Published: September 01, 2013
One of my favourite ‘snippets’ in the Sunday newspapers is the list of fashions ‘going up’ and those ‘going down’. Sadly, I’ve never heard of most of the designers, celebrities and gadgets that are featured on either list, but it makes me feel like I have a finger on some sort of pulse. In a briefly idle moment, I wondered what these lists would look like in the treasury sphere. ‘Going up’, we have working capital optimisation, cash flow forecasting (although this has always been there) and mobile solutions for payments and collections. ‘Going down’ we have decentralised cash management, long alcohol-soaked lunches with banks (never experienced by younger treasury professionals), and spreadsheets (we hope).
Cash management has been steadily climbing the list of priorities in recent years for banks and corporate treasurers alike. No longer is transaction services, of which cash management is a major element, the drab sister to its more glamorous corporate finance or investment siblings. For banks, cash management represents a reliable revenue stream that is less impacted by market volatility than other areas of activity and a vital opportunity to secure long term relationships with corporate customers. For corporates, efficient, reliable cash management is essential to the running of the business, and key drivers of working capital. It is also valuable ancillary business to build secure relationships with financing banks.
It would be quite wrong, however, to think that cash management is simply an ‘add on’ to a financing relationship; in fact, the need for banks to be highly competitive in their cash management offerings has never been greater:
Another view I have heard from some treasurers (although typically of smaller companies) is that cash management has become so commoditised that the choice of cash management bank is largely irrelevant. If technology, regulations, and cash management requirements never changed, and if cash management in every country was identical, then this view may be valid. The reality is, obviously, quite different. This article considers some of the cash management trends amongst multinational corporations, both globally and regionally.
Starting first in Europe, SEPA is a ticking time bomb for all companies operating in Europe that have not completed their migration, but as we have discussed in TMI on a number of occasions before, SEPA should be a catalyst for change to improve financial and operational efficiency. Pierre Fersztand, Global Head of Cash Management, BNP Paribas explains,
“SEPA is clearly the first priority for treasurers in Europe in order to achieve compliance by the February 2014 end date. Most companies are now involved in a project, typically on a country-by-country basis, whilst also trying to align these activities within a global strategy. Treasurers are recognising the opportunity that SEPA presents to rationalise banks and accounts and streamline cash management and payments processing. Some have issued requests for proposals (RFPs) for a global cash management and payments bank but more commonly, companies are seeking a regional partner who will support their SEPA migration and enable them to leverage the opportunities that SEPA presents.”
Jennifer Boussuge, Head of Global Transaction Services, EMEA, Bank of America Merrill Lynch emphasises strongly that treasurers should not ignore the SEPA opportunity, not only as it relates to cash management in Europe but globally,
“SEPA is clearly a priority for treasurers operating in Europe, but as one treasurer noted at a recent Bank of America Merrill Lynch roundtable, SEPA should not be considered simply a compliance issue but instead, it empowers treasury and is a gateway to greater efficiency. This is an unprecedented opportunity that treasurers cannot afford to miss. For example, while centralising collections has often proved challenging in the past, European harmonisation now means that this is feasible. As IT resources typically need to be engaged to convert formats to XML for SEPA payments, why not take the opportunity to roll out XML globally?”
Although SEPA migration projects have a mandatory deadline of 1st February 2014 from a compliance perspective, leveraging the opportunities that SEPA offers may be a longer-term strategy. In many cases, SEPA simply facilitates the objectives that treasurers already had, as Pierre Fersztand, BNP Paribas discusses,
“Visibility and control of cash remains a priority for corporations of all sizes. For example, while in the past many companies have set up cash pools across ‘easier’ markets, they are now seeking to extend the benefits to countries and currencies that are typically considered more challenging. Therefore, internal processes such as cash flow forecasting are also an important priority.”
Similarly, centralisation is not a new trend, but SEPA is fuelling many treasurers’ efforts to centralise cash management, payments and increasingly collections, as Pierre Fersztand, BNP Paribas outlines,
“The focus on payment factories continues, with a large number of companies seeking to centralise payments. Those that have already done so are now expanding the capabilities of centralised processing centres, such as automated reconciliation and supplier payment notifications.”
He continues,
“Collections factories remain relatively unusual, but the opportunities to centralise collections will continue to grow under SEPA, particularly SEPA Direct Debits.” [[[PAGE]]]
Although it is a major step towards standardisation and harmonisation, SEPA is not a silver bullet. Variations in the use of XML have been announced in some countries (e.g., Portugal), additional optional services (AOS) differ between countries, and in some cases, such as Germany and Spain, a variation on the SEPA Direct Debit scheme, Cor1, is in use. Furthermore, local instruments such as Riba are not replaced by SEPA Credit Transfers or Direct Debits. Therefore, as Pierre Fersztand, BNP Paribas warns,
“SEPA has not transformed Europe, and regional specificities still exist. Consequently, companies need their bank to provide a combination of tools to support a regional and global cash and treasury management strategy together with local capabilities and insights, particularly in more challenging markets.”
While treasurers in North America may not need to concern themselves with SEPA (unless of course they have business activities in Europe) they cannot afford to be smug. Treasurers (both in North America and globally) are under continued pressure to reduce costs and, not simply through ‘one off’ projects but by transforming processes across the financial supply chain. Dub Newman, Head of Global Transaction Services, North America, Bank of America Merrill Lynch observes,
“In the Americas, working capital management and optimisation are far higher priorities now than in the past, particularly now that treasurers are starting to anticipate that interest rates will be rising. Many are taking advantage of the current low rate environment to refine processes so that they are in a position to take advantage of higher rates when they materialise.”
As in Europe, cash visibility remains a priority, which is resulting in a greater focus on harnessing the right technology. Dub Newman, Bank of America Merrill Lynch describes how,
“Cash management is becoming increasingly technology-driven. Mobile banking for example, is allowing treasurers to have full cash visibility and control wherever they are: they can approve transactions or assess changing cash and risk positions. Developing mobile banking capabilities further is a key part of our strategy for all customer segments, not only in the United States but globally. Increasingly, customers are expecting to replicate the functionality they have today for their personal accounts to their business accounts.”
Technology is also offering new opportunities to change working capital dynamics. This includes both technology in payments, collections and inventory, and the integration between each element of the financial supply chain, but also customer-facing technology. For example, as Barclays’ article on Pingit for corporates illustrates in this edition of TMI (referring to a UK solution, but an example of a global phenomenon), mobile payments and customer engagement solutions are creating new opportunities for driving revenues and accelerating cash flow.
While Asia represents an essential growth market for virtually every industry, every treasurer knows that it is also one of the most complex and often restrictive regions from a cash management perspective. Market and regulatory infrastructures are changing fast, however. By understanding the current opportunities that exist in each country in which a company operates, and taking advantage of new ones as they emerge, treasurers can offer considerable value to their organisations by improving automation, reducing costs and mobilising funds more effectively. As Lee Swee Siong, Standard Chartered emphasises,
“As Asia becomes the new centre of economic activity for many companies, treasurers in the region are prioritising cash management, with a view to optimising both operational and financial efficiency.”
The steps towards operational and financial efficiency are the same as those in other regions, but they may be more difficult to achieve in practice. Lee Swee Siong, Standard Chartered explains,
“Treasurers are looking at where they could centre their cash and treasury functions most efficiently, and implementing structures to optimise inter-group liquidity and funding. Cash visibility in Asia is the first step in achieving this, but this is typically more challenging than in Europe or North America, due to the diversity of markets, currencies, banking relationships and localised market practices. The second step is centralising cash as far as regulations permit. Unlike other regions, cash management structures are less homogenous, with more of a ‘mix and match’ approach.”
Pierre Fersztand, BNP Paribas continues,
“Cash pooling is becoming a more important trend in Asia, which can be challenging given the regulatory diversity that exists. A primary treasury objective is to achieve pan-regional or even cross-regional cash pooling, but with this still not yet feasible, establishing visibility at a regional and global level is an important priority.”
Similarly, payment factories are also becoming more common, although as Lee Swee Siong, Standard Chartered notes,
“Transactional efficiency is also a priority for companies operating in Asia. Payment factories operating on a payments-on-behalf-of basis are less common in Asia than in Europe as it is not permitted in all markets, leading to hybrid solutions to optimise payment and cash management efficiency.”
While diversity across markets will remain a feature of cash management in Asia for the foreseeable future, and as we know from experiences in Europe, it can take a great deal of time and commitment to common goals to achieve harmonisation, there are moves towards payments and cash management efficiency, which in turn permits synergies across borders. As Lee Swee Siong, Standard Chartered describes,
“We are seeing a variety of banking and infrastructure developments in Asia. Just as SEPA is leading to changes in infrastructure and market practices in Europe, there are multiple examples in Asia where regulators are building more efficient local infrastructures, with more electronic and real-time processing. For example, India is developing a new ACH system (National Electronic Clearing Service – NECS) and Singapore recently introduced a real-time clearing system (Immediate Payments G3). Offshore RMB clearing is available in Hong Kong and more recently in Singapore through ICBC. In China, a new international payment system (CIPS – China International Payment System) is in development to specifically handle international RMB settlement, currently handled by the local RTGS payment system, CNAPS. This will be interoperable with SWIFT formats. As yet, it is unclear how this will affect existing offshore clearing mechanisms.”
Treasurers are also using the tools at their disposal to harmonise processes wherever possible, and the value of SWIFT for bank connectivity and communication is becoming increasingly recognised. As Lee Swee Siong, Standard Chartered discusses,
“SWIFT adoption is on the rise in Asia. Although foreign multinational corporations in Asia have been connecting to SWIFT for a number of years as part of a global connectivity strategy, this trend is now extending to multinationals headquartered in India, Korea and China. In many cases, these companies are able to benefit from the experiences of early adopters with global banks offering significant expertise and insight into best practices.”
Pierre Fersztand, BNP Paribas demonstrates,
“With Asia offering more opportunities than ever before, BNP Paribas offers SWIFTNet solutions in nine countries in Asia Pacific and has several SWIFT customers live in Asia.” [[[PAGE]]]
In some respects, however, it can be an advantage to have less mature or entrenched payment and cash management practices and infrastructure than those in regions such as North America and Europe. For example, it can be easier to adopt emerging technologies and leverage the opportunities they present, both to improve efficiency but also to create new business models. Exploring these opportunities and recognising how they can add value to the business is an important role for treasurers. Pierre Fersztand, BNP Paribas outlines,
“Treasurers are no longer restricting their focus to traditional payment and collection methods. eCommerce , global acquiring and electronic wallets are all driving new types of payments. There is particular interest in mobile payments in emerging markets such as Asia and Africa as companies of all sizes seek to find efficient and convenient payment solutions that are consistent with the infrastructural, regulatory and cultural diversity and enormous geographic distances in these regions.”
A discussion on Asia is incomplete without specific mention of China. There is a great deal of misinformation and misunderstanding about cash management. Although considerable constraints still exist, the process of liberalisation both for managing foreign currency flows and balances within China and cross-border, and cross-border movement of RMB, is both rapid and compelling. Lee Swee Siong, Standard Chartered illustrates,
“China is the topic that almost every treasurer looks to discuss. Since late last year, for example, there were moves to enable RMB and foreign currency ‘trapped’ in China to be lent to the parent company, and utilised as part of a regional multi-currency cash pool. These were only available to a small group of companies through the various pilot programmes. More recently, this has been extended from a limited group of companies registered in Shanghai to a pan-China initiative, with documented rules as opposed to case-by-case approvals. Lending to counterparties outside China is no longer limited to a select group of companies. This in turn will boost the use of RMB offshore. This is an important and welcome development that will accelerate the use of RMB as an international functional currency.”
Pierre Fersztand, BNP Paribas confirms,
“Companies operating in China are increasingly seeking to include offshore RMB into their regional liquidity management structures such as cash pooling, and optimise RMB payment processing through payment factories. In addition, they are looking to their banking partners to help them to comply with onshore regulations and achieve greater cohesion between their activities with local banks and those with global banks. For example, our clients can channel all their payments to BNP Paribas which we then distribute to the relevant local banks, enabling standardised, streamlined processes."
A key decision for many corporations is the degree to which they will adopt RMB, bearing in mind that while it remains a highly regulated currency, cross-border trade settlement now well-established, and the opportunities for using RMB are increasing. Lee Swee Siong, Standard Chartered comments,
“According to our internal research, the primary drivers of RMB adoption amongst our customers are better management of FX risk, cost reduction and enabling greater access to Chinese buyers and suppliers.”
As the ability to leverage RMB balances in cross-border structures continues to grow, and mobility improves, many treasurers will now be considering these opportunities seriously. Furthermore, while treasurers need to review their cash management structures and processes every two or three years in established regions, this review needs to take place every six months or so in China and other fast-growing countries in both Asia and Latin America.
Many of the trends we have described so far apply not only to specific regions but on a global basis. As Jennifer Boussuge, Bank of America Merrill Lynch rightly summarises,
“The world is more connected than ever before, as the global financial crisis illustrated. If China’s growth slows, then so too does the growth of Brazil as well as many other countries. This interconnectedness between countries and regions means that treasurers need to look at both the direct and indirect impact of particular scenarios, which creates complexities when formulating a risk management strategy.”
The lines between cash management and other treasury responsibilities such as risk management are becoming far less distinct. As treasurers seek to adopt integrated strategies to achieve visibility and control over cash globally, decisions over centralisation, and practices in cash flow forecasting and FX risk management are inherent elements of a single strategy. Jennifer Boussuge, Bank of America Merrill Lynch explains,
“FX risk management is another important area in which our corporate customers are proactively engaged. Treasurers want to understand group exposures in more detail and to centralise this as far as possible. Having achieved this, they are more likely to engage in active or dynamic hedging than they have done in the past. For example, hedging is becoming more transaction-based, with a focus on smaller ticket items that were formerly under the radar. No longer do treasurers want to be reactive to the need for risk management, they want to be proactive.”
Dub Newman, Bank of America Merrill Lynch continues,
“The risk conversation is extending to a wide spectrum of issues. Treasurers are increasingly asking the question, ‘what would you do if…?’ and assessing the potential impact of a variety of financial and operational scenarios. Centralising processes, such as transitioning to a shared service centre (SSC), group or regional treasury centre, is an important means of mitigating risk by pooling resources and systems, establishing centres of expertise, and facilitating easier back up plans.”
Technology is an enabler of integrated cash and risk management strategies, but as Lee Swee Siong, Global Head, Global Corporate Product, Transaction Banking, Standard Chartered comments, using the example of cash flow forecasting that continues to be elusive for many,
“Cash flow forecasting remains one of the most significant challenges for corporations globally. Workflows and business culture can also affect data accuracy, completeness and timeliness. Technology is an enabler of forecasting accuracy. This is achieved through standardising and accelerating the consolidation of data, but is not an answer in itself.”
The convenience and flexibility of technology available to treasurers has never been greater, however, and the potential continues to be enormous. As Jennifer Boussuge, Bank of America Merrill Lynch says,
“Many services, including treasury management system (TMS), are moving to the cloud, which creates exciting new opportunities for treasurers globally for accessing integrated services quickly and easily. For example, we are working with SAP to provide cloud-based solutions across multiple services.”
Treasurers have never been more mindful of the need to manage cash efficiently both within each country and cross-border, reduce the risk of loss or attrition, and maximise the value of cash within the business to ease reliance on external lenders. Leveraging the right organisational structures and cash management techniques is essential, but treasury cannot achieve these objectives in isolation. Today’s cash and treasury manager is an ambassador of operational and financial efficiency across the business, driving process enhancement, integrated approaches across business functions and technology innovation. Cash management has never been more compelling.
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