by Helen Sanders, Editor
Treasury centralisation is nothing new, and is typically considered to be a best practice for many industries, depending on their business model and culture. However, when looking at Asia, the role, and prominence, of regional treasury centres (RTCs) is changing. As the three key themes of globalisation, digitisation and regulatory liberalisation continue, the need and ability for RTCs to deliver value to their organisations is increasing. As Asia’s contribution towards global revenues continue to grow, could these RTCs become the global treasury centres of the future?
A new generation of treasury centres in Asia Pacific
Centralisation of treasury activities in Asia Pacific has become well-established, with a long heritage of sophisticated, highly professional RTCs amongst multinational corporations headquartered in North America and Europe, and the largest Asian multinationals in industries such as automotive and electronics. As globalisation and digitisation continue, however, corporations of all sizes, and headquartered in all regions, are taking the opportunity to increase visibility and control over liquidity and risk by concentrating treasury activities into treasury centres in Asia. Sandip Patil, Managing Director and Region Head, Global Liquidity and Investments, Asia Pacific, Citi explains,
“Initially, large sophisticated corporations headquartered in Western Europe and North America have for many years been setting up RTCs in Asia Pacific, but now we are seeing this trend extend to fast-expanding Asian multinationals as they recognise that a centralised treasury function is an efficient way of facilitating growth. In addition, in the past tier two corporations that have lacked the necessary scale in their international operations to justify centralising treasury are now seeing the benefits of doing so.”
HSBC expand on this,
“As Chinese companies expand their business into new markets, they are increasingly setting up treasury structures in Hong Kong, and tapping into expertise and best-practice techniques to support growth and efficiency.”
Furthermore, as Victor Penna, Head of Treasury Solutions, Standard Chartered Bank illustrates, this trend is not restricted to Chinese multinationals,
“In Korea, the largest corporations already have well-established, highly efficient treasuries, but the trend towards regional and global treasury centres in Asia is now impacting on the next tier. Malaysian corporations are also outgrowing their home market and expanding internationally. These businesses are therefore seeking similar sophistication in risk management, and cash and liquidity efficiency, as their peers in other regions.”
Factors in treasury centralisation
There are a variety of reasons behind this development, as Sandip Patil, Citi outlines,
“We see three key drivers of treasury centralisation in Asia Pacific: Firstly, globalisation, as corporations in all industries, expand beyond their home markets. Secondly, digitisation, with rapidly increasing availability of tools to facilitate centralisation and connect the business. Thirdly, competitive pressures, which will only increase further. Corporations of all sizes need to be as efficient as possible, reducing both operational and financial costs, using cash more effectively, and optimising intercompany flows.”
A fourth trend that is important to note, however, is regulatory liberalisation. In China, for example, it is becoming easier to automate and standardise financial processes, but also to manage cross-border liquidity in RMB, using techniques such as intercompany lending and cross-border cash pooling.[[[PAGE]]]
However, the shift towards centralisation into regional centres in Asia Pacific is not universal, with two alternative trends taking place. Firstly, as Victor Penna, SCB discusses,
“In addition to the trend for treasury centralisation, there is also a counter-trend taking place, albeit amongst a smaller number of corporations. Specifically, well-established treasury centres that have achieved a high level of automation and standardisation are transferring some functions back to head office where there is no specific value in conducting them locally.”
A second trend, albeit amongst a smaller number of corporations, is to decentralise some functions, such as cash management or local financing, particularly in countries where a corporation is a market leader. In these cases, it may be beneficial to maintain a local treasury presence to manage relationships with local banks and regulators and source competitive financing.
Locating the RTC
However, with the majority trend towards centralisation, one of the first issues that treasurers need to consider is the location of an Asia Pacific RTC. As Sandip Patil, Citi says,
“There is growing competition amongst potential centres, not only Hong Kong and Singapore that are well-established as attractive RTC locations, but other emerging centres such as Shanghai, Kuala Lumpur and Macau. While we are unlikely to see an immediate change in corporate behaviour, competition is positive in encouraging the removal of regulatory and administrative barriers, and more favourable labour policy and availability.”
Victor Penna, SCB continues,
“While Hong Kong and Singapore remain the most popular locations for RTCs, treasurers’ options are likely to expand. Singapore is becoming comparatively more expensive, which may restrict its appeal in the future, while governments in Malaysia and Thailand (as well as Hong Kong) are offering tax and regulatory incentives to encourage both local and foreign multinational corporations to open treasury centres. Similarly, Shanghai may become more popular as an RTC location as liberalisation continues, particularly in sectors that have major manufacturing operations in China, such as the automotive industry.”
However, Victor concurs with Sandip,
“The next few years are likely to see a region-wide race for treasury centres, with more choice of location; however, this is a future rather than current development.”
Evolving regional and global responsibilities
Having determined the choice of location, a key issue is then to determine the RTC’s responsibilities. What has become apparent in recent years, both amongst established and emerging RTCs, is that the role of many of these centres is changing, often radically, from those of ten or even five years ago. This shift reflects the growing importance of the region in revenue terms, changing financial priorities and technology solutions that facilitate automation and efficiency. This shift in responsibility is taking two key directions. Firstly, as Victor Penna, SCB highlights,
We are now seeing a shift so that some of these core responsibilities, such as cash management, are now led globally by treasurers in the Asia RTC rather than the head office.
“In the past, core functions such as risk, liquidity and bank relationships were managed by group treasury, while the RTC was responsible for local execution in accordance with group policy. We are now seeing a shift so that some of these core responsibilities, such as cash management, are now led globally by treasurers in the Asia RTC rather than the head office. This makes sense given that Asia is becoming many corporations’ largest revenue source, and is often the largest manufacturing centre, so its cash and working capital needs may be the greatest.”
HSBC is witnessing the same trend taking place amongst the bank’s customers,
“Corporations that have an established RTC network are looking to develop centres of excellence at a global as well as regional level. For example, an RTC in Singapore may be responsible for global cash management, as part of a global treasury team.”
Secondly, RTCs in Asia are expanding their remit in the same way as treasury centres in other regions as working capital optimisation becomes a more significant priority. Sandip Patil, Citi outlines,
“Conceptually, the RTC vision is evolving dynamically. As the banking sector goes through material change, customers can no longer simply square off positions, borrow or deposit cash with banks as they wish, resulting in far greater self-reliance than we have seen in the past.”
He continues,
“This vision is driving the growth of techniques such as in-house banking, POBO and ROBO, but also liquidity risk management. Since the global financial crisis, treasurers no longer want to rely on their banks for business continuity, but instead use the resources within the group to fund a liquidity shortage in a particular entity or region.”
HSBC agrees,
“An increasing number of RTCs are incorporating more sophisticated techniques such as in-house banking, POBO and ROBO. In many cases, these have already been implemented successfully in Europe and are now being rolled out to Asia Pacific as a next phase.”
Victor Penna, SCB continues,
“Inevitably, these solutions will take longer to implement than in Europe, given the diverse regulatory issues that need to be overcome, but there are significant moves in this direction. The use of trading centres, or supply chain management centres, in Hong Kong and Singapore is also becoming more popular, and treasury needs to be aligned with these operations. These trading centres often have a global as well as a regional scope, which will inform the RTC’s responsibilities.”
These trends are also leading to a greater focus not only on increasing the efficiency of financial flows, both inward and outward, but on monetising these transactions, using working capital financing programmes such as receivables financing and supplier financing. Victor Penna, SCB continues,
“Supply chain finance programmes, on both sides of the balance sheet, are growing significantly, not only with individual partner banks, but recently, we have seen an increasing number of corporations implementing bank-agnostic supply chain platforms, to which a variety of financing banks are then connected.”
The fact that some of these programmes have become large enough to require financing syndication, which is a phenomenon more typically found in Europe and North America, reflects the maturity of the supply chain finance concept in Asia Pacific, and the success in implementation.[[[PAGE]]]
Reducing complexity, achieving efficiency
With RTCs in Asia Pacific expanding the breadth of their regional responsibilities, and becoming global centres of excellence in business-critical fields, the demands they have of their banks and vendors are changing. Although there are various trends amongst RTCs, each company’s specific responsibilities and priorities will differ. Consequently, solutions need to be flexible enough to meet these diverse needs, and enable treasurers’ operational and financial objectives, as HSBC explains,
“Efficiency is the watchword of RTCs in Asia Pacific, both cost efficiency and liquidity/ working capital efficiency. The specific priorities, however, will depend on the nature of the business: for example, corporations that are expanding internationally place treasury professionals close to strategic growth locations to understand and manage risks, and facilitate growth. For more mature companies, the focus may be more on efficiency.”
Achieving efficiency is far more difficult an undertaking in Asia Pacific, compared with more cohesive regions such as Europe and North America, due to the regulatory and cultural diversity. This impacts on the nature of solutions and advice that they need. As Sandip Patil, Citi highlights,
“RTCs in Asia Pacific have a range of specific requirements that mean that the solutions and platforms that they put in place may differ from those in other regions. Asia Pacific is not one cohesive region, and every country is unique. For example, China, India and Korea have all developed entirely independently of each other, and have virtually no similarities to each other. Consequently, RTCs need tools that support local requirements in each country, whilst promoting standardisation and efficiency as far as possible.”
This has a variety of implications. Firstly, standardisation can be difficult to achieve in a region characterised by diversity, but as Victor Penna of SCB continues, the way in which treasurers are doing this is changing. For example, on one hand, there is a greater focus on best-in-class banking partners and solutions in each market,
“RTCs in Asia demand visibility and control over cash, and standardised processes, in the same way as every other region. However, the way in which they are achieving this is changing. Before the global financial crisis, many corporations adopted a regional or global strategy when appointing banking partners, so they sought a primary banking partner in each region. While we expected this to change in the immediate aftermath of the global financial crisis, this did not happen. Now, however, we are seeing a shift take place: corporations are now mandating their banks on a country-by-country basis, so they may have three or four partner banks in each region (in addition to local banks for regulatory reasons).”
While appointing multiple banks may result in fragmentation and loss of cash visibility and efficiency (which was one of the drivers in treasurers’ pre-crisis aims of appointing regional or global cash management banks), innovative technology has emerged to address this, as Victor Penna, SCB continues,
“Technology is a key enabler for corporations to achieve the operational efficiency and standardisation they require, whilst managing their counterparty risk, using bank-agnostic multibank platforms such as SWIFT and global standards such as XML ISO 20022.”
The potential for technology to facilitate standardisation and efficiency is not limited to bank connectivity. The use of specialist treasury management systems (TMS) and the treasury modules of ERPs is growing in Asia, with particular value in cloud-based, or SaaS (software as a service) solutions, or TMS hosted and managed by the vendor, which provide access to high quality solutions without the need to dedicate specialist resources to maintaining them. Increasingly, bank connectivity is provided as an integral part of both SaaS or managed solutions, again providing consistent access to multiple banks without the need to implement or maintain separate platforms.
The second major implication of the diverse landscape in Asia, with multiple currencies, regulatory frameworks and financial infrastructures, is that risk management often becomes more important than in Europe and North America. HSBC comments,
“RTCs of foreign multinationals in Asia Pacific often have a different remit than European treasury centres. While in Europe, treasury centres may be responsible for global funding and cash management, including investments, the focus in Asia Pacific is often on risk management rather than funding, particularly given the deeper market for liquidity in other regions. Consequently, they focus more on the relevant tax and regulatory issues to determine the right structures to manage their risks effectively, including those associated with intercompany liquidity management to ensure that business operations in each country can be financed. They also partner the business to achieve growth.” [[[PAGE]]]
Specialist treasury technology plays an essential role in supporting these objectives. In addition, advisory services, whether offered by banks, vendors or independent consultants, are becoming increasingly important. Few treasurers can afford to recruit and maintain specialist knowledge in every market in which they operate, so third-party advice, particularly from a partner that has a deep understanding of the business, is becoming increasingly important. This is resulting in a number of banks providing advisory services in addition to their traditional product and service offering to help solve liquidity and risk challenges. For example, one of the most significant issues in Asia Pacific remains the difficulty in unlocking ‘trapped’ cash, i.e. cash held in-country that is not required to fund local liabilities, but that cannot easily be converted or repatriated. Sandip Patil, Citi demonstrates,
“Trapped cash is a particular issue in Asia Pacific given that not all currencies are tradable, and there are often restrictions on currency movements. Treasurers therefore need their banks and vendors to deliver tools that provide visibility and control over cash whilst complying with these restrictions.”
Creating partnerships
As a result of these specific challenges, treasurers in Asia may have additional criteria when selecting banks and vendors, as HSBC illustrates,
“RTCs in Asia Pacific have different considerations in their choice of banking partners, solutions and platforms than treasury centres in other regions. For example, the way in which a company buys, sells and pays salaries and taxes will differ in every country in the region, so they need solutions that enable them to manage these local requirements whilst achieving standardised processes and visibility over cash and risk. This leads to different priorities: for example, while a bank’s physical presence in a country and its branch network may be less important in Europe, particularly post-SEPA, it remains an important issue for many corporations in Asia Pacific. In addition, it is very difficult for RTCs to track regulatory compliance in each country, so they rely on their banks to provide platforms to monitor and ensure compliance with diverse, often fast-changing regulations.”
While few cash and treasury management solutions have become commoditised, treasurers expect a comprehensive range of solutions to meet their liquidity and risk management needs as a baseline from their banks. Victor Penna, SCB confirms,
“In this environment, treasurers’ demands of their banks are changing. Firstly, they expect a similar level of sophisticated solutions to be delivered by each bank: for example, they will now expect virtual account solutions from all of their partner banks to facilitate automated reconciliation at individual invoice level. Secondly, it is now not enough for a bank to be present in a certain number of markets: treasurers want to understand the depth of solutions and services in each market, as well as the regional and global liquidity and risk management solutions that are available. Finally, the ability of banks to offer value-added advisory services to enable treasury centres to optimise their operational and financial efficiency across complex markets has never been more important.”
The global centres of the future?
The growth in responsibility, sophistication and organisational profile amongst RTCs in Asia Pacific looks set to continue, driven by a variety of factors. Firstly, while regulatory diversity is, and will remain an obstacle for the foreseeable future, Sandip Patil, Citi notes that,
“The regulatory and market diversity that currently characterises Asia Pacific will reduce over time as globalisation continues, and regulations generally move towards more open economies.”
For example, the ongoing process of regulatory liberalisation in China is already having a major role in the development of Asia Pacific RTCs as Sandip Patil continues,
“Developments in China will be a particular driver, not only as it is the biggest market in Asia for many corporations, but in many cases, it is becoming the biggest market globally. As currency and fiscal liberalisation continues, corporations will increasingly be seeking to incorporate China into regional and global treasury centres, a trend that is already emerging. The implication of this is not only that cash and treasury needs in China will be managed from treasury centres in Singapore or London, but regional or global treasury centres will be established in China, particularly by Asian multinationals.”
As HSBC points out, however, there are other developments taking place that will continue to create new challenges and opportunities for corporations operating in Asia, and the treasury centres that support them,
“Even five years ago, it would have been difficult to envisage the extent to which China has opened up, and the way in which the journey towards liberalisation continues will be vitally important to RTCs in Asia Pacific. Following on from the opening up of the Chinese economy, a related potential trend is the growth of ASEAN as a region, particularly with the development of the ASEAN Economic Community (AEC). While this could result in trade occurring with less friction between participating countries, there is still a long way to go.”
A second key driver is the relative importance of operations in Asia compared with other parts of the world. Amongst foreign multinationals, the more that Asia Pacific contributes to the business in revenue terms, the greater the importance of the RTC’s role. Similarly, amongst Asian multinationals, the more they expand outside their home markets, the more important the role of an international treasury centre. The third major driver is digitisation. While globalisation may be a gradual process, many RTCs are looking to make a rapid impact on the business, with technology a key enabler, as Victor Penna, SCB concludes,
“At a macro-level, we are already seeing a migration of sophisticated treasury management activities to Asia. While Asia used to lag behind Western Europe and North America in treasury sophistication, it is now becoming leading-edge, both amongst Asian multinationals seeking to ‘leapfrog’ legacy solutions and technology, and Western multinationals that need to maintain their competitiveness in a key strategic region. Given that Asia is the world’s largest economic area, we expect it to become the centre of treasury management for a growing number of companies.”
