by Michael Spiegel, Head of Trade Finance and Cash Management Corporates EMEA, Global Transaction Banking, Deutsche Bank
While the events of late-2008 and 2009 certainly led to a change in priorities within many corporate treasuries, many of these developments were in fact a continuation of trends already apparent before the crisis struck. For example, while corporates had been seeking to make better use of internal cash for some time, this became imperative as traditional external sources of liquidity dried up at the height of the crisis. In a similar vein, demand for financial supply chain management solutions was growing strongly throughout 2007 and 2008, yet the benefits that these initiatives bring – in terms of liquidity and counterparty risk management – came into their own as we entered a period of unprecedented economic turbulence and uncertainty.
So although there was without doubt a spike in interest in certain products and services during the crisis, this demand is likely to continue as many more corporates have now seen at first hand the benefits available. And even though the global economy certainly appears to be recovering steadily, uncertainty still remains regarding the possibility that this recovery may be a long drawn out process.
A related trend currently observed is corporates gradually returning to more strategic initiatives that were put on hold when the crisis struck. Indeed, while many of these involved the types of initiatives described above, the return of relative economic and financial stability has once again allowed treasurers to take a more considered view on the long-term direction of their businesses.
Cash management
Of course, liquidity was at the heart of the recent crisis for many corporates as it became a rarer commodity and therefore commanded a higher price. As capital markets became difficult to access and many other forms of financing became prohibitively expensive, the imperative grew to ensure that internal liquidity was managed as efficiently as possible. And achieving this requires both the increased visibility of cash and the necessary structures – such as, for example, cash pooling and concentration across subsidiaries – to make best use of it.
As well as enhancing internal liquidity management, there has also been a renewed focus on improving the cost efficiency of processes such as payments and collections – something that is often dependent on the level of centralisation, standardisation and automation that a treasury is able to achieve. Automating processes can greatly reduce the scope for human error and help to eliminate costly paper flows, while centralisation is likely to reduce much of the potential for unnecessary duplication and deliver visibility benefits that may help with managing internal liquidity.
Standardisation is another area which has seen significant progress in recent years. XML-based formats that allow the consistent exchange of information are rapidly becoming the norm, while a greater take-up of direct corporate access to the SWIFT network is also assisting in this respect. However, the key development driving standardisation in corporate treasuries – in Europe at least – is the Single Euro Payments Area (SEPA) initiative that is gradually harmonising the European payments landscape.
Since the implementation of the Payment Services Directive (PSD) in November 2009, the SEPA project can no longer be ignored and is finally becoming a reality for many. Through standardising both payments and collections across the Eurozone – and several other countries such as the UK – SEPA has opened up greater opportunities for corporates to rationalise their domestic and cross-border cash management arrangements.
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The financial supply chain
The onset of the financial crisis in late 2008 coincided with a period when – driven by a range of factors – many corporates had made a shift away from the use of documentary letters of credit towards trading on open account terms. While there are certainly tangible savings to be made through conducting trade in such a way, eliminating the use of documentary credits requires a new approach to be taken towards managing liquidity and risk. And this was an issue brought sharply into focus for many corporates as the crisis deepened.
With the focus on improving the management of internal liquidity, attention inevitably turned to the potential for releasing cash trapped in corporate supply chains. Alongside this imperative, counterparty risk – an issue easily neglected during an extended period of favourable economic conditions – also made its way to the top of many corporate agendas. Indeed, apart from the danger of a key trading partner being unable to honour obligations in terms of delivering goods or payment, the failure of, for example, a key supplier might have serious repercussion in terms of a corporate’s ability to continue trading.
When trading on open account, both of these issues – maximising liquidity and managing risk – can be addressed by the judicious use of financial supply chain management techniques. For example, by taking a collaborative approach to trading relationships and leveraging the often better credit rating of large well-established buyers, a win-win situation can often be realised, with the suppliers achieving a lower cost of funding in exchange for the buyer receiving more favourable payments terms.
However, as is the case with many of the other initiatives undertaken by corporates throughout the crisis, demand for financial supply chain management solutions is not likely to abate now that recovery has begun. Indeed, aside from ongoing economic uncertainty and fears of a ‘double-dip’ recession in many economies, the benefits afforded by this new approach to the financial supply chain will potentially offer corporates a competitive advantage even during periods of relative economic stability.
A changing banking landscape
For all these initiatives to be effective corporates will require support from a specialist banking partner and, as the crisis reached its nadir, it became apparent to many that a successful banking relationship requires more than just the delivery of products and services. Indeed, with several high-profile failures in the financial services industry, the issue of credit became a two-way street: corporates were now taking an active interest in the financial health of their banking partners and considering whether or not – in light of many taking government support – their bank was going to be able to support their needs in the future.
As a consequence, we saw many corporate treasurers reassessing their banking relationships as the crisis played out, with a view to seeking a partner with the credit quality and track-record for stability to support their businesses through the good times and bad. Indeed, with respect to Deutsche Bank, we have seen enquiries from potential clients rise and have retained a strong capital base and internal investment programme throughout the crisis. As a consequence we remain ideally positioned to continue delivering the best for our transaction banking clients regardless of the global economic conditions.