Treasury Management Services

The role of commercial banks is to act as trusted partners to their corporate associates. Over the years, the degree of trust has been steadily increasing. As a result, many corporations across the world are outsourcing critical parts of their business to banks. In the previous articles, we have already seen how certain payment functions are being outsourced to banks.

It is one thing to outsource a non-critical function such as payment processing to commercial banks. However, the treasury department is at the heart of any business. Most chief financial officers are not comfortable allowing third parties to have access to the core of their financial operations. Hence, it is a remarkable feat by commercial banks that they have been able to convince corporations to outsource their treasury function to the bank.

In this article, we will have a closer look at what are the treasury management services which are offered by commercial banks to their corporate clients and what are the benefits of having such services.

What are Treasury Management Services?

Treasury management services are a group of financial services which have a very wide scope. They can be defined as making decisions that allow for the management of assets and liabilities of the firm.

Treasury decisions include decisions regarding the type of funding, the interest rate to be paid, forex operations, payments netting, receivables trade, etc. There is no exact definition of treasury management. However, it needs to be understood that treasury refers to all the financial resources which are available to a firm.

Treasury management is about taking a bird’s eye view of the finances of the firm and making effective decisions in order to maximize the value of the firm. It is also important to note that treasury management encompasses activities across the front, middle and back offices of the firm.

Approaches to Treasury Management Services

There are two main approaches that are followed in the market regarding treasury management services. They are as follows:

1. The first approach to outsourcing treasury management is called the ring-fenced approach. Under this approach, the organization outsources the middle and back-office treasury work to the bank. However, it does not outsource the front office work. This means that the decision-making capabilities as well as the flow of information related to decisions are not shared with the commercial banks.

   Instead, the corporations make their own financial decisions without any advice from the commercial bank. However, the bank takes care of the transaction processing and other operational details. This model is generally followed by companies where the chief financial officer is skeptical about outsourcing critical functions.

2. The second approach to outsourcing treasury management is called the full-fledged approach. The name itself implies that there are no restrictions to the flow of information between the commercial bank and the corporation.

   The commercial bank is privy to decision-making corporations and is expected to provide advice that enables decision-making. The operational aspects of transaction processing are also included in this model. Such a model is followed in companies wherein the management believes that they can benefit from the experience of the commercial bank in treasury management functions.

Benefits of Treasury Management Services

Over the years, the number of corporations opting to outsource their treasury management services to commercial banks is increasing. This is because of the following benefits which accrue to the customer.

• Services of Skilled Professionals: The biggest problem with setting up an in-house treasury management department is the lack of skilled personnel. Small and medium-sized companies find it very difficult to attract and retain personnel who have the skills required to run a treasury operation. As a result, these banks outsource their operations to commercial banks that already have a team of capable business professionals with the required skillset.

• Technological Advantage: Treasury management services require the use of advanced technologies. This often means that the use of the latest technological tools is required in order to be competitive. A lot of small and medium-sized companies do not have the budgets to deploy these technologies. Also, these services are not available on the cloud as of now. Hence, outsourcing the services to banks that already have the required technology seems like a viable option.

• Better Reporting and Forecasting: Commercial banks are the experts in forecasting cash flows. They need to forecast cash flows for different industries while making loans. Hence, the cash flows and reports generated by the banks tend to be much more accurate as compared to the ones generated by the firms themselves. As a result, companies prefer to outsource their process so that they are able to gain efficiency.

• Streamlined Process: Lastly, it is important to realize that commercial banks have more streamlined treasury processes. This is because they are used to managing large amounts of money which they have borrowed from depositors. Their internal control mechanisms are far superior to what any individual corporation can possibly build.

  Hence, many corporations decide to outsource their treasury tasks to the bank in order to take advantage of this expertise that the bank possesses. At the same time, banks can generate additional revenue by utilizing their core competence.

The fact of the matter is that treasury management services are slowly becoming an important part of the entire value stream which is offered by commercial banks to their customers.

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