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Treasury transformation: digital and platform business models
Companies and their treasury teams are under increasing pressure to evolve, adapt and innovate new digital business models to thrive, and survive.
'Digital and platform business models; Transforming treasury for success' report
Companies and their treasury function are experiencing unprecedented, profound and rapidly developing change, driven in the main by economic, technological and demographic forces.
To stay on top, companies need to continually evolve and innovate their digital business models, and treasury and finance professionals play a crucial role in leading this transformation.
Such models essentially leverage digital technologies to enhance a company’s business value proposition, both through how it acquires new customers and in delivering the optimal customer experience.
While companies have been developing these models for years, the pandemic marked a historic shift in the need to adapt and innovate as e-commerce boomed.
Treasury teams are front and centre of this organisational change, fulfilling a complex role that requires them to simultaneously manage multiple elements through the economic cycle, from harnessing technology, and ensuring cybersecurity and data privacy, to seizing growth opportunities.
Delivering success also necessitates a strategic approach from treasury and one that is more engrained and linked to a company’s broader digital agenda and business strategy.
A platform for growth
Customers are central to determining what digital business model is best fit for success. Businesses are on different journeys. What they sell, how they sell and to whom can be very different, so approaches will vary to determine how to deliver optimal commercial value.
Digital business models are the models of some of today's highest-valued companies. These highly established high-growth companies with state-of-the art technologies are also a driving force of GDP growth.
With the adoption of digital commerce, one of the key priorities for many of our corporate treasury clients is how their banks are supporting their growth journey, whether that is in terms of geographic expansion or supporting the full variety of new payment and collection channels that are emerging in multiple geographies, especially in Asia.
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Indeed, technology is changing the very definition of industry sectors and the transformation it brings is redefining business models and value propositions. The value system of many industries is becoming inherently data-driven, cloud-enabled, and platform-centred, which are key characteristics of digital business models.
For instance, many companies (both traditional incumbents and digitally native) operate a proprietary or third-party digital platform (such as a third-party marketplace) in which to reach new customers.
Through facilitating interactions at scale, platforms unleash powerful network effects but also have the added benefit of being asset light.
Delivering value through platforms
Whereas linear models create value by manufacturing products and services upstream and selling them downstream through the supply chain, platform business models create and unlock value by facilitating interactions and transactions among consumers (users) or between consumers and producers.
Platforms use digital technology to connect people, organisations and resources within an ecosystem. The digital aspects of the model underpins the ability for a platform to create and deliver value.
Digital payments have definitely accelerated with the advancement of infrastructure. Together with this, we are now more able to go deeper into our markets, build closer ties with our customers, and offer them a more personalised digital experience.
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Within the platform model, there are different opportunities for revenue generation, for example, from commissions, fees or advertising that are created through network effects.
The network is also highly scalable in terms of attracting more users to the platform and as a result drives down transaction costs. Value delivery is also often simpler where there are no physically owned assets.
In summary, the key advantages of platform business models are:
- Network effects: The network effect takes place when the value of the platform increases and more participants (e.g., consumers) start joining. A virtuous cycle of growth (both in scale and revenue) can be created.
- Scalability: Platforms can scale rapidly. The revenue generated is high and the costs spent on various fees, transactions, and attraction of new users are usually much lower.
- Smaller capital requirements: Not owning physical assets (inventory) is a cost saving which means platform business models can invest more into business development.
- Data-driven actionable insights: Business operating a platform approach drive significant amounts of data, for example, on customer behaviour, which can be used to enhance the platform, drive specific personalised user experiences that drive revenue growth.
D2C + B2B model opportunity and challenges
In this rapidly evolving environment, resilient corporates are flexing their business models. With this rapid rise in e-commerce, and reduced footfall in retail establishments, many companies across sectors have begun complementing their wholesale models with direct-to-consumer (D2C) sales.
In addition, business-to-business (B2B) e-commerce has also proved to be a very effective sales channel.
However, as much as the D2C and B2B models present growth opportunities for companies, they also create challenges for corporate treasuries.
Five key D2C and B2B challenges:
1. A change in the profile of incoming payments – Established corporates operating traditional wholesale models usually incur low transaction volumes of higher ticket value. However, moving into D2C changes the profile of incoming payments. D2C via an e-commerce platform markedly increases the volume of lower value payments from purchases that can be made 24/7. This impacts collections as treasury must handle and reconcile many more receipts around the clock.
2. Increasing the number of different payment methods – Customer experience plays a big role in selling directly to consumers and particularly in the purchasing journey. Payment preferences vary depending on where customers are. A variety of payment options, offering needed flexibility, is best to meet customer expectations, but this potentially adds to the challenge around collections management.
3. FX cost management and customer experience – A growing global customer base will lead to more currencies for treasury to manage, including currencies that are not usually dealt with. FX cost management, and price transparency for buyers throughout the purchasing journey, becomes an imperative.
4. Working capital challenges – With online sales the flow of cash can be difficult to predict and potentially create challenges for cash flow forecasting and change liquidity requirements as the working capital cycle is shortened, meaning that it takes less time to convert the total net working capital (current assets less current liabilities) into cash.
5. New market expansion – Due to the lower entry barriers offered by e-commerce, expansion into new markets can be fast. However, managing payments can result in unforeseen complexities, such as how to work with local providers, understanding integration requirements, their payment policies, and more generally for treasury, what cash management structure should be set up?
Conclusion
Embracing digital business models such as D2C or B2B is a significant commercial business opportunity and one that requires treasury to connect to different parts of the business to understand the impacts and changes that must be made.
Treasury is an essential component of the change process, whether that be forging new relationships with card acquirers and payment providers, managing the collection of potentially much higher transaction volumes or managing FX and other risks.
Still, the commercial opportunity is so significant that treasury should make the most of entering an accelerating digital environment. Initially treasurers should explore the impact digital business models will have on cash flows, treasury processes and other systems underpinning those processes.
The key to adapting successfully is in the hands of every business. Evolving to win requires forward-thinking, for example, turning risk and uncertainty into competitive advantage, understanding and embracing technology, knowing your customers inside out and operating sustainably.
Discover Digital Business Models and Treasury Transformation with BCA
John Coker (British Car Auctions) and Tom Wood (HSBC) join Eleanor Hill (TMI) to discuss how digitalisation can transform business – and treasury. They discuss how digital business models are different, the factors that are driving them, what this means for treasury professionals.
In this podcast, John also shares the BCA journey, offering insight into what is required from the treasury team to ensure the company remains a market leader in wholesale B2B vehicle sales.
