Published: October 29, 2012
Japan is in the midst of an economic transformation, as corporations shift from a largely domestic focus to embrace international markets. The global downturn, including recession in Japan, has resulted in depressed domestic demand and increasing price pressure, exacerbated by growing competition from countries such as China. At the same time, huge government debt and Japan’s credit rating downgrade has meant that the cost of borrowing has increased. All these challenges, combined with the effects of the tragic earthquake and tsunami in 2011 have changed the industrial and economic landscape in Japan dramatically. Hans Janssen, Head of Treasury and Securities Services, Japan, J.P. Morgan comments,
“Traditionally, Japanese corporates have enjoyed close relationships with Japanese banks, with a primarily domestic commercial focus. However, challenges within the Japanese economy and broader macroeconomic trends have resulted in many corporates accelerating their overseas expansion.”
Consequently, we see Japanese companies focusing on international markets as a source of growth. As well as bringing new opportunities, trading internationally brings challenges too, not least the difficulty of maintaining visibility and control over cash balances and flows as global banking relationships become more numerous and complex. In this context, leveraging SWIFT as a single channel for bank communication can bring considerable advantage.
With a strong (and growing) international presence of many of the companies surveyed, many of the primary cash management concerns indicated by respondents were similar to those of other multinational corporations. Hans Janssen, J.P. Morgan notes,
“International expansion is not a new phenomenon for Japanese companies; in particular, many have invested in lower-cost manufacturing in other parts of the world. However, these corporations are now seeking to develop a deeper and more diverse overseas presence. For example, countries that were previously bases for manufacturing are becoming important consumer markets, so Japanese companies are seeking to establish sales and distribution functions overseas. While these companies’ international profile is typically not yet as extensive as that of multinational corporations headquartered elsewhere, this is changing quickly and treasurers are becoming more proactive in seeking efficient ways of managing their cash.” [[[PAGE]]]
For example, liquidity management and leveraging internal funding opportunities were priorities for many companies. However, 27% of respondents indicated that achieving visibility over cash remained a challenge and 14% noted that this was their top priority. This is often a problem associated with having a large number of banking partners and accounts, fragmented bank communication, and/ or limitations in treasury technology used internally.
Drilling down into the data in more detail, fragmentation of bank relationships is not a problem domestically for Japanese companies, as the majority of respondents (74%) had only one domestic bank; however, this is not the case at a global level, with many companies working with multiple banking partners. Hans Janssen, J.P. Morgan explains,
“Not only are companies expanding organically into overseas markets, they are also making foreign acquisitions, encouraged by recent changes to taxation rules in Japan which make it easier to repatriate overseas revenues. Acquired businesses have their own cash management banks and cash and liquidity management structures in place, and it is often not possible for the company’s house bank in Japan to provide comparable services. Consequently, Japanese companies are increasing the number of banking partners as they expand their international footprint.”
As figure 2 illustrates, there are some considerable limitations in the way that these companies receive bank balance information today. More than half of respondents (at least 52%) receive information manually or not at all, making it impossible to obtain a timely and complete view of cash balances globally. Forty-five per cent of companies surveyed receive bank account information weekly or even less frequently.
Effective bank connectivity is not only required for retrieving information. Corporates also need to transmit messages to their banks, such as payments and advice to receive. Typically, a centralised business model is most efficient for payments processing, such as through a payments factory or shared service centre, as companies can take advantage of economies of scale, consistent processes, formats and controls, and leverage a single technology platform. Most companies surveyed (68%) had not centralised their payments to date, and 28% had done so only for domestic payments in Japan.
Not only are there operational advantages and cost savings to be made by centralising payments, but there is also a compliance implication. Since 2008, listed companies have been obliged to comply with the Financial and Exchange Law (J-SOX). This requires treasurers and finance managers to demonstrate the effectiveness of financial processes and controls. It is very difficult to achieve this where payment processes are fragmented, inconsistent and/or based on disparate technology platforms.
As Japanese companies develop their international business, they need to reassess both the way that they manage their cash and the tools and organisational structures they deploy to facilitate this. With a range of opportunities available to corporates for automated bank communication, together with the ability to integrate information into treasury management systems and ERPs, there should be no barriers to retrieving balance and transaction information, and exchanging payments and other messages securely and efficiently with banks globally.[[[PAGE]]]
Web-based banking systems are used by 49% of respondents for accessing international accounts, and these solutions are typically very convenient and easy to deploy. Using proprietary systems from individual banks becomes more challenging when a company works with multiple banks, as each system must be maintained individually, including separate user profiles and security requirements. In addition, each system typically uses different formats, which makes it more challenging to integrate them successfully with internal systems, and each interface needs to be managed individually.
SWIFTNet is becoming a popular bank connectivity choice for multinational corporates globally, particularly those with multiple banking relationships. SWIFTNet is the secure, robust network used by banks to exchange information, with 9,000 banks currently connected. Corporates are also able to leverage this network to communicate with multiple banks through a single channel, including a variety of financial messaging, such as balance and transaction information, payments, trade transactions and confirmations. Seven per cent of companies surveyed indicated that they used SWIFTNet to retrieve balances on their international accounts (although it appears in reality that this figure is even lower), but there is a far higher proportion of companies that could benefit from SWIFTNet. Hans Janssen, J.P. Morgan suggests,
“Adoption of SWIFT by Japanese corporates is still relatively low but awareness and interest in SWIFT is starting to increase. For example, during a recent seminar that we held on in-house banking, payment factories and other initiatives such as SWIFT, there was a very encouraging response. It takes time for interest to be converted into adoption, but we expect to see a stronger take-up of SWIFT in the future for Japanese companies international payments and cash management business.”
SWIFTNet has two channels available to corporate users. FIN is the channel used for exchanging high value payments and similar messages, using SWIFT MT message types. FileAct is a channel for file transfer, enabling files of information (such as bulk payments) to be transmitted, with no restrictions on format. Hans Janssen, J.P. Morgan illustrates,
“SWIFT is applicable to Japanese companies for international payments and cash management but not domestic payments. While most countries have separate payment systems for high and low value payments, the two payment systems in Japan are used for domestic and cross-border payments respectively. The domestic payment system uses Japanese characters, which is not currently supported by SWIFT FIN.”
He continues,
“Most local banks cannot currently accept SWIFT instructions from corporates, but this is changing as they seek to provide services to foreign companies.”
However, as we have already established, most Japanese companies work with international banks to manage their cash and treasury activities outside Japan. Consequently, the (current) lack of support for SWIFT should not prevent Japanese companies from using SWIFTNet successfully. Most companies surveyed have one or very few cash management banks in Japan, so a local electronic banking or host-to-host solution is entirely appropriate for domestic payments and retrieval of account information. Consequently, the main reason why a company would wish to leverage SWIFT as a secure, global, multi-banking channel is for international payments, so the limitation on character sets would not be applicable.
Companies have a choice of connecting directly to SWIFT, indirectly through a service bureau or through a web-based tool provided by SWIFT, Alliance Lite2. In recent years, most companies have chosen to work with a service bureau as it avoids the need to invest in SWIFT skills and infrastructure. While it is not necessary to work with a service bureau located in Japan, some companies would prefer to do so. A list of service bureaus, including a selection in Japan, can be found at http://www.swift.com/partners. A service bureau can help with the physical connection to SWIFT, integration with internal systems, and formatting of information that is exchanged with each bank. Alliance Lite 2 is a new offering from SWIFT replacing its previous solution, Alliance Lite. The new version is cloud-based, requiring no technical infrastructure, and offers broad functionality and integration capabilities, and is priced at a level that is likely to prove attractive to a wide range of corporates. Hans Janssen, J.P. Morgan also believes that lower pricing will be a driver for adoption,
“With recent revisions to SWIFT pricing, and the introduction of Alliance Lite 2, the cost benefit analysis, and ease with which SWIFT can be adopted, has improved significantly, which will further encourage adoption.” [[[PAGE]]]
It is impossible for treasurers to manage liquidity effectively unless they have timely and complete access to balance information across all of their accounts. Similarly, making payments and exchanging other financial messaging securely and efficiently with banking partners is an essential business activity. Significant costs and reputational damage can be associated with fraud and error and the cost of payment processing can be very high if not conducted efficiently. Hans Janssen, J.P. Morgan concludes,
“Japanese companies are seeking ways to achieve more visibility and control over their cash globally, reduce credit requirements, and streamline financial processing, particularly those that find credit more difficult to obtain. Japanese companies are typically less centralised in cash and treasury management than their foreign peers, so this is an important area of focus for them. SWIFT is often the backbone for an efficient global cash management framework, so we see it as an increasingly important element in Japanese companies’ cash and treasury management strategy.”
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
