The Treasury Update Podcast by Strategic Treasurer

Episode 201

Understanding Plans, Pains, and Spend: NBFI

Seeking to understand the priorities, plans, and activities that financial institutions are focused on? On today’s podcast, host Craig Jeffery is joined by Steve Bullock, Vice President of Insurance and Financial Services at Kyriba, to discuss results from the 2022 Non-Banking Financial Institutions (NBFI) Survey. Topics of discussion center around technology, plans to spend, pain points, and more.

Our Non-Banking Financial Institutions Survey, underwritten by Kyriba, polled NBFI professionals on complexity, technology, exposure management, and assets, plans, pains, spend, and focus. You are invited to read through the top ten items from the research and see what is dramatic and notable, as well as what hasn’t changed much.

Download the report here.


Craig Jeffery, Strategic Treasurer

Craig - Headshot


Steve Bullock, Kyriba

Steve Bullock - Kyriba

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Episode Transcription - Episode #202: Understanding Plans, Pains, and Spend: NBFI

Intro  0:03 

Welcome to The Treasury Update Podcast presented by Strategic Treasurer, your source for interesting treasury news, analysis, and insights in your car, at the gym or wherever you decide to tune in.


Craig Jeffery  0:20 

Welcome to The Treasury Update Podcast. This is Craig Jeffrey, and I am here with Steve Bullock from Kyriba and we’re talking about Non-Bank Financial Institution. So, insurance companies, brokerages and we’re looking at the results of the most recent survey, as well as some discussion on those topic points. Steve, it is good to see you and hear you again.


Steve Bullock  0:43 

Hi Craig, nice to see you and thanks very much for your time today,


Craig Jeffery  0:47 

Thanks to Kyriba for underwriting this year’s iteration of the NBFI survey. You can find the information in the show notes for downloading the report, really rich set of data for those industries in this set of industry verticals. So, with that, Steve, I wanted to just talk to you and hear your comments on Non-Bank Financial Institutions, insurance companies and the like. What do you see, apart from the survey results? What do you see as setting them apart from other industry verticals, whether it’s manufacturing or higher ed? Where are they? Where are they different?


Steve Bullock  1:26 

There’s a fair few areas actually, Craig, and obviously, the survey that we undertook together has really pulled those out. But I think the things that springs to mind, really are sort of the volumes around bank account management. So, it’s very, very intensive. Similarly, with the amount of payments that are being processed on a regular basis, that tends to be high volume, and obviously very, very focused. And the other things, of course, is the investment side of things. Clearly, the treasury business is really targeted and focused on ensuring that they’re making the best return on the monies for their organizations.


Craig Jeffery  2:01 

Different industry verticals may have different areas where they have a certain level of treasury intensity. But let’s talk about accounts for a moment. You talked about the number of accounts that people have you talked about investment activity and payments but about accounts. What do you see is a distinguishing point there besides just the volume?


Steve Bullock  2:21 

Well, the type of bank account tends to vary typically in your sort of bread-and-butter corporate you’re gonna get checking accounts, you’re gonna get investment accounts, but when it comes down to the NBFIs they have a whole series of different accounts for different reasons. One may be use for, for brokerage custodian for payments for fees for internal and external monies, as well as obviously investments that were mentioned a while ago. So, not only is there the volume of the bank accounts, this distinction of what those bank account counts tend to be used for. They’re very, very defined and segregated whereas in other corporate areas, you may find a mix of different transaction types going into the same bank account.


Craig Jeffery  3:05 

We saw that those with regular bank accounts or demand deposit accounts, how we like to refer to those, over 12% of entities, no matter the size, had over 500 of those accounts, customer custodian accounts for custody accounts, 15% had more than 250 custody accounts. So, those accounts that have custody, the various types of assets and securities and 15% had over 100 trust accounts. So, your point is well taken, and wanted to shift the discussion to payments of payments control because you talked about that as a high-volume area. Payments are a significant focus for many, many companies, but certainly for, whether it’s insurance companies or people paying pensioners, there is a high volume. What are some of the things that we’re learning, both from this research, but also what you’re seeing in the market? And just so everyone knows, Steve heads up a sales group to this set of industry verticals so he’s talking to them day in and day out?


Steve Bullock  4:11 

What we hear regularly is that the biggest focus tends to be around the minimization of any fraud risk. That’s something that as individuals we’re regularly getting targeted for. Business is very much the same but in a much greater capacity. So, the ability to seek to prevent that as best those organizations can and to it at the same time, ensure that there’s adequate security around the payments workflow and payments control really stands out as one of the major requirements that people have, not only from the technology they use, but also in how the processes are managed within their organization. The other aspect, which is obviously vital as part of that, that fraud and security aspect is compliance. It may be good to monitor your fraud and your security but at the same time you want to ensure that what you are processing falls within the compliance framework that your business and your organization work within people that want to ensure that are my payments being ratified as the recipient is someone who’s not on a blacklist or is not in a country where I should not be doing business based on geographical changes that are occurring as we noted.


Craig Jeffery  5:20 

I just wanted you to comment on the priorities. One of the questions that we asked those taking a survey was about the different priorities that people have and ask them to list them and in order those, security and fraud prevention was number one at 66%, compliance was number two at 45, efficiency was 33%. So, you’ve sort of got into why they might be ordered this way. But any additional insights onto the priorities here.


Steve Bullock  5:49 

I’ll just pick up on the third one that I’ve not mentioned, which is obviously efficiency side of things. So, you know, when we talk about this error of business, as we said the payment volumes tend to be high that might rise and fall during certain months and certain quarters depending on what’s happening, certainly, particularly at month or quarter end. So, one of the other interesting trends that we’re seeing and something that you know, the market has been moving to over the last couple of years is the adoption of artificial intelligence and machine learning, to ensure that when payments are being processed through the treasury organization, that they are actually being tracked and being understood as to what they relate to if there’s any anomalies that are being created as part of that process. Or if there’s anything that does not appear to be correct based on the underlying businesses, exact requirements. A simple example could be that every payment has to have backup documentation. And if one payment does not have that, then that could be rejected as a possible error to be ratified subsequently by another team within the organization. But as we talk about AI and machine learning, again, terms that come up quite consistently in day-to-day life as well as business. It’s not used as often as you would anticipate. There’s definitely an interest there. And the software side of the world is making good progress. But I think the adoption is lacking, whether it’s a case of people are just sort of waiting for the other person to go first or they themselves are just a little bit unsure of what that’s going to mean to them and their organization. There’s definitely an interest but it’s the true adoption or sort of not being picked up as quickly as anticipated.


Craig Jeffery  7:28 

Those are good point. So, just some of those numbers for those who are listening, current usage by this sector for AI and ML for payments, 3% are currently using yet tenfold more, another 30% plan to use it. That’s a 10x growth. Now, just by way of comparison, encryption, which I would also think would be close to 100%. We see that as 50% in terms of how people answer the survey, if people are unsure that all of their processes are using it. They might not answer that but, 50% indicate currently using encryption and another 17% expected to adopt it. So, you know when you think about that, that’s you know, 30 something percent growth and encryption total of 17% of the entire population, whereas we see a tenfold increase, instead of 70%, more adopting 30% more. So, I think there’s a lot of a lot of good room. You made a comment there. Maybe we just do a little bit of a discourses here. You mentioned that the tech firms are doing quite well here they’re building, I’m assuming you mean that they’re building these capabilities into their system like Kyriba’s doing. And maybe the challenge too is, especially in this area where it’s been very payment intensive, a lot of companies have their own payment hubs or their homegrown payment systems and they may not be able to layer in artificial intelligence and machine learning to capture anomalies detect frauds and items in the same way or with the same speed as, let’s say FinTechs that are really focused on that or how do you see that changing over time? Are they going to build it on their own? Are they going to adopt more from technology providers? What are you thinking,


Steve Bullock  9:18 

The non-bank side of the house so always had, and this obviously goes back many, many years as far as adding interest to consider build versus buy. I think that’s one thing that has really never gone away from that side of the industry. However, when people look for consistency, they’re now looking more and more for cloud-based applications things they don’t have to administer themselves, servers they don’t have to worry about themselves, staffing they don’t have to consider, then the aspect of utilizing off the shelf software that is utilized by others in the industry becomes more appealing. So, as we talk about adoption, definitely, as you say there’s a lot of legacy platforms out there that have been built for purpose within certain businesses. They serve a purpose, but ultimately, you can’t continue to customize and customize to the point where it’s so far out on the limb that you can never go back and clearly as you reflect on the current utilization of artificial intelligence and machine learning, 3% is an extremely low number and your reading reflects the comment I made about around adoption. And 30% is a great jump towards, you know people racing it. But there’s a …. way to go. And the question is what’s going to make people take it further. I think again, it comes back to ensuring that people are clear on the benefit. They’re clear that their peers are relying on it and it has a use and its overall comfort level that a machine is going to do the work that maybe two or three people in my business were doing before when they were reviewing payments by hand.


Craig Jeffery  10:51 

Yes, Steve you know the other thing that seems to be changing in the environment as we you know, as you described, there’s a lot of homegrown or built for a particular purpose systems and the NBFI space, it made sense when those were built back whenever they were built because the capabilities didn’t exist and for the most part didn’t exist in the software you could acquire especially when you go back 15 years or 12 or 15 years and beyond. But now we see this increased threat of fraud, more sophisticated fraud, other issues that exist and all these additional requirements coming to bear. There’s not the compelling situation of well, we have to build that because it doesn’t exist. It’s like it does exist. It’s been built and so that makes it I think it makes it a much harder decision to say. We’re going to build strategic and by tactical, you know when you when you have a hard time building those items that are considered essential. I think that’ll be interesting to see how this shifts over. I think there’s gonna be a lot more that trend towards using technology providers in these areas is going to become more and more dominant as we’ve seen it shifting in the last five to eight years. I wanted to shift on to one of the other topics on waterfall payments now. I think people that are familiar with it, maybe don’t want as much of an intro as others but a lot of different people in different industries are listening and may want to know what a waterfall is, what a waterfall payment is, before we describe what we learned in this year’s survey. So, what is a waterfall? Payment? What are the situations that bring that about?


Steve Bullock  12:39 

Yeah, so the term waterfall payment, also termed waterfall distribution by some organizations really is focused more on the non-insurance side of the Non-Bank Financial Industry. So, if we think about private equity firms, hedge funds, investment managers, and also really a waterfall payment is really a method in which capital is just to be distributed to the investors of funds as the underlying the investments are sold for profit, but the waterfall in effect actually triggers different payments at different times. So, as the capital is distributed, it’s basically passed across a structure of sequential payments that then make up that underlying waterfall. So, if you simply consider that if you and I were investors, but you were an A class investor and now it’s a B class investor, you would receive your funds first prior to me receiving them.


Craig Jeffery  13:34 

And you mentioned that private equity firms might have these insurance companies not as much. Just some of the data on there, 61% of insurance companies didn’t have these type of payments to make. So, only 39% of insurance companies had them whereas 71% of non-insurance Non-Bank Financial Institutions.


Steve Bullock  13:57 

And that’s really where that aspect of industry as I said that’s really where it’s impacted by the waterfall is definitely you know, there’s a maturity of an investment that tends to trigger the requirements waterfall.


Craig Jeffery  14:09 

Steve, these payments, and the operational activity around those have, you know, a number of impacts you already mentioned accounting, there’s the execution of the payment, there’s an element and an aspect of they have to be very timely. Usually, they’ll have to occur relatively quickly within the same period of time a day. There’s a lot of attention paid to them. As we were talking earlier, it seems like there’s kind of a high level of, let’s just call it immaturity in the systems and the processes that are built to handle payments generally I didn’t know if you wanted to comment on that or just talk about why do people have to consider accounting and operational needs here?


Steve Bullock  14:55 

Well, we’ll talk about that because I think when you consider the technology side of things, clearly, you’re correct there is an immaturity out there as to when we consider treasury software, how it could handle something such as a waterfall payment, which can, in certain instances be very, very unique. The structure of those waterfalls and how those funds are distributed could be really in effect unique for each waterfall that occurs at the end, for example of each particular period. And therefore, the technology side really needs to have the flexibility to not only allow structures to be defined, saved, and reused, but also the flexibility for those structures to be tweaked or revised as necessary. And certainly, what we’re hearing and seeing within the marketplace is there’s very few vendors at present that offer that capability as a standard. There are sometimes workarounds available that aren’t always pretty and there are some times inclusion of manual processes into that to ensure that the payment goes out the door. But as you say, to ensure that those payments are made in a timely basis, probably within a compliance framework that needs to be completed and they don’t fall into a manual painful process then automation is a necessity.


Craig Jeffery  16:12 

As we shift once again, want to talk about collateral management. This is an area that impacts most NBFIs. This is the first year of questions on collateral management and the information was quite interesting. What are people doing from a practice perspective? Does this or how does this impact cash positioning? Do you have visibility to your collateral in this regard, but maybe you could begin with describing a little bit about the process of how collateral is managed? And you know, where are they doing that? I know we have a lot of data from the research here but maybe let you get started there.


Steve Bullock  16:51 

Collateral management has been, actually been around for a long, long time. So, if you think about collateral or some kind of guarantee, against some funds, you’re borrowing it might be that you know, as an individual, you want to go and borrow $10,000 and you put your car up as collateral. And think about this as the same thing, but obviously on a much larger scale and on a very different aspects of the impact of business. So, when we consider the businesses that are managing this, it could be insurance businesses, it could be investment companies, it will be brought to dealers and so on. It is going to touch so many different parts of their organization. Many firms will have dedicated collateral management teams tagged to them will be credit teams. From the dealer perspective there’ll be front middle and back-office teams and of course there’s a legal contingent as well. And as they’re actually processing and managing this collateral, most of it which nowadays tends to fall outside of the bread-and-butter corporate treasury system. There’s the other aspects of accounting, evaluation, and the overall requirement from the compliance and tracking purpose to ensure that what is being taken as collateral is it falls within the realms of what is auditable and controllable. So, you know, the management of the collateral is clearly vital to understand, as you said, the overall cash position of the organization because it isn’t always just as straightforward as that’s my smart cash balance. The collateral has a value which changes on a regular basis, depending on what that collateral exactly is.


Craig Jeffery  18:23 

So, Steve on prognostication look, a look forward, where do you see this heading over time, perhaps from a couple of perspectives, one from an organizational perspective, and then second from a system perspective? Let me just give a few statistics on the organizational side, so we asked who performs collateral management at your company treasurer is number one a 31%.  28%, they don’t assign a role. 17% was finance other than treasury. Risk management was 10%. And those haven’t a specialized collateral group was a mere 7%. What do you what do you think is gonna happen on the structural or organizational role with collateral management as we look forward? Maybe just five years?


Steve Bullock  19:08 

Well, I think it will comes back down to cash management whether it’s next year whether it’s five years’ time to ensure the business truly understands from a finance perspective, how much cash it has, whether that’s physical cash, whether that’s the value of collateral and so on, then ensuring that at least the visibility of that collateral falls into the treasury area is pretty key. So, it may be that it’s managed outside, it may be that it’s managed within treasury. It may be that there’s no distinct management team around it, but the fact is, it needs to be in a central place, so that it can actually be seen from the overall big picture of what the what the organization is continuing to focus on.


Craig Jeffery  19:49 

The key issue is treasury has set visibility to and that’s where it has to go. Where it may happen organizationally, is not viewed as nearly as important.


Steve Bullock  19:59 

No, I think it’s just at the end of the day, it comes back down to visibility, if treasury and finance don’t have a clear picture of the collateral situation, there’s a huge viewpoint missing from there, from what they’re seeing every day.


Craig Jeffery  20:10 

A monthly cycle is not adequate, or soon will become viewed as inadequate for the roles that people have to manage their liquidity. Now if we shift over to system, I’ll go through just a couple of stats, because that may feed into your comments. So, how does collateral management impact cash positioning? So, this is a current snapshot, this is obviously not out five years, two thirds, 66%, indicate it doesn’t laterals tracked separately, and isn’t integrated with cash position, don’t cry, because that can be used to or tone… that but that’s where it sits today. Another 17% indicate the collateral different exposures etc. Those are linked and can be seen together. 14% have a clear view into their collateral pools. And then 3% is probably the most mature view is that the link exposure and collateral is visible within our cash positioning and forecasting process. That’s the pinnacle so we go from that’s a pretty big cliff, we fall of 66, 17, 14 and three, so maybe we can talk about where you see system and automation changes helping us get up this mountain.


Steve Bullock  21:27 

First of all, just want to comment on those numbers and we chatted about this the other day. Two thirds of people don’t see this as a necessity within their cash positioning, that’s a bit of a shocker. Bit of a worry that people don’t see that as a requirement that they should at least understand. But there’s a remaining third that do something about it. So, you have to consider why is that? But certainly, from a systematic perspective where system readers is revolving now is really to a minimum to ensure that there’s some visibility into that collateral position. And the value of that and the ability to, if not to market on a regular basis to exactly to be in a position to allow that to be gathered from maybe a subsequent system that’s being used. So, there’s really two trains of thought, either I want my collateral managed within my treasury software or I have something existing already that I want to take information from into my treasury, so I can actually then understand my call liquidity position and it comes back to me liquidity–that’s the key thing.


Craig Jeffery  22:27 

Yeah, so I guess whether it’s whether sits within a treasury management system, or its accessible through open banking, open treasury, the APIs are or feeds, you’re still getting to where you need to be. Before I asked you to give some final thoughts on what we’re talking about here. I did want to just spend just a few moments about areas that were covered in this research. And again, Steve, thank you for your help and collaboration and putting this together and executing this and over multiple years. The topics included complexity, so areas of high intensity, technology, use and plans, exposure management and assets, plans, paying, spend and focus, as well as measurements and learning– what are people measuring themselves against? So, there’s a lot that we didn’t cover in today’s podcast, Steve, but yeah, I’d love to get any final thoughts on things that we spoke about, or things that we did?


Steve Bullock  23:29 

Well, I think we did this, a similar survey to this a couple of years ago. And I think in many ways, it’s good to see some consistency in some of the results we’ve got this time around. And I’m sure the next time we do this, there’ll be some continued consistency and evolution. But, as we stepped into a few different areas, which we’ve just touched on waterfall payments and collateral to name a couple. There’s definitely a demand and an interest in both of those areas depending on what area of the treasury business you’re involved in. But clearly the most very, very mature when it comes to the technology side of the house. Certainly, as we consider the Non-Bank Financial Institution side of things, there’s always going to be high volume. We’ve talked about the beginning, whether it’s banks, whether it’s bank accounts, whether it’s payments, whether it’s just day-to-day processing, that’s never gonna go away. It’s just the nature of what they do, and how they work within the markets that work with. So, I think that’s well expect some consistency. If there’s ever a point where people can rationalize bank accounts, I’ll be very interested to see how that’s going to be achieved, especially as I have to dissect everything in the way that they do. But at the end of the day, I think, as we said, I think it comes back down to this is a very natural area of the world where in-house built legacy software has existed for many years and continues to exist. And I think what we’ll see in the next few years is more adoption of tools that are just ready and fit for purpose.


Craig Jeffery  24:53 

Again, thanks so much for doing this research together and for talking about some of the results and your views on the market.


Steve Bullock  25:02 

Thank you, Craig. Appreciate it.


OUTRO  25:07 

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Report: 2022 Non-Banking Financial Institutions

Our Non-Banking Financial Institutions survey, underwritten by Kyriba, polled NBFI professionals on complexity, technology, exposure management and assets, plans, pains, spend, and focus. Download the report today for the analysis of the results.

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