Technology, Media and Telecommunication Cash Management Outlook: Diversification and Change

Technology, Media and Telecommunication Cash Management Outlook: Diversifi cation and Change

If 2016’s high M&A activity levels are any indicator, technology, media and telecommunication (TMT) treasuries will be also having a busy 2017. A variety of other factors are also likely to play a part in strategic decision making during the year, but on the bright side, several of these have positive implications for treasury. As Sacha Deal, Global Sector Head – Technology, Media & Telecommunication, Global Liquidity and Cash Management at HSBC explains, these range from potential operational effi ciency gains and cost savings to longer term treasury transformations that leverage evolving transaction banking solutions to help future proof the business.

In 2016, much of the focus of TMT treasuries was on integrating newly acquired businesses, or spinning out of operations post de-merger. A key part of these activities was the streamlining of processes to achieve cost effi ciencies. Although TMT deal activity in 2016 gives an indication of the fundamental trends we are likely to see through 2017, there will probably be a wider range of drivers.

These can be broadly classifi ed as industry-specifi c, geopolitical, regulatory, payment industry related or technological, with some inter-dependency and overlap among them. From a timing perspective, these drivers will have a range of time horizons. Some will have an impact straight away, whilst others (largely relating to regulation) will take eff ect in late 2017 or beyond. Nevertheless, while their infl uence may not be immediate, these future drivers need to be

considered now and the necessary measures and controls to mitigate their potential impact need to be part of today’s strategic treasury perspective.

Industry specifi c factors: convergence, capex and marginsConvergence

Q4 2016 was a very strong quarter for TMT M&A deal activity and it looks likely that this activity will be sustained in 2017. While a considerable portion of this has been within the individual technology, media and telecommunications sub-sectors, an important contributor to deal volumes has been convergence across those sub-sectors, plus acquisitions/partnerships completely outside the TMT sector. This has taken various forms, such as mobile phone operators acquiring media assets for video content to stream over their networks.

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Elsewhere, there has been diversification into other sectors such as automotive, with initiatives such as “connected cars” that depend upon collaboration among technology companies, mobile phone operators and auto manufacturers, plus the sharing of their associated technologies.

This extension of TMT M&A activity into other sectors and sub-sectors poses a number of additional challenges for corporate treasuries. While a telecoms treasury may have some insight into how another telecoms treasury and its financial processes probably operate, this is less likely to hold true if their company takes over an auto component manufacturer or media company. This is where being able to depend upon an experienced transaction bank can ease matters considerably when it comes to M&A planning and integration.

Capex and margins

Many TMT companies have to make substantial capital expenditure to remain competitive. For technology companies, it may be R&D spending, while for mobile companies it may be for frequency spectrum purchases. The figures involved can be considerable: for instance, the UK 4G spectrum auction in 2013 required a total investment of GBP2.3bn by five mobile operators, with the largest individual investment being GBP800mn1. The forthcoming 5G spectrum auction will probably require a further substantial investment: Ofcom has announced a reserve price in the 2.3GHz band of GBP10mn per 10 MHz lot and a total reserve price of GBP70m for the entire 190MHz of spectrum to be auctioned.2

Elsewhere, regulation is exerting something of a two way pull. New EU legislation regarding limitations on roaming charges outside a subscriber’s own country will erode margins for mobile operators. On the upside, if proposed changes to net neutrality in the US take effect, mobile, cable and broadband providers may have an opportunity to increase margins.

This combination of continuing capex demand and potentially declining margins has major implications for TMT treasuries. On the capex side, the pressure will be on maximum utilisation of available liquidity to support capex, so finding, accessing and centralising all available cash will be a priority. Particularly in view of rising cross-border TMT M&A activity, this may present treasurers with the challenge of tapping liquidity in unfamiliar countries, plus incorporating it within a suitable (possibly new) liquidity structure. As regards to eroding margins, the expectation will be for treasury to reduce processing costs further, but also to introduce efficiencies, such as automated reconciliation, which can accelerate the working capital cycle. Yet again, this is a situation where a suitably-qualified transaction bank can provide valuable assistance.

In the context of M&A activity, the challenges relating to capex and margin erosion become all the greater for treasury. There will be additional pressure to integrate the cash flows from an acquisition as fast as possible to fund future capex, while also delivering process efficiencies in an unfamiliar business to improve the working capital position. If the company’s transaction bank has extensive M&A experience, then once again treasury will benefit from its support.

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1 https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2013/winners-of-the-4g-mobile-auction2 https://5g.co.uk/guides/5g-uk-auction/

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Geopolitical factorsTMT treasurers may also have plenty to do in the context of broader geopolitical and policy factors. Brexit, the US’s declared intention to re-negotiate NAFTA and withdraw from the Trans-Pacifi c Partnership, plus potential US Corporation Tax reform, all contribute to a changing trade environment.

These developments could appreciably change the value of existing/potential TMT assets and/or drive changes in entity/account structure/domicile. Treasury might fi nd itself having to switch entities and close/open multiple bank accounts in diff erent jurisdictions in response to some or all of these factors. In a global context, treasury might therefore have to make multiple and rapid changes that involve unfamiliar territories, regulatory regimes and business practices. In this scenario, treasury would obviously benefi t from the support of a transaction bank with global expertise. However, even more valuable is a means of tapping into that expertise via a single point of contact that can co-ordinate the necessary resources on the treasury’s behalf.

RegulationApart from sector-specifi c and geopolitical factors, it is hard not to notice the potential eff ects of current and pending regulation on TMT treasuries. This applies across a wide range of activities from liquidity management and investment, to data portability, to cyber security, to application programming interfaces (APIs).

Basel III

Basel III is a case in point, particularly as USD interest rates are rising and treasuries are therefore likely to be more focused on yields available on surplus cash. Under Basel III, the net stable funding ratio and the liquidity coverage ratio are driving banks to adopt a very diff erent approach to the way in which they manage their own balance sheets. Greater emphasis is now being placed on operational relationships due to the increased importance of operational balances linked to transactions.

As a result there is increased benefi t in a corporate understanding their cash fl ows and the types of cash they hold from working capital to restricted cash or strategic to reserve. Then, as a result of better understanding the types of cash a corporate holds it raises expectation for banks to create new channels for sourcing better yields. For instance, HSBC has launched Liquidity Investment Solutions (“LIS”), an automated solution for sweeping funds directly into money market funds held with a choice of four asset managers. The funds have strong ratings and off er alternative counterparties due to their nature. Sweeps to and from the funds can be tailored based upon user- defi ned parameters.

Data management and control

Robust data management and control confer a competitive advantage on those TMT treasuries that wish to leverage data analytics, and some regulators are keen to assist this by supporting free movement of data. However, on the fl ip side, regulators are also keen to deliver data privacy through initiatives such as the EU General Data

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3 http://www.allenovery.com/SiteCollectionDocuments/Radical%20changes%20to%20European%20data%20protection%20legislation.pdf (page 9)

Protection Regulation. This will take eff ect in May 2018, but has more immediate implications for TMT treasuries, particularly if those TMTs hold any consumer data. In addition to measures regarding data protection, the regulation also gives consumers the right to portability of their personal data. They will be able to request a copy of these in a format usable by them and electronically transmissible to another processing system.

The penalties for corporations who breach customer data security are considerable: fi nes of 4% of annual turnover or EUR20 million, whichever is the greater3. Corporations may also have to set out their data protection policy for the regulator and appoint a data protection offi cer.

Cyber security: people and process security

Cyber security has been another area of regulatory activity, with the US Federal Reserve’s Cyber Security Consultation and the EU’s Network Information Security Directive being two obvious examples. The key point for TMT treasuries to bear in mind is that this sort of regulation now aff ects corporates directly, not just indirectly via the banking industry.

Where high levels of M&A activity cause notable levels of staff turnover, this regulation is especially germane to TMT treasuries. It is tempting to believe that the associated risks can be mitigated simply by using technology solutions. In reality, the main source of severe breaches is the human element, either accidentally or by design. Hackers often mine readily available social media data to produce more convincing phishing emails and so make it more likely that a poisoned link will be followed or an infected attachment will be opened.

The right banking partner can ameliorate many of these risks, as it will have the necessary process consulting expertise to identify gaps quickly in processes (often involving manual activities) that would be prone to exploitation. These could be anything from overly easy access to vendor payment data, to a lack of segregated payment preparation and authorisation.

Regulation and APIs

Another area of regulatory activity relevant to TMT treasuries is the mandatory use of APIs, which is enshrined by PSD2 in Europe and the Competition Markets review in the UK. PSD2 requires banks to permit third-party providers real time access to their customers’ accounts (obviously subject to customer permission). These providers can then off er services such as account aggregation/monitoring and payments processing. Access must be provided via a common application programming interface (API) standard, and work on this has already been started by industry bodies such as the Open Bank Working Group in the UK.

TMT treasuries will be able to exploit this API to gain access to advanced data analytics services, such as long term forecasting and behavioural trends analysis (e.g. looking for patterns in supplier payments or group entities’ internal payment activity).

Some banks have been resistant to this sort of initiative, in the belief that they would lose business to fi nancial technology companies (fi ntechs). Others, such as HSBC, regard it as an opportunity to benefi t corporate treasury clients through collaboration with third parties and the bank has accordingly launched two fi nancial technology innovation laboratories in Singapore and Hong Kong. It uses these to work with fi ntechs on developing new digital banking solutions in areas such as big data analytics, bio-metrics, and distributed ledger technology. While the concept of using APIs in transaction banking is still at an early stage, HSBC is already exploring possible third party payment/account aggregation solutions that it can provide to clients.

Payments industry developmentsImmediate payment systems and SWIFT global payments innovation (gpi)4

One of the most striking recent developments in the payment industry – and one that offers considerable opportunity to TMT treasuries – has been the growing introduction of immediate payments systems. In these systems, transmission and receipt of payments happen in real time, rather than on a batch basis. In addition to countries that have already implemented them, a number of others are either planning or building them, while a further group are exploring their potential.

This sort of immediate payment system presents TMT treasuries with various possible benefits, such as near-immediate control of working capital cycles and real time reconciliation of receivables. However, if internal treasury systems are not capable of processing incoming data in real time, then these benefits will remain inaccessible.

Apart from their speed, many new immediate payments systems also have far greater capacity than legacy payment systems for transmitting additional data, such as invoice numbers. This makes it far easier for TMT treasuries to achieve auto-reconciliation of customer payments, even in situations where a single payment covers multiple invoices. This in turn helps these treasuries accelerate the working capital cycle, as goods can be released sooner against more rapidly reconciled customer payments.

Another notable payment industry initiative is the SWIFT Global Payments Innovation (gpi). In due course, TMT treasuries will be able to use this to trace the progress of their payments all the way from initiation to the point of arrival in their beneficiaries’ bank accounts. This should result in

more efficient (and potentially automated) handling of claims for payment non-receipt by suppliers.

Virtual Accounts, POBO and ROBO

Virtual accounts have been in use for a while, with one example being in improving accounts receivable reconciliation. Rather than customers all sending remittances to the same account, each customer is given their own individual virtual account number to pay into, thus ensuring that all remittances can be reconciled to the customer level reliably.

However, virtual accounts are now being re-imagined as “Next Generation Virtual Accounts” (ngVA) and offer a range of further capabilities that can assist TMT treasuries in dealing with their cash and liquidity management challenges.

For instance, virtual accounts can be used to reduce the number of physical accounts required to run day to day operations, as well as the associated costs and administrative burden. Among other things, they can ease the tasks of account opening and administration, with the ability for treasuries to “self-service” their virtual accounts, such as in the creation and maintenance of virtual account structures.

In addition, TMTs can use virtual accounts to build structures that represent a set of subsidiaries or business units that treasury can centrally manage. Treasury can then make payments on behalf of (POBO) these business units or subsidiaries, and handle receivables on behalf of (ROBO) them in addition to managing the liquidity of the group on a centralised basis. This can provide the transparency needed at the entity or subsidiary level, while still delivering a centralised operation for the treasury – plus potentially also being more cost-efficient.

4 https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi

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Distributed ledger technology: higher effi ciency, lower costs From the perspective of TMT treasuries, distributed ledger technology (DLT) is quickly moving from abstract concept to something worthy of resources and serious attention. By sharing a transaction ledger across all participants attached to a computer network, there are various ways in which DLT can deliver added value. DLT’s collaborative basis means that all steps in an entire business processes can be handled via a single medium. International trade is often cited as an example of this, where importers, exporters, inspection agencies, customs authorities, shippers, banks, insurers and others could all participate directly and update transactions in near real time (subject to consensus agreement/authorisation by others on the network).

Transaction blocks can be processed and entered in the ledger and, once recorded there, are irrevocable. Copies of the same ledger are automatically distributed among all participants, which in addition to providing a barrier to hacking, has the further benefi t of minimising exception processing. This is because participants are no longer all creating their own private records that might confl ict with each other, but instead use identical copies of the same ‘public’ record.

DLT has a practical application for functions such as cross border payment systems, which often involve various intermediary participants. This can increase both costs and complexity from the corporate treasury’s perspective. An illustration of the DLT alternative to this is the SBI Ripple Asia Venture. This aims to deliver round the clock settlement for domestic and cross border transfers, with an estimated reduction in payments fees versus conventional payment systems of 90%5.

HSBC has been active in its support for DLT, recently investing in fi nancial technology innovator R3 securing USD107mn; the world’s largest distributed ledger technology (DLT) investment to date. R3 is the largest consortium of global fi nancial institutions collaborating to develop a platform and commercial applications for DLT.

The Digital Trade Chain (DTC), of which HSBC is a founder member, off ers another practical illustration of how DLT could work for trade fi nance processes. The DTC focuses on small and medium enterprises (SMEs), with the intention of providing them with a simplifi ed method for managing, tracking and securing domestic and international trade transactions.

The fact that several central banks are actively investigating DLT as a means of supporting new digital currencies underlines how its credibility is growing. The Bank of Canada is currently piloting Cadcoin, a digital currency for interbank transfers. In Singapore the Monetary Authority of Singapore is examining a similar concept called Project Ubin in which HSBC is actively involved, as it also is in Hong Kong’s similar Project LionRock. Meanwhile, the Bank of England is exploring the creation of a digital currency, including the provision of payment services and deposit accounts on a DLT platform.

However, while DLT off ers considerable practical promise for TMT treasuries, the extent to which this becomes reality varies widely depending on a corporation’s choice of bank. Regrettably, some banks regard DLT much as they view fi ntechs: as something that threatens their business and should be resisted. By contrast, some other banks regard DLT as an opportunity that should be embraced. HSBC, for example, is actively involved in discussions with various cross-border payment distributed ledger technology platforms and is also a major contributor to the R3 blockchain technology consortium.

5 https://www.fi nextra.com/blogposting/13033/blockchain-payments-disruption-use-cases-and-real-world-examples-recent-developments

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Published: July 2017

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ConclusionThere is a huge variety of expertise and capability across treasuries in the TMT sector. Therefore, whether in M&A situations or not, there is similar variety in what can be achieved with just internal resources when it comes to delivering effi ciencies and automation. Combining this with the way that the various challenges outlined above are tightly coupled with treasuries’ individual technology and processes, and it becomes clear that traditional product-based approaches are inappropriate. A standardised product cannot be used to address risks such as cyber security intrusion; this instead requires comprehensive process expertise that can provide in-depth analysis and solutions tailored to each situation.

TMT companies are diversifying into other business areas and geographies, plus many of the day-to-day demands they face have an equally diverse nature. This makes any sort of silo-based approach inappropriate. Instead, TMT companies need to be able to count upon banking partners with diverse cross-sector and geographical expertise that fi ts the myriad challenges their treasuries face.