Published : 10 months ago, on 09/11/2023

Digitalize or Displace: the crucial choice for bank treasury departments 

Abhijit Duge, Global Industry Lead, Capital Markets and Risk Management, Finastra 

The role of a bank’s treasury department has experienced a profound transformation over the past decade. This transformation has been spurred by emerging challenges and shifts in the industry landscape, driving a re-evaluation of traditional methods for overseeing a bank’s financial standing. Treasury teams have evolved from primarily focusing on operational tasks to assuming pivotal, central, and strategic roles within the organization.

Traditionally, treasury teams in banks prioritized delivering robust risk management, governance, and compliance frameworks, alongside optimizing the bank’s liquidity and funding profile to maintain stability and ensure regulatory compliance. However, the dynamics have shifted dramatically, prompting treasurers to adopt a novel approach to growing their business while prudently managing risks. 

A continuously evolving regulatory landscape is one factor behind this paradigm shift. The increasing complexity and stringency of regulatory compliance demands substantial investments from banks to adapt to changes. Traditional banks now also face heightened competition from agile and lightly-regulated non-banking entities that are offering superior customer experiences in various areas, such as FX services and cross-border payments.

Another critical aspect of this changing landscape is the growing emphasis on climate finance, necessitating alignment with net-zero commitments in banks’ lending books and investment strategies. Macro-economic trends, such as interest rate hikes and looming threats of recession in certain parts of the world, further exacerbate the challenges faced by treasurers.

To effectively navigate these complex challenges, treasury departments need comprehensive visibility of their exposures and risks in their trading and banking books. Real-time access to data and the ability to analyze different scenarios are imperative for making informed decisions. Data and analytics have become fundamental tools for the modern treasury department, enabling them to traverse the increasingly complex financial landscape.

The imperative to embrace digitalization

Recognizing the need for a strategic response to these challenges, several structural shifts in the treasury and capital markets space underline the urgent requirement to digitize banks’ treasury divisions. 

An agile operating model and a flexible cost base that aligns with rapidly changing business and regulatory priorities are essential in this evolving landscape.  Technology-led disruptions, such as blockchain-based centralized trade processing infrastructure and digital bond issuance, are also gaining traction. 

These disruptions have the potential to fundamentally redefine market infrastructure and business models for banks. Consequently, traditional banks, burdened by legacy, on-premises, and fragmented technology architecture within their treasury and trading divisions, are now compelled to transform to differentiate their offerings and thrive against the competition. Running an AI/ machine learning model on an outdated technology stack is no longer a viable approach. A fundamental rethinking of systems, processes, and interactions is required to keep up with the pace of change and to remain competitive in the digital age.

A roadmap for success

Undertaking a digitalization program might seem like a daunting task, especially for established financial institutions with extensive legacy systems and processes. A carefully planned and phased approach can ease the transition and ensure successful adoption of digital technologies.

Stage One: Identification and prioritization

The first stage involves identifying areas ripe for digitalization and then defining and prioritizing the use cases. This could include addressing delayed visibility of data or lack of visibility, both of which could impact critical business decisions. Additionally, automating regulatory reporting, which is continually evolving and consumes significant internal resources, is an important use case. By prioritizing these areas, the treasury department sets the foundation for its digitalization journey.

Stage Two: Value Evaluation

In the second stage, the focus shifts to evaluating options that deliver the most value in the quickest manner for the identified use cases. A bank has the option to develop an in-house solution or launch an internal project to automate regulatory reporting. However, collaboration with a cloud-based regulatory reporting service that leverages necessary trade data from the on-premises treasury solution is a smarter alternative. This collaborative approach minimizes disruption to the business and the technology stack.

Stage Three: Cloud adoption

The bank’s treasury evaluates the wider adoption of the cloud to introduce agility and flexibility into its technology operating model, either to a public cloud or a private cloud managed by a technology partner. By doing so, the bank can refocus on its core competencies while leveraging the capabilities and expertise of technology partners.

Embracing digitalization for growth and risk management

The challenges related to data security in the cloud have been a concern for many organizations, including those in the financial sector. However, considerable progress has been made in addressing these concerns through increased investments in cloud security by service providers. Additionally, regulators have set clear guidelines around data residency and data privacy to provide a framework for secure cloud adoption.

For banks’ treasury divisions, the time for hesitancy has passed; it is now the opportune moment to act. While banks have made significant strides in digitizing their retail and corporate banking infrastructure over the last decade, treasury divisions have been conservative in embracing digitalization initiatives. Although treasuries have invested in systems to automate their trade lifecycle and upgrade risk and compliance frameworks, there has been a lag in the large-scale adoption of disruptive technologies and smarter tools to unlock the value in treasury activities.

There’s no longer any reason to delay. Banks’ treasury divisions need to proactively adopt digital technologies, streamline operations, enhance the customer experience, and unlock new revenue streams to thrive in the evolving financial landscape. The strategic shift toward embracing digitalization will not only optimize risk management, but also position banks to capitalize on emerging opportunities. By acting decisively and embracing digitalization, treasury departments can effectively navigate the challenges posed by industry forces and macroeconomic trends, securing a sustainable and competitive future in the financial sector.