CFOs and treasurers today need to navigate a rapidly evolving, frequently uncertain and increasingly competitive marketplace. Technology and digital channels continue to transform industries. The regulatory environment also keeps changing, with many business leaders concerned about the potential impact of more regulation.
According to a 2015 PwC survey of CEOs, while two-thirds of business leaders globally see more opportunities for their companies today than three years ago, an almost equal number see more threats to growth. And according to a 2015 survey by our parent company, BNP Paribas, and The Boston Consulting Group, CFOs and treasurers around the world rank risk management as their highest priority.
That’s no surprise – particularly as companies need to navigate a range of market and economic challenges and risks. Market volatility has surged with lingering eurozone concerns and on going speculation about the timing and frequency of US interest rates hikes – the Federal Reserve’s first rate hike in nearly a decade. In recent months, companies have also faced currency volatility that has reached its highest level in years. Currency movements may have cost North American and European companies more than $31.7bn in the first quarter of 2015, posing risks for corporate earnings and revenues going forward – particularly as companies become more international.
Geopolitical and cyber risks pervade
Companies are operating against an uncertain geopolitical backdrop. Risks ranging from the effects of a slowdown in Chinese economic growth and the Russia-Ukraine conflict to the spread of ISIS influence across the Middle East and North Africa continue to simmer around the globe.
Global GDP growth rate
Source: The World Bank
Meanwhile, cyber threats continue to escalate, with the size, frequency, and financial cost of cyber crime incidents reaching record levels. Juniper Research expects the cost of data breaches will increase to $2.1trn globally by 2019, almost four times the estimated cost of breaches in 2015.
At the same time, economic growth continues to be subdued around the world. In June, the World Bank downgraded its outlook for global growth to 2.8 percent (see side bar), expecting continued strains as the global economy transitions due to imminent monetary tightening in the US and the ramifications of low commodity prices.
How can businesses manage these myriad risks and gain a competitive edge across their footprints? Let’s look at three essential commercial banking strategies that companies can adopt to minimise risk and enhance competitiveness in a world of flux and unpredictability.
1. Supporting innovation across markets
Companies are adding or amplifying an international dimension to their operations, with 72 percent of Fortune’s 2015 Most Admired Companies reporting that globalisation will have a ‘very important’ or ‘important’ impact on their organisations. But large corporations are no longer the only players extending their reach by participating in international trade; small and medium-sized companies are getting into the game.
If your company is going abroad for the first time or you are looking to expand your existing international presence, ensuring your commercial bank focuses on the regions where you operate is critical – whether it’s in Europe, Africa, Asia Pacific, or the Middle East. Working closely with a bank that can support your operations around the world creates consistency, increases transparency, and improves economic efficiency and controls for your business. With BNP Paribas as our parent company, Bank of the West connects our clients to commercial banking solutions and expertise in 75 countries, reducing geographic and organisational borders that can otherwise stifle growth. As companies operate more broadly in an increasingly complicated world, they need to understand the international business landscape and implement smart financial strategies in order to keep innovating and set themselves apart from their peers. For example, smart trade strategies can dial up your company’s competitiveness and agility wherever you operate. This can include securing and strengthening relationships with key commercial partners to expand your company’s reach in your home market and abroad.
A banking partner can serve as an intermediary to bridge the interests of buyers and suppliers using solutions like trade instrument financing or receivables monetisation. At Bank of the West, our Global Trade Solutions (GTS) team delivers solutions that address a buyer and supplier’s payment needs while helping companies build stronger trading partnerships, regardless of competing interests or currency fluctuations.
Companies can also implement strategies to reduce risk related to a supplier or buyer, and explore ways to extract additional liquidity related to commercial contracts. Our GTS team analyses a company’s trade and supply chain cycles to extract alternative and incremental sources of buyer or supplier liquidity. For example, we offer a unique asset purchasing solution that enables a seller to accelerate its collection cycle, creating incremental liquidity with no business disruption.
In addition, collaborating with a banking provider that offers robust international cash management capabilities can help strengthen your business’ liquidity management, risk management, and accounting controls, while facilitating your cross-border transactions. Bank of the West’s International Cash Management team helps meet businesses’ treasury needs across international markets – giving them visibility over their cash, increasing their control, and helping optimise their working capital so they can deploy cash wherever they need to.
2. Managing volatility and uncertainty
Volatility and uncertainty are two key words that have defined the business landscape in 2015. Currency markets have been rattled by monetary policy divergence and soft commodity prices prompting interest rate cuts in markets around the globe. The US dollar’s significant appreciation versus all major world currencies has created a headwind for the US economy, US-based exporters, as well as corporations in emerging markets with significant dollar-denominated debt.
An experienced commercial bank can recommend hedging tools to help your business manage currency risk and movements – such as a strengthening dollar. There is no such thing as a one-size-fits-all hedging strategy. At Bank of the West, our foreign exchange team customises strategies – including identifying natural hedges within a business, setting up foreign currency accounts, and implementing forward contracts with variable settlement windows – to minimise currency risk while protecting and potentially improving profitability everywhere our clients operate.
Actively managing interest rate and commodities price exposure can also help reduce one of the financial uncertainties of running your business in a volatile environment. Interest rate risk tolerance levels vary widely, particularly during volatile times. Bank of the West’s interest rate derivative team works closely with businesses to understand their unique risk appetite and operating environment, considering economic and market conditions before building and delivering appropriate and prudent interest rate hedging strategies.
3. Defending against cyber threats
Last but by no means least, cyber security threats loom as a significant risk to every company’s competitiveness, growth prospects, and survival. The frequency and costs of cyber crime incidents continue to rise: according to PwC’s 2015 Global State of Information Security survey, the total number of security incidents detected by respondents reached 42.8 million in 2014, an increase of 48 percent from 2013. That translates into 117,339 incoming attacks every day. A whopping 62 percent of organisations were targets of payments fraud last year, according to the 2015 AFP Payments Fraud and Control Survey.
The impact of these attacks is very real – and they can have fatal consequences for a company’s reputation and profitability. The average cost of a data breach has reached a record $3.8m, representing a 23 percent increase since 2013, according to a May 2015 study by the Ponemon Institute.
And no organisation is immune, as demonstrated by this year’s theft of personnel data on millions of current and former US government employees. Despite these real and present dangers, corporate budgets are not keeping pace – the PwC information security survey revealed that investments in information security budgets actually declined four percent over 2013.
Vigilant eyes and ears
Taking a thorough and holistic approach to fraud prevention is essential for your business to guard against creative and diversified cyber criminal attack strategies. A banking partner should serve as your company’s vigilant ‘eyes and ears’, keeping you educated about the latest cyber crime trends and threats. A bank also needs to be proactive to minimise the risk of fraud while also helping your organisation contain and mitigate the damage caused if cyber criminals are able to strike.
At Bank of the West, we deliver a robust suite of fraud prevention solutions and features that are essential to safeguarding against fraud. Our Security team maintains open lines of communication with law enforcement organisations and have strong information sharing mechanisms in place so we can stay aware of known risks, alert our clients, and modify our processes as needed.
We speak with our clients about security regularly, gathering their feedback so we can modify and strengthen our products and back office controls.