Published: March 21, 2000
According to a recent study sponsored by The Bank of New York Mellon (Integrating treasury solutions in Asia and Europe – a roadmap for success), 92% of corporates surveyed in Korea say that their local banks lack the necessary skills to provide fully-integrated cash and trade solutions, whereas in Germany, 100% of corporates surveyed disagreed with this view. How can such a dichotomy between two such advanced exporting economies be explained? In brief, the answer to this question lies in the level of treasury service sophistication of their local banks: although why should the degrees of service sophistication differ to such an extent and what effect does it have on trade?
Members of the OECD, once the major exporter economies to both fellow and non-OECD countries, are moving towards becoming net importer economies, chiefly from non-OECD emerging markets.
To answer these questions, let us begin at the beginning. Traditionally, the two key treasury solutions areas – cash management, dealing with cash flow and liquidity optimisation and trade services, dealing with cross-border risk mitigation – have been offered to corporates via two separate banking areas. This divided system worked well while bank-issued letters of credit (LCs) were the method of choice for international trade and treasury departments were solely responsible for cash-flow management, but the game has since moved on. The evolution of trade flows and changes in the role played by corporate treasury mean that maximum efficiency of liquidity and risk management cannot be achieved if cash and trade are not fully-integrated.
Today’s treasury department is viewed as a strategic tool and, as a result, treasury professionals are increasingly expected to improve the bottom line; as well as identify solutions to daily cash management challenges, improve internal data control, meet increased compliance expectations, and undertake staff and expenses reductions. This expansion of role and responsibility is a key driving force behind the corporate-call for collaborative treasury services to enhance working capital management; which changes in international trade practices, coupled with the recent economic turbulence, have made a crucial issue for corporates.
Integrated treasury solutions can be defined as a range of (usually bank-offered) products and services designed to aid the efficient operation of a company’s physical and financial supply chains, by optimising liquidity and cash-flow management and mitigating credit and operational risk. Crucially, such solutions are more than a technological offering, which is where the complication lies. The key point is that these solutions should, ideally, be available from local banks and there is a good reason for this. Corporates in Spain (typically a sophisticated exporter market) when asked, expressed a desire for local-bank provided collaborative treasury solutions because global commercial banks that possess the necessary technology are seen as lacking strong relationships with Spanish corporates. Leveraging such local knowledge through a collaborative network is, therefore, imperative for true fully-integrated solutions. However, the sophisticated platforms required to manage the complexities of operations of this nature (as well as automate traditionally paper-based systems) have a prohibitive cost for many local banks. This probably explains why some are finding themselves unable to meet their corporate clients’ present needs, and as a result, many are finding themselves pushed out of international trade; with the result that cash and trade integration remains stunted in their local markets. [[[PAGE]]]
Any developments towards fully-integrated treasury solutions also need to take into consideration the radical changes that have taken place in international trade over the past 20 years. Members of the Organisation for Economic Cooperation and Development (OECD), once the major exporter economies to both fellow and non-OECD countries, are moving towards becoming net importer economies, chiefly from non-OECD emerging markets. This shift has had a profound effect on risk management and trading terms.
According to SWIFT data, open account trading – trades that are not protected by LCs – now represents over 70% of global cross-border trade, compared to just 15% for LCs and 7% for documentary collections. This is a reflection of the power of the OECD-based buyers to dictate preferential trading terms to suppliers: who are often put under pressure to extend payment terms. In turn, this has an impact on the working capital needs of these suppliers. Integrated treasury solutions can help suppliers (particularly smaller, non-OECD suppliers) finding themselves in this situation, mitigate cash management difficulties that are often a result of such changes in terms.
Local banks will lose ground to international banks unless they look at offering their own fully-integrated treasury services.
Many such companies have restricted access to these services, as they are dependent on their local banks, many of which have not invested in fully-integrated systems: largely because they are unable to do so because of limited available liquidity. Certainly, the credit squeeze has led corporates to source alternative solutions, and some corporates, notably in Korea, that operate along automated and fully-integrated lines, have bypassed their local banks by outsourcing these services to global banks. A sure sign that failure to provide a collaborative service is to the local banks’ detriment.
Local banks cannot and must not allow themselves to be sidelined and a true collaborative treasury offering will require a return to the traditional model of local and regional banks fulfilling the role as risk-assessors of potential borrowers. Changes in the way banks operate have led to the traditional local bank credit evaluation of prospective borrowers becoming superseded by a head-office model that favours lending on an industrialised and centralised basis. The result of this has been a disconnect between those responsible for making lending decisions and those businesses requiring credit; leaving some (otherwise financially buoyant) corporates cut-off from funding. A return to local decision making would enhance local trade relationships, which in turn can be enhanced by an IT offering: thereby ensuring that such local risk assessment is coupled with a global treasury services offering. Indeed, this seems to be the logical next step and the path to it can be traced either via the adoption of open account trade and cash and trade integration on the trade side; or via the automation of cash management, utilisation of bank-provided cash management products and services and the integration of cash and trade, on the cash management side. [[[PAGE]]]
In the current climate, however, significant investments in technology are unlikely to be approved, creating a major hurdle for local banks to overcome. The implementation of the necessary technological platforms, which are at the cutting edge of treasury services solutions is, unquestionably, a huge expense and undertaking. Yet the benefits they provide must be offered locally. In all cases, local banks are the central dynamic towards integrated treasury services, as research shows that where local banks have invested in the technology required, cash and trade integration has advanced. This means that local banks will lose ground to international banks unless they look at offering their own fully-integrated treasury services.
The real choice facing local banks is, therefore, whether to outsource to a bigger commercial bank or to collaborate with a specialist treasury services bank. The danger with outsourcing to another commercial bank is that the bank in question may be a competitor: meaning that loss of business is a potential threat. Specialist providers such as The Bank of New York Mellon can, however, offer a non-compete collaborative approach, which eliminates this risk.
The Bank of New York Mellon advocates the adoption of the non-compete collaboration model. Such arrangements help local banks break the barriers they face in developing fully-integrated treasury services for their corporate clients; enabling them to retain core competencies, generate cost efficiencies and deepen and widen their treasury services offering. Local banks, for their part, also gain access to specialist banks’ sophisticated technology and worldwide correspondent banking networks, secure in the knowledge that their local business is safe and that the relationship is equal. The collaboration model is about more than the integration of banks and platforms; as it involves the integration of business disciplines (with the aim of sharing best practice solutions) and the sharing of local knowledge at a global level. Enabling collaboration via sophisticated technology platforms is the next step to making this a reality.
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