Published: October 01, 2012
Globalisation is accelerating the flow of people, goods and services, capital, energy and information across country borders. For a multinational corporation, the impact of globalisation extends further than the opportunity to expand into new markets: it involves new ways of doing business, creating strategic and operational challenges and opportunities. Treasurers have a pivotal role in facilitating their company’s global expansion and supporting changing business models, creating the backbone for supplier and customer engagements by enabling efficient, cost-effective payments and collections. Innovations in cross-border payments are a prime example of how business trends are changing. In a growing number of businesses, traditional treasury mechanisms for facilitating cross-border trade no longer support these emerging business models effectively, necessitating new techniques and approaches.
Cross-border payments are typically considered by treasurers as a challenging but necessary condition for doing business. These challenges include:
Cost. Cross-border payments are more expensive than domestic payments, and it is often difficult to assess and deduce charges incurred through multiple correspondent banks, leading to a loss of value and a lack of visibility and auditability.
Information. As payment messages are transferred between banks and across borders, information held on the payment may be truncated or the detail lost, making payments and collections more difficult to reconcile.
Complexity. As companies work with a growing number of suppliers worldwide, the number of accounts that the company has to open and maintain frequently proliferates, resulting in growing administration and control issues.
Risk. By maintaining multiple foreign currency accounts, the company is exposed to FX risks and may need to exchange currency to fund supplier payments, which adds cost and administrative effort.
These challenges directly controvert treasurers’ and finance managers’ objective to achieve cost-effective, highly automated end-to-end payments processing. Traditionally, companies have tried to mitigate some of the challenges of international payments by paying suppliers in their base currency or another major currency such as USD, therefore minimising the number of currencies and accounts they need to maintain. However, as new business models emerge, the nature of supply and demand is changing dramatically for certain industries. For example, in the past, suppliers to a large technology company may themselves have been medium- or large-sized companies, with a similar degree of financial sophistication. Today, distributed development of applications for mobile and tablet devices and the growth of open source development means that suppliers could be micro businesses or individuals located in any part of the world. These companies or individuals may not be in a position to accept foreign currency payments. Furthermore, it would be prohibitively expensive and administratively intensive to collect bank account details (which may only be used once or on an ad-hoc basis), maintain local accounts and/ or make cross-border payments to these suppliers, often for very small amounts.
A similar challenge relates to collections. In many industries, companies have historically adopted a distributor model, so collections are typically large, regular amounts received electronically from distributors or agents. Increasingly, companies are engaging more directly with the end customer, such as through eCommerce models. This means that companies increasingly need to be able to manage smaller collections through a wider variety of payment methods and currencies. This includes domestic payment methods, which may be cash or manual payments but increasingly new forms of electronic payments such as mobile payments.[[[PAGE]]]
Macroeconomic changes are also shaping new cash flow dynamics. As companies expand their business in emerging regions such as Asia and Latin America, gradual market liberalisation and currency deregulation in countries such as China and Brazil mean that treasurers and finance managers can no longer rely on making and receiving payments to/from importers and exporters in USD or EUR. Instead, they need to be able to support RMB or BRL in order to maintain their competitive position, without loss of efficiency or control. Regulatory changes are not only an issue in emerging markets. The migration to SEPA (Single Euro Payments Area) in all Eurozone countries will mean that SEPA Credit Transfers and SEPA Direct Debits will replace existing domestic payment methods by 2014. While the aim of SEPA is to reduce costs and fragmentation across the Eurozone, and to facilitate intra-regional trade by eliminating cross-border payments within the Eurozone, companies outside of this area will need to review how they make payments to Eurozone countries to leverage the opportunities for standardisation and reduced costs.
Shifting business paradigms have the potential to create further risk, complexity and cost to payment and collection processes unless treasurers and finance managers adopt a similar degree of innovation in the way that they do business. There are a variety of ways in which they can achieve this. Payments centralisation, through a payments factory or shared service centre is often an important element of an effective payments strategy, but centralisation alone does not solve the challenge of cross-border and international payments.
Leveraging the network. One important element in achieving an efficient global payments infrastructure and mitigating the challenges associated with cross-border payments is to work with a bank with an extensive global network. For example, at Citi, we enable our clients to reduce the cost and data attrition associated with correspondent banking as we are typically able to transmit the majority of payment instructions across our branch network, reducing correspondence fees and ensuring the completeness and accuracy of data.[[[PAGE]]]
Simplifying cross-border payments. Leveraging a global network has other advantages too; for example, as the illustration in box 1 demonstrates, treasurers and finance managers have the opportunity to instruct a wide variety of cross-border payments through a single channel and a single file, irrespective of the ultimate format, currency and beneficiary. The bank then makes payments locally, using electronic, manual payments or cash as appropriate.
Multi-currency payments. Not only can treasurers and finance managers facilitate global payments more cost-effectively, but they can also do so without the need to open accounts in each currency, therefore minimising currency risk and simplifying account structures and administration. For example, Citi’s WorldLink® Payment Services enables companies to make payments and receive collections in 130 countries from a single account, across a wide variety of payment methods, whether manual or electronic. This is a powerful proposition for corporates, public sector bodies, non-government organisations and financial institutions alike, as it provides a framework to facilitate international growth reducing any additional cost or complexity.
Bespoke solutions. Increasingly, treasurers and finance managers need payment and collection solutions that are specific to changing business models, without compromising their objectives of centralisation, standardisation and efficiency. As the examples in boxes 1 and 2 illustrate, combining proven yet innovative solutions in a way that is unique to each company, and therefore addressing each company’s specific requirements, is rapidly becoming essential to enable the company to respond to changing market dynamics.
Globalisation in its many forms continues to transform the way that corporations do business. From market and currency deregulation, the emergence of new supplier and consumer markets to digitisation and technology innovation, new business challenges and opportunities are being created for corporations globally. Treasurers and finance managers need to be in a position to support the company’s commercial activities by providing efficient payments and collections. This increasingly involves innovative solutions that support competitive, flexible and global business models whilst maximising efficiency, control and risk mitigation. Working with a bank with a global network, a significant level of payment expertise, and bespoke solutions that combine both proven capabilities and continuous, commercially relevant innovation to corporations is critical to achieving this objective successfully.
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