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Treasury and Payments

Tailoring treasuries: Innovation drives comparative advantage for asset-based businesses

Asset-based businesses are using innovation to increase operational agility and gain a comparative advantage.


Firms that use asset-based business models are transitioning to in-house bank operating models that use virtual accounts. As a result, these firms are able to onboard new entities and open new bank accounts faster, and reduce their bank and account management operating costs. A case study is presented describing how an Adam Smith award-winning asset-based business applied banking innovation to achieve a highly efficient and scalable operational framework to reduce complexity and accommodate growth.

 

Segment characterization: businesses organized around special purpose vehicles

Asset-based businesses are firms predominantly found in the real estate, transportation, infrastructure or energy industries. These businesses have legal structures that are organized around their assets like aircrafts, vessels, properties or production plants. As such, these firms are dynamic, and they continuously form new entities—special purpose vehicles (SPVs)—as they acquire assets. Large numbers of SPVs are typically encapsulated within levels of holding companies to achieve key business and risk mitigation objectives:

However, from a cash management perspective the complex holding company and sprawling SPV legal structures result in a proliferation of bank accounts. And because of the significant KYC demands on each SPV bank account, it may take months before an asset can be incorporated and activated—impairing the asset-based business’ operational agility.

As account structures grow, so does the on-going effort required by dedicated treasury staff to manage bank mandates, account-level signatory cards and user entitlements. Such non-strategic administrative workload does not add value to a treasury organization. Finally, from a liquidity management perspective, optimizing working capital management—both funding and cash consolidation—across large bank account structures adds complexity and cost where cash sweeping is required to move balances between group companies.

In summary, while bank accounts per SPV are a useful tool to enable legal and operational segmentation, the model also elevates the cost of doing business, which impacts pricing, profit and loss, and competitive advantage for asset-based businesses.  As a result, many firms face a perennial imperative to rationalize bank accounts to improve competitive positioning and control costs.




Award-winning corporate case study

Acwa Power is one asset-based business that has used virtual accounts for its in-house bank project and saw significant value across treasury, operations and technology.

Prior to undertaking its treasury transformation, ACWA Power maintained a complex corporate structure that relied on hierarchies of legal entities and SPVs, to manage capital allocation and financing, as well as segregate operations and control risk. The account landscape across the group supporting the various “HoldCos” and “OpCos” comprised of about 600 bank accounts.

Group cash management at ACWA Power was equally complex due to the proliferation of bank accounts from its ever-growing corporate structure. Manually managing thousands of intercompany transactions annually for cash concentrations, equity injections, dividend disbursements, returns processing and management fees placed severe strain on a small treasury team. (They operate from Riyadh, Saudi Arabia and Dubai in the United Arab Emirates). 

In 2019 the group treasurer, Abdul Majid Syed, drove an innovation agenda that transformed the firm’s treasury operating model. For this effort, they were awarded overall winner for the prestigious 2021 Treasury Today Best in Class Treasury Solution in the Middle East/UAE.

Summarizing the project, ACWA Power stated:

In our treasury transformation project, ACWA Power implemented a new treasury management system, bank-agnostic multi-bank connectivity with SWIFT and a virtual account structure

ACWA Power Communications Department

ACWA Power invited J.P. Morgan to introduce the innovative way clients were using bank technology based on virtual accounts. ACWA Power stated:

Different regions have a different level of technological maturity. In this region we are not far behind, but when bank guidance is available on utilizing advanced tools in a proper manner, it’s helpful to get everyone onboard. When the J.P. Morgan team approached us on virtual accounts for in-house banking, at first, we initially concluded it wasn’t possible for us. But J.P. Morgan understood our business and our requirements well. We provided them with information, and they showed us what was possible and what were the benefits. We began moving forward to work on the challenges created by so many bank accounts (600 globally). We give a lot of credit to J.P. Morgan for bringing the awareness to our teams of how the virtual account product works. That was really important

ACWA Power Communications Department

ACWA Power is proud of the market recognition by Treasury Today and believes the results they describe are available to others, stating:

The 2021 Adam Smith award recognizes this innovative bank solution in Saudi Arabia. The benefits we saw from this project included improved working capital from freed trapped cash and recovered ROI, a transition to a scalable and highly-efficient centralized model with no business interruption during a pandemic, and 100 percent visibility over all bank accounts—both physical and virtual. The savings have already paid for the investment cost and we anticipate that multiplying as we build out the set-up.
The solutions we implemented and the support from our solution partners like J.P. Morgan made the difference

ACWA Power Communications Department

Taking the next steps to treasury transformation

Transforming an organization’s treasury operating model can deliver tremendous value by introducing a highly efficient and scalable framework to reduce complexity and accommodate growth. Following a traditional path of centralization requires considerable capital expenditure. Banking innovations have emerged offering many organizations an alternative approach with certain industries such as asset-based businesses standing to see some of the greatest benefits.

 


Learn more about ACWA Power’s success.


 

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of
J.P. Morgan, its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed to be reliable. Neither the author nor J.P. Morgan makes any representations or warranties as to the information’s accuracy or completeness. The information contained herein has been provided solely for informational purposes and does not constitute an offer, solicitation, advice or recommendation, to make any investment decisions or purchase any financial instruments, and may not be construed as such.

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