goods, the reseller buys the goods and then sells them instantly to the buyer on the basis of an invoice or other forms of settlement.

This is an attractive proposition for many businesses by combining the advantages of eCommerce and traditional sales models. At the same time, it builds a higher level of trust than traditional marketplace models.

Managing growth, building trust

The issue of trust is an ongoing challenge that the industry is trying to solve for in new ways in the era of eCommerce. In the past, this was created through trade finance instruments, such as letters of credit, but in a digital age, we are seeing greater potential for digital escrow and distributed ledger technologies (blockchain) for smart contracts.

Furthermore, managing the impact of new business models becomes particularly complex when expanding into new or less familiar countries or regions with different regulatory and market requirements, such as capital and currency controls, payment methods, and business and consumer culture. 35% of respondents (including 43% of CFOs) identify the need to understand regulatory requirements in new markets as the biggest challenge associated with growth outside their home region.

The difficulty, however, is that new business models are typically driven by sales and procurement teams, so treasurers may not be involved upfront. Treasurers have already proved their value in a crisis situation and have gained greater senior management attention; the challenge now is to retain this attention and continue to prove this value on an ongoing basis, not just at time of crisis, but in a new, digital business as usual.

Click here to read the second edition of Standard Chartered’s Borderless Business Report.