Published: November 01, 2010
Corporate treasury management in France is something of a paradox. On the one hand, we have witnessed a high degree of centralisation in multinational corporations’ domestic cash and treasury management organisation in recent years, with the treasury department taking control over policy, liquidity, cash and risk management, and payables/ receivables in France. Outside France, however, the situation has typically been rather different, with a more decentralised approach to treasury management. Local CFOs manage the needs of the business in each country according to local specificities. In the past, this dual treasury organisation has often been the result of a lack of technology; however, although technology has matured, it has become more entrenched organisationally. Following the financial crisis, when liquidity and risk became higher priorities, and inspired by new industry opportunities, we are now seeing a shift towards greater convergence in multinational corporations’ domestic and international treasury management and recognition of the benefits of centralisation.
EBICS and SWIFTNet
There is no coincidence in the timing of treasurers’ efforts to harmonise and centralise their cash and treasury management activities. Not only has the financial crisis raised the profile of treasury and the importance of its activities, but there are also a variety of catalyst events that are presenting opportunities for change. One of the most significant is the termination of ETEBAC, the protocol that has been a mainstay of corporate-to-bank communication in France for many years, and which will be mourned by many organisations. By September 2011, corporates will be obliged to implement an alternative connectivity method, typically either SWIFTNet or the French adaptation of EBICS. There are advantages and disadvantages of either method, but we are already seeing a number of international, multi-banked corporations adopting SWIFTNet, although the implementation effort is higher.
Corporates in France have typically been less inclined to single banking relationships than those in other parts of the world, and until three or four years ago, companies typically issued requests for proposal (RFPs) to potential banking partners in each country. This is now changing, and as part of an effort to rationalise and harmonise cash and treasury management activities globally, treasurers are now seeking to consolidate banking relationships at a regional level. However, these companies remain committed to a multi-bank model, even though each bank may deliver a wider range of services and in more countries. Consequently, just as we saw ETEBAC, which is bank independent, gaining widespread adoption in France, French companies have also been amongst the first to adopt SWIFTNet.
Looking towards SEPA
A second catalyst for change is the Single Euro Payments Area (SEPA). Although the new SEPA payment instruments, SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD), had a slow start initially, we are now seeing a steady increase in volume, with SCT now representing more than 2% of total payment volumes, demonstrating that SCT is now starting to be used domestically in some European countries. The instrument is proving a viable alternative to domestic credit transfers in France, so we anticipate volumes continuing to grow, particularly once a final end date for migration from domestic payment schemes to SEPA is announced. Perhaps more important than SCT is the SDD, and although this was introduced more recently than SCT, we are already seeing substantial volumes from major collectors of retail payments, such as insurance, telecoms and utilities firms. Firstly, the new SDD scheme offers the opportunity to perform direct debits more efficiently, and secondly, cross-border and business-to-business direct debits can be undertaken.
There are still some challenges associated with SEPA in France, but also a number of opportunities that are specific to the French market. For example, the mandate requirement for SDD differs from the existing domestic scheme, so to automate the process as far as possible, there is considerable interest in an electronic mandate system. Bearing in mind the attraction of cross-border direct debits under the SDD scheme, this could only be effective if accepted by banks across the Eurozone but although this is likely to materialise, a pan-European e-mandate system will take time to develop, despite its undoubted attractions to corporates and banks alike. To be successful, we first need to see a defined end date so that corporates and their bankers can justify prioritising this project; secondly, all parties will need to be pragmatic in adopting interim solutions before a full e-mandate process is available.[[[PAGE]]]
Payment Services Directive
Also related to SEPA is the introduction of the Payment Services Directive (PSD). While this is being rolled out to every country in the Eurozone, there are some important distinctions in France that create specific opportunities for users of payment services. For example, before the PSD was introduced, banking law in France prevented entities other than banks from delivering payment services, unlike countries such as UK and Germany. Most banks in France consider the removal of this restriction to be a threat to their competitive position and are resistant to the change. However, we recognise that the introduction of new players actually provides an opportunity to improve the quality and reduce the cost of payment services. Deutsche Bank is the largest correspondent bank for euros, processing 21% of euro clearing transactions1, so we see the potential for providing white-labelled services to payment services providers that give their clients confidence in the integrity and resilience of the service, whilst providing companies in France with greater choice. Consequently, we are actively supporting emerging third party companies with the licensing and documentation required to register for payment processing.
Leveraging the opportunity
The combination of an increased recognition of the benefits of centralisation, and the opportunity of achieving it, the need to migrate from ETEBAC and the prospect of SEPA means that treasurers in France are poised for cash and treasury transformation. Even though there is still a degree of apathy about migration from ETEBAC and adoption of SEPA instruments, those that have already taken advantage of these opportunities have made substantial progress. France is now at the forefront of SWIFTNet migration amongst corporations, and these companies are now amongst the most sophisticated technologically in the world. The impact is not limited to process and communication efficiency, however. By centralising financial activities and increasing visibility and access to cash, treasurers are able to take greater control over working capital and enhance the financial supply chain. For example, during the crisis we saw a greater interest in various forms of supply chain financing, such as supplier, stock, distributor and pre-shipment financing. As many large multinationals rely on suppliers globally that are often smaller companies, these firms have sought to support these companies to avoid interruption to their own supply chain in the event of supplier failure. Since the crisis, however, these programmes are proving equally valuable, but for different reasons. As competition re-emerges, larger companies are using supply chain financing to incentivise suppliers to prioritise their supply needs. This is particularly important in low-margin industries with a ‘just in time’ supply chain and can be an important competitive advantage to ensure that goods are distributed to customers as quickly as possible. Companies with a decentralised approach to international treasury management find it difficult to establish such programmes as local entities typically lack the economy of scale and capacity to set up and manage them.Another challenge associated with decentralised treasury organisations that the recent trend towards centralisation amongst French companies is helping to address is the ability to unlock ‘trapped’ cash. Even though interest rates are low, there are plenty of incentives to bring as much cash together as possible from across the business. For example, cash surpluses can be used to fund deficits and therefore reduce local borrowings, and erosion of the value of cash in high inflation countries prevented. Consequently, we are seeing significant interest in liquidity management solutions. While cash pooling has essentially become a commodity, a global approach to liquidity, across all markets and currencies, is more difficult to achieve, and solutions need to be constructed according to the needs of each organisation. We are therefore helping companies to balance local cash management needs with those of the wider business and in some cases, acting as intermediary between different parts of the company. Notional pooling, or interest allocation, is also becoming increasingly popular as a way of combining the effects of positive and negative cash balances without affecting the integrity of account structures. [[[PAGE]]]
While cash and treasury management centralisation has been a long-standing trend for companies headquartered in many countries, this trend has typically been restricted to domestic activities for French activities. Today, however, encouraged by the financial crisis and industry initiatives such as the winding-up of ETEBAC and increasing momentum towards SEPA, corporates in France are leveraging their expertise in multi-bank, bank-independent connectivity to facilitate sophisticated, efficient cash and treasury management activities. In this environment, where formats and connectivity methods will clearly be a priority, it will be important not to lose sight of the potential business benefits of connectivity transformation. As a bank with expertise in France, across Europe and beyond, Deutsche Bank is increasingly the bank of choice for French corporates seeking to establish the cash and treasury management framework for the future.
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