So far, blockchain solutions that apply directly to corporate treasury have been few and far between. But that may be changing.
BLOCKCHAIN AND TREASURY
In a recent webinar, Treasury Alliance Group teamed up with fintech firm Adjoint to display how the latter has combined blockchain technology with related smart contracts and application programming interfaces (APIs) to create a solution that aims to dramatically speed up and reduce the costs of settling intercompany transactions.
Although Adjoint declined to name companies it has been testing its Adjoint Smart Treasury solution with over the last year, it did relay some client input. According to a treasurer at what Adjoint described as a Fortune 500 company, the solution has helped their organization greatly reduce major pain points in typical processes, such as cross-border payments and labor-intensive billing.
The CFO of another large multinational estimates “annual savings of $10 million from transaction costs and labor costs from just a simple implementation across a few subsidiaries.”
The solution allows corporate treasury departments to operate their own private permissioned distributed ledger, a security feature that enables them to choose which internal corporate entities and third parties can access the network. Smart contracts then automate regulatory and corporate compliance requirements for transactions such as intercompany loans, FX and netting, which lowers the cost of booking transactions between subsidiaries. And the movement of critical information from banks and data providers, as well as between corporate entities, is enabled by APIs.
“It performs much of the key functionality of in-house banking using blockchain, and does it at a very low cost,” said Daniel Blumen, partner at Treasury Alliance Group.
Simplifying intercompany transactions
Companies have pursued lengthy implementations of enterprise resource planning (ERP) systems and treasury management systems (TMS) that enable them to do intercompany transactions. Those systems, however, tend to batch transactions and settle them overnight, and transactions such as FX and intercompany loans often require using third-party banks and their related fees and other costs.
With Adjoint’s Smart Treasury solution, “This takes place much faster, at a much lower cost, and it will actually accept feeds from the banks using APIs, which then feed the ERP—again, using API—and it carries all of the information necessary through smart contracts,” Blumen said.
Somil Goyal, chief operating officer at Adjoint, explained that companies can essentially consolidate costly, physical bank accounts into a selected number of blockchain virtual accounts. Money can then be debited or credited among those accounts as needed, using smart contracts and APIs to make the make the necessary FX translations, apply interest on intercompany loans, and similar calculations.
For example, Goyal said that one corporate subsidiary, A1, may have to make a payment of €50, but holds €20 in its virtual account, even though the account has plenty of U.S. dollars. It could go to its bank to do an FX trade, settle it in a master account held at the bank, and pay a fee to do so. Or, using smart contracts on the distributed ledger and sourcing an exchange rate of 1.1 from a trusted market source such as Thomson Reuters or a bank, it could do a swap with another subsidiary, A2, whose virtual account also holds sufficient euros, saving the margin it would have used for an external execution.
“What you see happening here is that the balance A1 has in dollars goes down, because it paid $33, and A2’s balances goes up, because it received $33, and the reverse happens in euros,” Goyal said. “Interestingly, the external balances have not changed, because this is information management, or bookkeeping, within the virtual accounts of the distributed ledger, rather than the master accounts that have been maintained on behalf of the group externally.”
Goyal said that a blockchain-based system such as Adjoint Smart Treasury provides three main benefits. One is visibility, enabling treasury to see balances across the company at all points in time, compared to the traditional batch-based statements that simply can’t provide up-to-the minute information.
Efficiency is also a major plus, and that takes two forms. One, companies can significantly reduce fees and costs to third parties, such as transaction costs and margin. And second is increased efficiency internally.
“We’re looking at upwards of a 30 percent improvement in efficiency in the treasury back-office processes,” Goyal said. “It’s not just cost savings, but also increased capacity for better risk management.”
The third set of benefits is transformational, expanding the types of transactions that can be done, Goyal said, adding, “Can I do different forms of intercompany funding, e.g., a mix of loans, equity and hybrid instruments? Can I use liquidity better for functions like supply-chain finance, refinancing, or more dynamic discounting?”
At the end of the webinar, a participant asked whether a Smart Treasury-type solution is worth considering if the company has fully implemented ERP and TMS software that work well and treasury staff find easy and beneficial to use—an ideal likely to elicit skepticism from most treasury executives.
Goyal noted that a well-integrated solution may provide corporate treasury with good visibility, and a functioning in-house bank may already provide some efficiency. In the case of Smart Treasury, however, its APIs actually integrate smart contracts into a company’s ERP, TMS and other systems, improving the way they interact.
“We see our solution as complimentary,” Goyal said. “We don’t see it as competing with well-functioning ERP and TMS systems, but helping them function better.”