Zanders Transfer Pricing Suite is an innovative, cloud-based solution designed for companies looking to automate the Transfer Pricing compliance of financial transactions. With over five years of experience and trusted by more than 60 multinational corporations, the platform is the market-leading solution for financial transactions Transfer Pricing. On March 31, 2023, Zanders and Royal Philips jointly presented the conference "How Philips Automated Its Transfer Pricing Process for Group Financing" at the DACT (Dutch Association of Corporate Treasurers) Treasury Fair 2023.

Context
The publication of Chapter X of Financial Transactions by the OECD, as well as its incorporation into the 2022 OECD Transfer Pricing Guidelines, has led to an increased scrutiny by tax authorities. Consequently, transfer pricing for financial transactions, such as intra-group loans, guarantees, cash pools, and in-house banks, has become a critical focus for treasury and tax departments.

ZANDERS TRANSFER PRICING SOLUTION

As compliance with Transfer Pricing regulations gains greater significance, many companies find that the associated analyses consume excessive time and resources from their in-house tax and treasury departments. Several struggle to automate the end-to-end process, from initiating intercompany loans to determining the arm's length interest, recording the loans in their Treasury Management System (TMS), and storing the Transfer Pricing documentation.

Since 2018, Zanders Transfer Pricing Solution has supported multinational corporations in automating their Transfer Pricing compliance processes for financial transactions.

ROYAL PHILIPS CASE STUDY

Managing over 80 intercompany loans annually and with a wide geographical scope, Royal Philips faced the challenge of complying with their Transfer Pricing obligations. During the conference, Joris Van Mierlo, Corporate Finance Manager at Philips, detailed how Royal Philips implemented a fully integrated solution to determine and record the arm's length interest rates applicable to its intra-group loans.

The productivity and performance of the treasury function within insurance companies have undergone a transformative evolution, driven by the emergence of what is now termed Treasury 4.x. In this digital era, characterized by rapid technological advancements, Insurance Treasury is transitioning towards a more dynamic and strategic role. Treasury 4.x is distinguished by its capacity to envision and operate within various financial scenarios, reflecting a forward-thinking approach. The contemporary Insurance Treasury aligns itself with the principles of "Fit-for-purpose" – emphasizing a centralized organizational structure embedded seamlessly within the financial supply chain. Highly automated processes, often referred to as "exception-based management," are integral to this paradigm shift, enabling treasuries to focus resources on critical issues and exceptions, thereby enhancing efficiency and minimizing manual intervention. This evolution underscores the imperative for insurance treasuries to leverage cutting-edge technologies and embrace a proactive, scenario-driven mindset, ensuring adaptability and resilience in the face of dynamic market conditions. 

Innovation of Payment Landscape

In the ever-evolving landscape of payment innovation within the treasury functions of insurance companies, a pivotal focus has been placed on migrating to the ISO 20022 XML messaging standard and moving away from FIN MT messages. This migration, driven by SWIFT, is not just a strategic choice but an industry-wide mandate, compelling all financial institutions, including insurance companies, to transition to the ISO standard by November 2025. This migration is a cornerstone in revolutionizing payment processes, offering a standardized and enriched data format that not only enhances interoperability but also facilitates more robust and information-rich communication. As insurance companies navigate this time-sensitive transition, a review of address logic within payment files becomes even more critical. The insurance companies are mandated to review and refine address logic within payment files by November 2026. Ensuring that the company is compliant with evolving financial messaging standards will not only improve the overall efficiency, speed and compliance of payments, but it will also provide the opportunity to redefine the best-in-class cash management operating model. 

In additional to the industry migration to a new messaging standard, the introduction of Central Bank Digital Currency (CBDC) could impact the traditional roles of treasuries by offering new means of payment, settlement, and potentially altering liquidity management strategies. CBDCs could enhance efficiency in cross-border transactions, simplify reconciliation processes, and influence investment strategies. Insurance treasuries might need to adapt their systems and processes to incorporate CBDCs effectively, ensuring compliance with regulatory requirements and taking advantage of potential benefits associated with this digital form of currency. We are also witnessing an increase in momentum around the use of distributed ledger technology within the wholesale banking domain. In December, JP Morgan announced it was live on Partior, the Singapore-based interbank payment network that uses blockchain and is designed as a multi-bank, multi-currency system for wholesale use, with each bank controlling its own node. This is clear evidence we are starting to gain real traction around potential solutions using both blockchain and CBDC’s that will further increase the number of payment rails available to support the payments ecosystem.  

Finally, the payment landscape of insurance companies sees further innovation with Faster Claims Payment (FCP). This solution streamlines the disbursement of claims, decoupling it from traditional monthly processes. FCP integrates seamlessly with the Vitesse payment platform, ensuring direct access to insurer funds and significantly reducing delays in payments. This paradigm shift promotes efficiency and enhances customer satisfaction through its accelerated claims payment system. The innovative payment landscape, however, could highlight a potential impact for processes of insurance treasuries. Increased application of faster and real-time payments requires insurance treasuries to have sufficient liquidity readily available to meet the immediate financial obligations. This demands careful planning of cash reserves to ensure uninterrupted claim processing while maintaining financial stability and stresses the importance of effective cash management for navigating any potential downside impact of FCP. 

Changing Macroeconomic Environment

The insurance treasury is profoundly influenced by macroeconomic events, and the convergence of several geopolitical challenges has introduced heightened uncertainty and downside risks. Elevated geopolitical tensions, particularly the intensified strategic rivalry between the United States and China, the Russia-Ukraine war, and the recent Middle East conflict, pose significant threats to the insurance industry's stability. These events bring the potential for energy price shocks, amplifying concerns about increased insurance industry losses stemming from geopolitical and economic upheavals. Furthermore, the scheduled elections in 76 countries, with pivotal ones in the United States, Taiwan, and India, add an additional layer of uncertainty. Political transitions can introduce policy shifts, impacting regulatory environments and potentially altering economic landscapes, further complicating risk assessment for insurance treasuries. As the global geopolitical landscape remains dynamic, insurance treasuries must navigate these challenges prudently, emphasizing resilience and adaptability in their financial strategies to mitigate potential adverse impacts. 

Interest rate changes command a substantial impact on the treasury functions of insurance companies, and the recent shifts in central bank policies have introduced a dynamic landscape. The conclusion of the central banks' rate tightening cycle, coupled with the Federal Reserve's announcement of rate cuts for 2024 and beyond, signals a pivotal change. While these rate cuts are aimed at supporting economic recovery, they pose challenges for insurance treasuries that traditionally benefit from higher interest rates. The insurance industry faces the paradox of modest GDP growth across advanced economies, with the downside risk of a potential rebound in inflation and further geopolitical shocks. The relatively elevated interest rates, however, offer a silver lining for (re)insurers, providing a boost to future recurring income. As maturing assets are reinvested at higher rates, this strategic advantage could help mitigate some of the challenges posed by the shifting interest rate environment, fostering resilience and adaptability in the treasury functions of insurance companies. 

Taking into account the aforementioned macroeconomic changes, insurance treasuries must ensure they possess local treasury experts capable of supporting multiple regions with adapting to shifting business dynamics.

Changing Market Rates

The impact of changing market rates on the asset management activities of insurers is profound, extending to collateral management practices. Market rate fluctuations exert direct influence on the valuation and performance of their investment portfolios, notably affecting the required Variation Margin (VR) and Uncleared Margin Rules (UMR) on derivatives holdings. As rates oscillate, the value of derivative positions can vary significantly, necessitating adjustments in margin requirements to effectively manage risk exposures and collateral obligations. 

Additionally, these changes in market rates affect the liquidity position of insurers, prompting the need for more dynamic models to optimize liquidity management. Given the importance of maintaining sufficient cash and liquid assets, insurers must adapt their strategies to ensure they can meet obligations promptly, especially considering the impact of FX fluctuations on assets denominated in non-base currencies. This entails employing more dynamic models to gauge liquidity needs accurately and employing strategies such as RePo agreements to enhance flexibility in accessing cash when required. Thus, navigating the complexities of changing market rates requires insurers to employ a comprehensive approach that integrates risk management, liquidity optimization, and currency hedging strategies. 

Data Analytics and Predictive Modelling

The integration of artificial intelligence (AI) and predictive analytics has revolutionized the treasury function within insurance companies, particularly in the realm of cash flow forecasting. These advanced technologies enable insurance treasuries to analyze vast datasets, identify patterns, and make more accurate predictions regarding future cash flows. AI algorithms can process information rapidly, taking into account a multitude of variables, such as market trends, policyholder behavior, and economic indicators. This enhanced predictive capability is instrumental in optimizing liquidity management, allowing insurance companies to proactively anticipate cash needs and allocate resources efficiently. The importance of AI and predictive analytics in cash flow forecasting cannot be overstated, as it empowers treasuries to make informed decisions, mitigate financial risks, and navigate the complexities of the insurance landscape with greater precision and agility.

Regulatory Compliance

Regulatory compliance is pivotal for insurance company treasuries, significantly influencing financial strategies and operations. The complex regulatory landscape, including directives like the Insurance Recovery and Resolution Directive, Solvency II, and EMIR Refit, aims at ensuring financial stability, consumer protection, and market integrity. These requirements, from solvency standards to reporting obligations, impact how treasuries manage assets, liabilities, and capital. Non-compliance can lead to severe consequences, prompting insurance treasuries to invest in sophisticated systems for continuous monitoring. Striking a balance between compliance and strategic financial goals is crucial for navigating the regulatory environment and ensuring long-term organizational sustainability. 

Additionally, insurance companies operating across different jurisdictions face fragmented compliance regulations, consisting of local laws and regulations. This has become a prominent challenge experienced by insurance company treasuries and visible in various treasury processes, from payments to liquidity management. Establishing robust processes and conducting regular compliance reviews could help insurance companies to address the fragmented compliance framework. By proactively addressing compliance challenges and embracing innovative solutions, insurance companies could achieve robust global operations and success in an increasingly interconnected world.   

For more information about Treasury 4.x, download our latest whitepaper: Treasury 4.x - The age of productivity, performance and steering.

Mid 2023, Bolt successfully implemented its new full-fledged treasury management system (TMS). With assistance of Zanders consultants, the mobility company implemented Kyriba – a necessity to support Bolt’s small treasury team. As a result, all daily processes are almost completely automated. “It's about reliability.”

Bolt is the leading European mobility platform that’s focused on more efficient, convenient and sustainable solutions for urban travelling. With more than 150 million customers in at least 45 countries, it offers a range of mobility services including ride-hailing, shared cars and scooters, food and grocery delivery. “Bolt was founded by Markus Villig, a young Estonian guy who quit his school to start this business with €5,000 that he borrowed from his parents,” says Mahmoud Iskandarani, Group Treasurer at Bolt. “He built an app and started to ask drivers on the street to download it and try it out. Now we have millions of drivers and passengers, almost 4,000 employees and several business lines. Last August, we celebrated our 10th anniversary. So, we have one of the fastest growing businesses in Europe. And our ambition is to grow even faster than so far.” 

Driven by technology 

Because of its fast growth, Bolt’s Treasury team decided to look for a scalable solution to cope with the further expansion of the business. Freek van den Engel, Treasury manager at Bolt: “We needed a system that could automate most of our daily processes and add value. Doing things manually is not efficient and risks are high. To help us scale up while maintaining efficiency, we needed our Treasury to be driven by technology.” 

Iskandarani adds: “Meanwhile, our macro environment is changing and we had some bank events. In the past years, startups or scale-ups have seen big growth and didn't focus too much on working capital management. Interest rates were low, which made it easy to raise money from investors. Now, we need to make sure that we manage our working capital the right way so that we can access our money, mitigate risks, and that we get a decent return on our cash. That’s when it's controlled by Treasury and invested correctly.” 

Choosing Kyriba

Van den Engel led a treasury system selection process three years ago for his previous employer, where he also worked together with Iskandarani. “That experience helped us to come up with a shortlist of three providers, instead of having a very long RfP process looking at a long list of vendors. We started the selection process in June 2022 and two months later we chose Kyriba because of its strong functionality. Also, it’s a solution offered as SaaS, which means we don't have to worry about upgrades – a very important reason for us. Kyriba has been working with tech companies similar to ours. Another decisive factor was their format library, called Open Format Studio. It allows us to use self-service when it comes to configuring payment formats, reducing our costs and turn-around time when expanding to new geographies.” 

Implementation partner 

For Bolt, Kyriba will function as in-house bank system, and support its European cash pool. During the selection process, the team had some reference calls with other Kyriba users to discuss experiences with the system and the implementation. “One piece of feedback we received was that it works very well to bring in implementation partners to complete such a project successfully. Zanders stood out, because of its proven track record and the awards it had won. Also, Mahmoud and I both had experience with Zanders during some projects at our previous employer. That’s why we asked them to be our implementation partner.” 

In October 2022, the implementation process started. In July 2023, the system went live. Kyriba’s TMS solution covered all treasury core processes, including cash position reporting (including intra-day balance information), liquidity management, funding, foreign exchange with automatic integration to 360T and Finastra, investments, payment settlements and risk management.  

Trained towards independency 

As part of the implementation process, Zanders trained Bolt on how to use the new tool, and assisted in using the Open Format Studio. In this way, the team built the knowledge and experience needed to roll out to new countries more independently.  

Van den Engel: “We aimed to be independent and do as much as possible ourselves to reduce costs and build up in-house expertise on the system. Zanders helped us figuring out what we wanted, explained and guided us, and showed what the system can do and how to align that with our needs in the best possible way. Once we were clear on the blueprint, they helped us with our static data, connectivity and initial system set-up. After the training they led, we were able to do most of it ourselves, including the actual system configuration work, for which Zanders had laid the foundation.” 

Rolling out the payment hub 

With assistance of Zanders consultants, Bolt also set up a framework to roll out the payment hub, for the vendor payments from its ERP system called Workday and its payroll provider, Immedis. The consultants assisted with configuration of initial payment scenarios and workflows. “We made the connections, tested them and did a pilot with Workday last summer. After training and with the experience that we've built up using Open Format Studio, we can roll out to new countries and expand it ourselves. Starting in August, we continued to roll out Kyriba’s payment hub to more countries, and to implement Payroll. With the payment hub we are now live in 16 countries and that's basically fully self-serviced. Apart from some support for specialized cases, we don’t need support anymore for the payment hub.” 

Many material benefits 

Having a small hands-on project team meant no need for a complex project management organization to be set-up. Naturally Bolt and Zanders started using agile project management, with refocus of priorities to different streams as necessary. The Kyriba implementation project was closed within the set budget in 9 months’ time.  

Iskandarani is happy with the results. “It is clear there are benefits of this implementation when it comes to efficiency and risk management. We now have the visibility over our cash and the fact that we have a system telling us that there’s an exposure that we should get rid of, that has a lot of value. Also, we have some financial benefits that we could not have achieved without the system. Today we can pool our cash better, we can invest it better, and we can handle our foreign exchange in a better way. Before this, we have overpaid banks.” 

Reliability and control 

“We could have hired more people”, Van den Engel adds. “But some things are just very difficult to do without this system. It's also about reliability. Even if you have a manual process in place that works, you will see it breaking down from time to time. If someone deletes a formula, or a macro stops working, that becomes very risky. It’s also about the control environment. As a company we're looking to become more mature and implement controls that should be there – that too is very difficult to do without a proper system that can generate these reports, be properly secured with all the right standards that we need to adhere to, or do fraud detection based on machine learning in the future. It's impossible to do all that manually. Those are material benefits, but hard to quantify.”

The new landscape is all about a digital real-time experience which is creating the need for change in order to stay relevant and ideally thrive. If we reflect on the various messages from the numerous industry surveys, it’s becoming crystal clear that a digital transformation is now an imperative.

We are seeing an increasing trend that recognizes technological progress will fundamentally change an organization and this pressure to move faster is now becoming unrelenting. However, to some corporates, there is still a lack of clarity on what a digital transformation actually means. In this article we aim to demystify both the terminology and relevance to corporate treasury as well as considering the latest trends including what’s on the horizon.

What is digital transformation?
There is no one-size-fits-all view of a digital transformation because each corporate is different and therefore each digital transformation will look slightly different. However, a simple definition is the adoption of the new and emerging technologies into the business which deliver operational and financial efficiencies, elevate the overall customer experience and increase shareholder value.

Whilst these benefits are attractive, to achieve them it’s important to recognize that a digital transformation is not a destination – it’s a journey that extends beyond the pure adoption of technology. Whilst technology is the enabler, in order to achieve the full benefits of this digital transformation journey, a more holistic view is required.

Figure 1 provides a more holistic view of a digital transformation, which embraces the importance of cultural change like the adoption of the ‘fail fast’ philosophy that is based on extensive testing and incremental development to determine whether an idea has value.

In terms of the drivers, we see four core pillars providing the motivation:

• Elevate the customer experience
• Operational agility and resilience
• Data driven real time vision
• Workforce enablement

Figure 1: Digital Transformation View

What is the relevance to corporate treasury?
Considering the digital transformation journey, it’s important to understand the relevance of the technologies available.

Whilst figure 2 highlights the foundational technologies, it’s important to note that these technologies are all at a different stage of evolution and maturity. However, they all offer the opportunity to re-define what is possible, helping to digitize and accelerate existing processes and elevate overall treasury performance.

Figure 2: Core Digital Transformation Technologies

To help polarize the potential application and value of these technologies, we need to look through two lenses.

Firstly, what are some of today’s mainstream challenges that currently impact the performance of the treasury function, and secondly, how these technologies provide the opportunity to both optimize and elevate the treasury function.

The challenges and opportunities to optimize
Considering some of the major challenges that still exist within corporate treasury, the new and emerging technologies will provide the foundation for the digital transformation within corporate treasury as they will deliver the core capabilities to elevate overall performance. Figure 3 below provides some insights into why these technologies are more than just ‘buzzwords’, providing a clear opportunity to elevate current performance.

Figure 3: Common challenges within corporate treasury

Cognitive cash flow forecasting systems can learn and adapt from the source data, enabling automatic and continuous improvements in the accuracy and timeliness of the forecasts. Additionally, scenario analysis accelerates the informed decision-making process. Focusing on currency risk, the cognitive technology is on a continuous learning loop and therefore continues to update its decision-making process which helps improve future predictions.

Moving onto working capital, these new cognitive technologies combined with advanced optical character recognition/intelligent character recognition can automate and accelerate key processes within both the accounts payables (A/P) and account receivables (A/R) functions to contribute to overall working capital management. On the A/R side, these technologies can read PDF and email remittance information as well as screen scrape data from customer portals. This data helps automate and accelerate the cash application process with levels exceeding 95% straight through reconciliation now being achieved. Applying cash one day earlier has a direct positive impact on days sales outstanding (DSO) and working capital. On the A/P side, the technology enables greater compliance, visibility and control providing the opportunity for ‘autonomous A/P’. With invoice approval times now down to just 10.4 business hours*, it provides a clear opportunity to maximize early payment discounts (EPDs).

Whilst artificial intelligence/machine learning technologies will play a significant role within the corporate treasury digital transformation, the increased focus on real-time treasury also points to the power of financial application program interfaces (APIs). API technology will play an integral part of an overall blended solution architecture. Whilst API technology is not new, the relevance to finance really started with Europe’s PSD2 (Payment Services Directive 2) Open Banking initiative, with API technology underpinning this. There are already several use cases for both Treasury and the SSC (shared service center) to help both digitize and importantly accelerate existing processes where friction currently exists. This includes real time balances, credit notifications and payments.

The latest trends
Whilst a number of these new and emerging technologies are expected to have a profound impact on corporate treasury, when we consider the broader enterprise-wide adoption of these technologies, we are generally seeing corporate treasury below these levels. However, in terms of general market trends we see the following:

• Artificial intelligence/machine learning is being recognized as a key enabler of strategic priorities, with the potential to deliver both predictive and prescriptive analytics. This technology will be a real game-changer for corporate treasury not only addressing a number of existing and longstanding pain-points but also redefining what is possible.
• Whilst robotic process automation (RPA) is becoming mainstream in other business areas, this technology is generally viewed as less relevant to corporate treasury due to more complex and skilled activities. That said, Treasury does have a number of typically manually intensive activities, like manual cash pooling, financial closings and data consolidations. So, broader adoption could be down to relative priorities.
• Adoption of API technology now appears to be building momentum, given the increased focus around real time treasury. This technology will provide the opportunity to automate and accelerate processes, but a lack of industry standardization across financial messaging, combined with the relatively slow adoption and limited API banking service proposition across the global banking community, will continue to provide a drag on adoption levels.

What is on the horizon?
Over the past decade, we have seen a tsunami of new technologies that will play an integral part in the digital transformation journey within corporate treasury. Given that, it has taken approximately ten years for cloud technology to become mainstream from the initial ‘what is cloud?’ to the current thinking ‘why not cloud?’ We are currently seeing the early adoption of some of these foundational transformational technologies, with more corporates embarking on a digital first strategy. This is effectively re-defining the partnership between man and machine, and treasury now has the opportunity to transform its technology, approach and people which will push the boundaries on what is possible to create a more integrated, informed and importantly real-time strategic function.

However, whilst these technologies will be supporting critical tasks, assisting with real-time decision-making process and reducing risk, to truly harness the power of technology a data strategy will also be foundational. Data is the fuel that powers AI, however most organizations remain heavily siloed, from a system, data, and process perspective. Probably the biggest challenge to delivering on the AI promise is access to the right data and format at the right time.

So, over the next 5-10 years, we expect the solutions underpinned by these new foundational technologies to evolve, leveraging better quality structured data to deliver real time data visualization which embraces both predictive and prescriptive analytics. What is very clear is that this ecosystem of modern technologies will effectively redefine what is possible within corporate treasury.

*) Coupa 2021 Business Spend Management Benchmark Report

The CLS system was established back in 2002 and since then, the FX market has grown significantly. Therefore, there is a high demand from corporates to leverage CLS to improve corporate treasury efficiency.

In this article we shed some light on the possible technical solutions in SAP Treasury to implement CLS in the corporate treasury operations. This includes CLS deal capture, limit utilization implications in Credit risk analyzer, and changes in the correspondence framework of SAP TRM.

Technical solution in SAP Treasury
There is no SAP standard solution for CLS as such. However, SAP standard functionality can be used to cover major parts of the CLS solution. The solution may vary depending on the existing functionality for hedge management/accounting and limit management as well as the technical landscape accounting for SAP version and SWIFT connectivity.

Below is a simplified workflow of CLS deal processing:

The proposed solution may be applicable for a corporate using SAP TRM (ECC to S/4HANA), having Credit risk analyzer activated and using SWIFT connection for connectivity with the banks.

Capturing CLS FX deals
There are a few options on how to register the FX deal as a CLS deal, with two described below:

Option 1: CLS Business partner – a replica of your usual business partner (BP) which would have CLS BIC code and complete settlement instructions.
Option 2: CLS FX product type/transaction type – a replica of normal FX SPOT, FX FORWARD or FX SWAP product type/transaction type.

Each option has pros and cons and may be applied as per a client technical specific.

FX deals trading and capturing may be executed via SAP Trade Platform Integration (TPI), which would improve the processing efficiency, but development may still be required depending on characteristics of the scope of FX dealing. In particular, the currency, product type, counterparty scope and volume of transactions would drive whether additional development is required, or whether standard mapping logic can be used to isolate CLS deals.

For the scenarios where a custom solution is required to convert standard FX deals into CLS FX deals during its creation, a custom program could be created that includes an additional mapping table to help SAP determine CLS eligible deals. The bespoke mapping table could help identify CLS eligibility based on the below characteristics:

• Counterparty
• Currency Pair
• Product Type (Spot, Forward, SWAP)

Correspondence framework
Once CLS deal is captured in SAP TRM, it needs to be counter-confirmed with the trading counterparty and with CLS Bank. Three new types of correspondence need to be configured:

• MT300 with CLS specifics to be used to communicate with the trading counterparty;
• MT304 to communicate with CLS Custody service;
• SWIFT MT396 to get the matching status from CLS bank.

Credit Risk Analyzer (CRA)
FX CLS deals do not bring settlement exposure, thus CLS deals need to be exempt from the settlement risk utilization. Configuration of the limit characteristics must include either business partner number (for CLS Business Partner) or transaction type (for CLS transaction type). This will help determine the limits without FX CLS deals.

No automatic limits creation should be allowed for the respective limit type; this will disable a settlement limit creation based on CLS deal capture in SAP.
CLS Business partner setting must be done with ‘parent <-> subsidiary’ relationship with the regular business partner. This is required to keep a single credit limit utilization and having FX deals being done with two business partners.

Deal execution
Accounting for CLS FX deals is normally the same as for regular FX deals, though it depends on the corporate requirements. We do not see any need for a separate FX unrealized result treatment for CLS deals.

However, settlement of CLS deals is different and standard settlement instructions of CLS deals vary from normal FX deals.

Either the bank’s virtual accounts or separate house bank accounts are opened to settle CLS FX deals.

Since CLS partner performs the net settlement on-behalf of a corporate there is no need to generate payment request for every CLS deal separately. Posting to the bank’s CLS clearing account with cash flow postings (TBB1) is sufficient at this level.

The following day the bank statement will clear the postings on the CLS settlement account on a net basis based on the total amount and posting date.

Cash Management
A liquidity manager needs to know the net result of the CLS deals in advance to replenish the CLS bank account in case the net settlement amount for CLS deal is negative. In addition, the funds would need to be transmitted between the house bank accounts either manually or automatically, with cash concentration requiring transparency on the projected cash position.

The solution may require extra settings in the cash management module with CLS bank accounts to be added to specific groupings.

Conclusion
Designing a CLS solution in SAP requires deep understanding of a client’s treasury operations, bank account structure and SAP TMS specifics. Together with a client and based on the unique business landscape, we review the pros and cons of possible solutions and help choosing the best one. Eventually we can design and implement a solution that makes treasury operations more efficient and transparent.

Our corporate clients are requesting our support with design and implementation of Continuous Linked Settlement (CLS) solutions for FX settlements in their SAP Treasury system. If you are interested, please do not hesitate to contact us.

Now that we have passed and are still in an uncertain period, it is time to discover opportunities to reposition and prepare for new challenges and developments. How should you, as a treasurer, prepare for another unpredictable year? What can your company, and the treasury organization specifically, do to add value by recognizing the trends? How can Treasury contribute to dealing with current challenges in global supply chains?

While much about what 2022 will hold is uncertain, there are a few trends that will definitely play an important role. In this article we explore three main topics to navigate through the new environment and which are crucial to guide your treasury plan for the coming year.

Foresee the accelerating winds of change within the payments landscape
Innovation within the payments industry is closely linked to the continued digitization of commercial and consumer transactions. There are three topics worth mentioning when discussing the main points of attention for corporate treasury within the global payment landscape, being: (1) integration of e-commerce, (2) rise of alternative payment instruments, and (3) further payment standardization.

Integration of e-commerce into corporate treasury is an important topic for many treasurers. Consumers are driving the significant rise in the usage of alternative payments methods, like digital wallets (e-wallets), mobile payments, and ‘buy now, pay later’ solutions. Chinese consumers are leading the way with digital wallets which now account for over 72% of e-commerce purchases . Additionally, 56 countries are now providing real-time payment rails and the rising use of APIs promises to deliver a frictionless experience for more consumer payments. As a result, one of the important actions for Treasury in 2022, is to ensure that Treasury is linked into the different e-commerce platforms in the group in a similar fashion to how Treasury is responsible for managing traditional payments and bank relationships. Treasury should be the guardian of a safe payments infrastructure (including e-commerce payments) performed by reliable counterparties that are compliant with international regulation.

In terms of the rise of alternative instruments, we see the introduction of new digital coins, aimed at reducing volatility compared to the ‘traditional’ cryptos. This includes governments looking at the possibility of launching their own central bank digital currencies (CBDCs) which leverages the underlying distributed ledger technology as well as the introduction of so-called stablecoins, which are pegged to the value of an underlying asset. While the Bahamas was the world’s first CBDC with the launch of the Sand Dollar in October 2020, China is currently taking the lead with around 70 million digital Yuan transactions reported since the start of its pilot, which initially covered 4 cities. According to Atlantic Council, there are now 81 countries considering CBDCs, including the Federal Reserve, the European Central bank, the Bank of Japan and the Bank of England. While the future remains uncertain, these developments could lead to more mainstream use cases for digital currencies. This would have a potential impact on the payment formats we use, timing of payments and the role of traditional (network) banks. While use cases are limited at this moment, treasurers should be aware of the potential material impact on the payments landscape.

When it comes to payments standardization, API adoption is starting to accelerate, which will have a profound impact on both corporate treasury and financial shared service centers through the acceleration of information and processes. However, the lack of standardization within the industry appears to be causing the primary drag on adoption. This will become a foundational technology for real-time treasury, as real time balance and transactional information will provide immediate visibility and enable faster, more informed decisions to be made.
The final payments innovations on the horizon are a combination of global messaging and infrastructure projects. First, there is the planned SWIFT adoption of a selection of the ISO20022 XML messages included in the 2019 annual standards release. While this will initially be adopted within the banking community as part of the publicized MT-MX migration, the expectation is that banks will look for corporates to migrate at some point to take advantage of the more structured data opportunities and, if the CGI-MP is successful, greater alignment around the implementation within the banking sector. Moving onto the country level infrastructure, the UK is progressing its RTGS renewal program which will be underpinned by the adoption of ISO 20022 XML messaging. In addition, Hong Kong and Singapore are also building new RTGS payment rails underpinned by ISO 20022. Within the Nordics, there is P27, which aims to establish the first integrated region for domestic and cross-border payments in multiple currencies.

Stay ahead of new global tax regimes
The BEPS initiative impacted Treasury structures and the pricing of financial transactions in recent years. For example, thin capitalization rules, limitations to interest deductions and transfer pricing guidance have initiated multinationals to rethink their intercompany finance practices.

More specifically, the final OECD transfer pricing guidelines for financial transactions had a major impact on the internal corporate finance function of corporate treasuries. Numerous corporates revisited their pricing framework for intercompany loans, financial guarantees, cash pools and in-house banks in order to prevent issues during tax audits and possible transfer pricing adjustments.

We observe that more scrutiny is placed on the ‘at arm’s length’ pricing of treasury transactions and expects this to continue in 2022. It is thus advisable for treasurers to ensure that their intercompany lending framework is consistent, transparent and compliant with the latest transfer pricing guidelines. Especially since the simplified practice of using one group credit spread for all in-house bank participants is not compliant with the OECD guidelines. Therefore, as the burden of compliance increases, corporates are being pushed to look for solutions which can support them in automating this onerous process whilst still be fully compliant.

Lastly, treasurers should be aware of the latest development in international taxation: the global minimum tax. The G20 and all OECD member countries agreed on 8 October 2021 that multinationals will have to pay a minimum global tax of 15%. As the scope and the details of the tax reform are not clear yet, treasurers are advised to be aware of the topic and align with the internal tax team in order to identify the potential business impact. Treasury and tax can collaboratively serve as a strategic advisor towards their organization.

Seize the strategic opportunity in ESG
When talking about sustainability within treasury, many treasurers’ first port of call is to investigate a sustainable financing framework, either via green or social financing. ESG (environmental, social and governance) considerations play an important role in the external financing and the internal capital allocation process. In the long run, companies that have not implemented an ESG strategy may be deprived from fresh capital. This particular case is becoming more apparent within certain industries, like polluting industries or the so-called sin stocks (gambling, alcohol, tobacco, and weapons industry), where the transition from Greenium to a Brown money penalty may be more present than in other industries. However, there is more than just green or social financing. The topic around ESG is currently gaining momentum. ESG considerations are essential for long-term success; it is no longer just a necessity, but also a strategic opportunity.
So how should Treasury drive the ESG agenda? There are numerous innovative ways for Treasury to incorporate ESG into its strategy. For example, in addition to including ESG factors in the financing documentation or SCF programs, Treasury may incorporate ESG elements in the internal capital allocation process too. This can be done by adding ESG-related risk factors to the weighted average cost of capital (WACC) or internal hurdle investment rates for its capital allocation decisions. By having an ESG-adjusted WACC, one can evaluate projects by considering the ESG impact of an investment. By adjusting the WACC to, for example, the level of CO2 that is emitted by a project, the capital allocation process favors projects with low CO2 emissions. Another example of how Treasury can contribute to the company’s ESG goals is to encourage new and existing partners (e.g. banks or vendors) to take sustainable measures, by embedding ESG requirements into selections processes.

A corporate reaps the most benefits from its ESG policy when initiatives are mapped to the right KPIs to track the sustainable performance over time. KPI’s should be SMART, forward looking and focus on material themes. For Treasury, an example of such a metric is the percentage of suppliers rewarded with preferred supply chain finance (SCF) terms because of their ESG performance. To enlarge the impact of an ESG policy even more, and increase market transparency, KPIs should be benchmarked against industry standards.

Another way to increase market transparency is to maintain a corporate’s records by getting an external verification of its sustainable performance. This is enabled by the EU taxonomy model to avoid greenwashing.

Are you ready for your treasury journey?
2022 promises to be another exiting year with many opportunities to drive the Treasury function forward. The three main topics described in this article highlight the longer-term trend of Treasury moving closer to the business. The changing role of Treasury towards a comprehensive value-added center towards the business often requires a transformation in the Treasury organization. Zanders looks forward to discussing these and other trends with you and to support you on your treasury journey in 2022!

References
1) 2021 Global Payments Report by Worldpay from FIS
2) Common Global Implementation – Market Practice Group (formed October 2009)

This is particularly relevant for large complex organizations that are running SAP. The SAP S/4HANA move is complex and presents great opportunities and challenges. For the treasury within these large complex organizations it does not make sense to wait for the enterprise to formulate a roadmap as then the likelihood of the treasury requirements not being properly prioritized are high.

It is in this context that Zanders provides the option to help your organization formulate a treasury technology roadmap. Driven by 27 years of experience we have built a best practice framework for treasury transformation projects. The approach we have formulated for the treasury technology roadmap ensures that we start by focusing efforts on establishing a clear set of requirements for the treasury organization and processes. Here too we have built up a sound catalogue of strategic treasury requirements which are mapped to a solid treasury business process framework, and it is against this foundation that we engage with the treasury organization to ensure we emerge with an accurate view of the specific treasury requirements. In the process we ensure these requirements are categorized according to priority and evaluated relative to current available functionality.

Enablers for core treasury activities
We also establish a clear scope for the roadmap based on the activities to be covered which in effect defines the processes in scope. The Zanders framework uses three core treasury activities being Treasury Operations, Risk Management and Enterprise Funding with the associated 15 underlying sub-processes that support these.

The Zanders framework then has four enablers that support these core treasury activities. These are:

1. Strategy and organization
2. Banking Infrastructure
3. Processes and systems
4. Governance and controls

Typically for a treasury technology roadmap engagement, the focus is on the processes and systems enabler, but we will also take into the strategy and organization in formulating the scope of the assessment here the geographic and organizational scope is established and confirmed. For banking infrastructure, the banks, bank accounts and payment type scope is established.

Figure 1: Treasury Roadmap; Driven by 27 years of experience we have built a best practice framework for Treasury Transformation projects. Based on this framework and considering what has been requested by clients, we propose the following approach to build a well-defined Treasury Technology Roadmap.

Figure 2 – Treasury scope; The starting point for kicking off the roadmap is defining the functional scope in line with the three core Treasury activities (Treasury Operations, Risk Management, Enterprise Funding) and the relevant underlying 15 sub-activities.

Fit-gap analysis of requirement
The next step in the process is solution design where we perform a fit-gap analysis of requirement and compare this to the existing and proposed treasury technology platforms. This analysis can be tailored to exclusively focus on SAP treasury solutions or include suitable alternative technology platforms. In addition, with the increase in available add-on solutions in the market this analysis can also be expanded to explore and expose the relevant technology solutions that fit the unique treasury requirements based on the prioritization established.

Where the first step of the process ensured an accurate understanding of the organization’s treasury requirements, this step ensures that the treasury organization is exposed to a focused set of relevant solutions that meet these requirements.

A further important consideration is on which SAP system within the organization the treasury requirements will be implemented. Here the many available deployment options need to be considered and evaluated including S/4 HANA side car options (Cloud or On Premise), deployment in a single central instance and the likes of Central Finance architecture and approach.

Meeting all objectives
Finally, the roadmap step is where the analysis is brought together to settle on relevant alternative options that meet both treasury and the broader enterprise’s strategic long-term objectives. For these viable technology options realistic implementation timeframes are estimated and a framework for total cost of ownership is established. This ensures that the basis for the business case is established and the parameters for the various options are clearly articulated.

In such a way the treasury organization is able to help lead rather than follow at this crucial time and hence ensure that the treasury technology requirements are included in the overall enterprise technology roadmap and a measure of order and clarity is brought into the formulation of the enterprise transformation plans.

At the birth of any project, it is crucial to determine the most suitable project management framework by which the treasury objectives can be achieved. Whether the focus is on TMS implementation, treasury transformation or risk management, the grand challenge remains – to ensure the highest quality of the delivered outcome while understanding the realistic timelines and resources. In this article we shed a light on the implications of project management methodologies and address its main concepts and viewpoints, accompanied by experiences from past treasury projects.

In recent years, big corporates have been strategically cherry-picking elements from various methodologies, as there is no one-size-fits-all. At Zanders, our treasury project experience has given us an in-depth knowledge in this area. Based on this knowledge, and depending on several variables – project complexity, resource maturity, culture, and scope – we advise our clients on the best project management methodology to apply to a specific treasury project.

We have observed that when it comes to choosing the project management methodology for a new treasury project, most corporates tend to choose what is applied internally or on previous projects. This leverages the internal skillsets and maturity around that framework. But is this really the right way to choose?

Shifting from traditional methodologies

As the environment that businesses operate in is undergoing a rapid and profound change, the applicability and relevance of the traditional project management methodologies have been called in to question. In the spirit of becoming responsive to unforeseen events, companies sensed the urgency to seek methods that are geared to rapid delivery and with the ability to respond to change quickly.

Embracing agile

The agile management framework aims to enhance project delivery by maximizing team productivity, while minimizing the waste inherent in redundant meetings, repetitive planning or excessive documentation. Unlike the traditional command and control-style management, which follows a linear approach, the core of agile methodology lies in a continuous reaction to a change rather than following a fixed plan.

This type of framework is mostly applied in an environment where the problem to be solved is complex, its solution is non-linear as it has many unknowns, and the project requirements will most likely change during the lifetime of the project as the target is on a constant move.

The illustration of an agile process (figured above) portrays certain similarities to the waterfall approach, in the sense of breaking the entire project in to several phases. However, while these phases in the waterfall approach are sequential, the activities in agile methodology can be run in parallel.

Agile principles promote changing requirements and sustainable development, and deliver working software frequently which can add value sooner. However, from a treasury perspective, you often cannot go live in pieces/functionalities since it increases risk or, when a requirement comes late in process, teams might not have the resources or availability to support the new requirement, creating delivery risk.

Evolving Agile and its forms

Having described the key principles of agile methodology, it is vital to state that over the years it has become a rather broad umbrella-term that covers various concepts that abide by the main agile values and principles.

One of the most popular agile forms is the Kanban approach, the uniqueness of which lies in the visualization of the workflow by building a so-called (digital) Kanban board. Scrum is another project management framework that can be used to manage iterative and incremental projects of all types. The Product Owner works with the team to identify and prioritize system functionality by creating a Product Backlog, with an estimation of software delivery by the functional teams. Once a Sprint has been delivered, the Product Backlog is analyzed and reprioritized, and the next set of deliverables is selected for the next Sprint. Lean framework focuses on delivering value to the customer through effective value-added analysis. Lean development eliminates waste by asking users to select only the truly valuable features for a system, prioritize the features selected, and then work on delivering them in small batches.

Waterfall methodologies – old but good

Even though agile methodologies are now widely accepted and rising in popularity, certain types of projects benefit from highly planned and predictive frameworks. The core of this management style lies in its sequential design process, meaning that an upcoming phase cannot begin until the previous one is formally closed. Waterfall methodologies are characterized by a high level of governance, where documentation plays a crucial role. This makes it easier to track the progress and manage the project scope in general. Projects that highly benefit from this methodology are characterized by their ability to define the fixed-end requirements up-front and are relatively smaller in size. For a project to move to the next phase, all current documentation must be approved by all the involved project managers. The excessive documentation ensures that the team members are familiar with the requirements of the coming phase.

Depending on the scope of the project, this progressive method breaks down the workload into several discrete steps, as shown here:

Project Team Structures

There are also differences between the project structures and the roles used in the two presented frameworks.

In waterfall, the common roles – outside of delivery or the functional team – to support and monitor the project plan are the project managers (depending on the size of the project there can be one or many, creating a project management office (PMO) structure) and a program director. In agile, the role structure is more intricate and complex. Again, this depends on the size of the treasury project.

As stated previously, agile project management relies heavily on collaborative processes. In this sense, a project manager is not required to have a central control, but rather appointing the right people to right tasks, increasing cross-functional collaboration, and removing impediments to progress. The main roles differ from the waterfall approach and can be labelled as Scrum master, Agile coach and Product owner.

Whatever the chosen approach is for a treasury project, one structure is normally seen in both – the steering committee. In more complex and bigger treasury projects (with greater impact and risk to the organization) sometimes a second structure or layer on top of the steering committee (called governance board) is needed. The objective of each one differs.

The Project Steering Committee is a decision-making structure within the project governance structure that consists of top managers (for example, the leads of each treasury area involved directly in the project) and decision makers who provide strategic direction and policy guidance to the project team and other stakeholders. They also:

• Monitor progress against the project management plan.
• Define, review and monitor value delivered to the business and business case.
• Review and approve changes made to project resource plan, schedules, and scope. This normally depends on the materiality of the changes.
• Review and approve project deliverables.
• Resolve conflicts between stakeholders.

The Governance Board, when needed, is more strategical by nature. For example, in treasury projects they are normally represented by the treasurer, CFO, and CEO. Some of the responsibilities are to:

• Monitor and help unblock major risks and potential project challenges.
• Keep updated and understand broader impacts coming out from the project delivery.
• Provide insights and solutions around external factors that might impact the treasury project (e.g. business strategic changes, regulatory frameworks, resourcing changes).

Other structures might be needed to be designed or implemented to support project delivery. More focused groups require different knowledge and expertise. Again, no one solution fits all and it depends on the scope and complexity of the treasury project.

The key decision factors that should be considered when selecting the project structure are:

Roles and responsibilities: Clearly define all roles and responsibilities for each project structure. That will drive planning and will clearly define who should do what. A lack of clarity will create project risks.

Size and expertise: Based on roles and responsibilities, and using a clear RAPID or RACI matrix, define the composition of these structures. There should not be a lot of overlap in terms of people in the structure. In most cases ‘less is more’ if expertise and experience is ensured.

The treasury project scope, complexity and deliverables should drive these structures. Like in the organizational structure of a company, a project should follow the same principles. A pyramid structure should be applied (not an inverted one) in which the functional (hands-on) team should be bigger than other structures.

Is a hybrid model desirable? Our conclusion

While it is known that all methodologies ultimately accomplish the same goal, choosing the most suitable framework is a critical success factor as it determines how the objectives are accomplished. Nowadays, we see that a lot of organizations are embracing a hybrid approach instead of putting all their hopes into one method.

Depending on the circumstances of the treasury project, you might find yourself in a situation where you employ the waterfall approach at the very beginning of the project. This creates a better structure for planning, ensures a common understanding of the project objectives and creates a reasonable timeline of the project. When it comes to the execution of the project, however, it becomes apparent that there needs to be space for some flexibility and early business engagement, as the project happens to be in a dynamic environment. Hence, it becomes beneficial to leverage an agile approach. Such project adapts a “structured agile” methodology, where the planning is done in the traditional way of management, while the execution implements some agile articles.

Even a small project like a SaaS cash flow forecast system implementation is complex if we take into account that the business, regulatory and technical landscape is constantly evolving and that in most cases business resources cannot fully dedicate their time to projects. In today’s world, project teams also need to respond to change quickly and deliver value as soon as possible, both to the project and to business stakeholders. The challenge is to do that while also being in control of timelines, budget, scope, and – most importantly – creating quality and value to treasury and the business.

As described in project management theory, a project is typically constrained by three elements. This is called the triple constraint, iron triangle or project triangle. The three elements are scope, time, and cost. This theory is project management methodology agnostic. It does not matter whether the project is delivered from a waterfall or agile approach; if any of these elements are changed, something else must change.

The theory of the project management triangle is true, but far too simple. Reality differs; only working with these three variables is a limitation when the aim is to deliver a project that also meets the quality criteria defined by the business. In that case, you also need to consider other variables that we will highlight in this article, as these will impact delivered quality, as well as scope, timelines, and cost.

Variables to consider for a successful project

Based on our experience, we know that all these variables will change and need to be adjusted during any project. However, these changes (to scope, timelines or cost) should come from evolving business requirements, a changing landscape and the additional value that they can bring to the business – and not due to a wrong project approach, or variables, processes and structures that were incorrectly or insufficiently defined at the start of the project.

What we see is that most projects are not delivered within the defined scope, time, and cost, due to incorrect project planning, lack of the right project structure or skillsets, and an unclear approach – and not because business is evolving.

So, how can we use this to manage projects effectively? We know, after all, that conditions inevitably change.

In most cases, the variables in a treasury project don’t change in the core functional area. Implementation teams (whether they are strategical, tactical, or operational) usually have a high level of treasury expertise. They speak the same language as the business and that helps to structure the scope, project, and delivery. The right business engagement allows you to keep the efforts, timelines, scope and cost under control.

Typically, it is other areas outside of treasury functional delivery that undermine delivery within timelines, scope, and cost. There are several reasons for this, including these key factors:

• Lack of a detailed approach defined at the start of the project
• Lack of time and focus given to these areas throughout the project
• Lack of a right skillset (both external and internal) allocated to the project and specific areas

Support areas

Which are the areas that undermine delivery within timelines, scope, and cost? We call these ‘support areas’ to the functional treasury delivery team. Since they are considered support areas, most of the time there is a lack of focus or lack of treasury skilled people to define the right approach at an early stage.

These support areas are:

• Project management
• Business and change management
• Data management
• Testing
• Infrastructure and integration

The way that it should work, theoretically, is that these areas support the core treasury delivery. Apart from making sure that their own deliverables support the overall functional delivery, their tasks should take the workload and pressure away from the core team and leaving it to the business to focus on priority items and risk areas.

What happens in practice is that, due to the reasons mentioned above (i.e. not using the right skillsets and an incorrect detailed approach defined for each of these areas), instead of taking off the pressure or workload from the core team, these areas require more time and put more pressure in the core functional team, requiring the time and focus of the key people to be shared across high and low priority and risk areas.

Questions you need to ask

Are all the deliverables critical to a successful project? Project empire-building happens in some projects, so review and prioritize deliverables. Non-critical deliverables will impact cost, timelines, and quality, shifting project focus and resources.

Therefore, at the start of a project, we always need to ask ourselves:

1. Do we have the right approach for each project area (core functional, project management, etc.)?
2. Is the approach based on similar projects, with a similar landscape, scope and complexity?
3. Is the approach defined by someone with treasury skills and experience?

An ERP implementation is not the same as a treasury system implementation, since the data required, the processes and risk areas differ. Integration-wise, counterparties involved in treasury system projects differ in terms of file formatting and content, where security and encryption is key. From a testing perspective: how can you prioritize test activities if you don’t know the difference between trade settlement and trade capture?

The same applies to non-system related projects. A treasury transformation project does not require data to be loaded into a new treasury management system, however required reporting (project management dashboards) or stakeholder mapping and management differ from a non-treasury non system related project.

An agnostic approach and agnostic skillsets do not really work. The triangle comes into play when something affects one of its variables. For example, if we need to produce more reports for project management, or have more non-critical deliverables while the time frame is too short to deliver all, the project will likely need more resources, or perhaps a scope reduction. Either way, it will certainly impact quality.

Why do projects succeed?

All successful projects have things in common, and these are incorporated in our implementation framework, for areas like data, testing, project management, business change.

This article is the first of a series on implementation projects. In the next parts, we will start delving into each one of the areas mentioned, sharing our insights and explaining the right approach to impact costs, timelines and scope with changes that will increase the delivered quality and value for the business and that are coming from evolving business requirements with a clear ROI.

There are many concepts in which a virtual account can be deployed. In this second article on ‘How to setup virtual accounts in SAP’, we depict the concept that can be implemented in SAP the easiest without needing specialized modules like SAP Inhouse cash; all can be supported in the SAP FI-CO module.

In the process, we rely on a simple set of building blocks:

• GL accounts to manage positions between the OpCo’s and Treasury and GL accounts to manage the external cash balance.
• Receipt and processing of external bank statements.
• On the external bank statement for the Master Account, an identifier needs to be available that conveys to which virtual account the actual collection was originally credited. This identifier ultimately tells us to which OpCo these funds originally belongs to.

How to implement virtual accounts in SAP

This part assumes that the basic FI-CO settings for i.e. the company code and such are already in place.

Master Data – General Ledger Accounts

Two sets of GL accounts need to be created: balance sheet accounts for the representation of the intercompany positions and the GL account to represent the cash position with the external bank.

These GL accounts need to be assigned to the appropriate company codes and can now be used to in the bank statement import process.

Transaction code FS00

House bank maintenance bank account maintenance

In order to be able to process bank statements and generate GL postings in your SAP system, we need to maintain the house bank data first. A house bank entry comprises of the following information that needs to be maintained carefully:

1. The house bank identifier: a 5-digit label that clearly identifies the bank branch
2. Bank country: The ISO country code where the bank branch is located.
3. Bank key: The bank key is a separate bank identifier that contains information like SWIFT BIC, local routing code and address related data of your house bank

Transaction code FI12

Secondly, under the house bank entry, the bank accounts can be created.

1. The account identifier: a 5-digit label that clearly identifies the bank account
2. Bank account number and IBAN: This represents the bank account number as assigned to you by the bank.
3. Currency: the currency of the bank account
4. G/L Account: the general ledger account that is going to be used to represent the balance sheet position on this bank account.

Transaction code FI12 in SAP ECC or NWBC in S/4 HANA

The idea here is that we maintain one house bank and bank account in the treasury company code that represents the Master account as held with your house bank. This house bank will have the G/L account assigned to it that represents the house banks external cash position.

In each of the OpCo’s company codes, we maintain one house bank and bank account that represents each of the “virtual” bank accounts as held with your house bank. This house bank will have the G/L account assigned to it that represents the intercompany position with the treasury entity.

Electronic Bank Statement settings

The Electronic Bank Statement (EBS) settings will ensure that, based on the information present on the bank statement, SAP is capable of posting the items into the general or sub ledgers according to the requirements. There are a few steps in the configuration process that are important for this to work:

1. Posting rule construction
   Posting rules construction starts with setting up Account symbols and assigning GL accounts to it. The idea here is to define at least three account symbols to represent the external Cash position (BANK), the IC position with OpCo1 (OPCO1) and thirdly the IC position with OpCo2 (OPCO2). A separate account symbol for customers is not required in SAP.
   For the account symbol for BANK we do not assign a GL account number directly in the settings; instead we will assign a so-called mask by entering the value “+++++++++”. What this does in SAP is for every time the posting rule attempts to post to “BANK”, the GL account as assigned in the house bank account settings is used (FI12 or NWBC setting above).
   For the account symbol OPCO1 and OPCO2 we can assign a dedicated balance sheet GL that represents the IC position with those OpCo’s. These GL accounts have already been created in the first step (FS00).
   Now we have the account symbols prepared, we can start tying together these symbols into posting rules. We need to create 3 posting rules.
   Posting rule 1 is going to debit the BANK symbol and it is going to credit OPCO1 symbol.
   Posting rule 2 is going to debit the BANK symbol and it is going to credit OPCO2 symbol.
   Posting rule 3 is going to debit the BANK symbol and it is going to credit a BLANK symbol. The posting type however is going the be set to value 8 “Clear Credit Subledger Account”. What this setting is going to attempt is that it will try to clear out any open item sitting in the customer sub-ledger using “Algorithms”. More on algorithms a bit later.
   As you can imagine, posting rules 1 and 2 are applicable for the treasury entity. Posting rule 3 is going to be used in the OpCo’s EBS process.
   Transaction code OT83
2. Posting rule assignment
   In the next step we can assign the posting rules to the so-called “Bank Transaction Codes” (or BTC’s like i.e NTRF) that are typically observed in the body of the bank statements to identify the nature of the transactions.
   To understand under which Bank Transaction Code these collections are reported on the statement, you typically need to carefully analyze some sample statement output or check with your banks implementation team for feedback.
   Important to note here is to assign an algorithm to posting rule 3. This algorithm will attempt to search the payment notes of the bank statement for “Reference Numbers” which it can use to trace back the original customer invoice open item. Once SAP has identified the correct outstanding invoice, it can actually clear this one off and identify it as being paid.
   Transaction code OT83
3. Bank account assignment
   In the last part we can then assign the posting rules assignments to the bank accounts. This way we can differentiate different rule assignments for different accounts if that is needed.
   Transaction code OT83
4. Search Strings
   If the posting rule assignment needs more granularity than the level provided in step 2 above here (on BTC level), we can setup search strings. Search strings can be configured to look at the payment notes section of the bank statement and find certain fixed text or patterns of text. Based on such search strings we can then modify the posting behavior by for instance overruling the posting rule assignment as defined in step 2.
   Whether this is required depends on the level of information that is provided by the bank in the bank statements.
   Transaction code OTPM

Importing and processing bank statements

We should now be in good shape to import our first statements. We could download them from our electronic banking platform. We could also be in a situation where we already receive them through some automated H2H interface or even through SWIFT. In any case, the statements need to be imported in SAP. This can be achieved through transaction code FF.5. The most important parameters to understand here are the following:

1. File parameters: Here we define the filename and storage path where our statement is saved. We also need to define what format this file is going to be, i.e. MT940, CAMT.053 or one of the many other supported formats
2. Posting Parameters: Here we can define if the line items on the bank statements are going to be posted to general or sub-ledger.
3. Algorithms: Here we need to set the range of customer invoice reference number (XBLNR) for the EBS Algorithm to search the payment notes for any such occurrence in a focused manner. If we would leave these fields empty, the algorithm will not work properly and will not find any open invoice for automatic clearing.

Once these parameters are maintained in the import variant, the system will start to load the statements and generate the required postings.

Transaction code FF.5

Closing remarks

Other concepts could be where a payment factory is already implemented using i.e. SAP IHC and the customers wants to seek additional benefits by using the virtual account functionality of its bank.

This is the second part of a series on how to set up virtual accounts in SAP. Click here to read the first part. A next part, including more complex concepts, will be published soon.

For questions please contact Ivo Postma.