Published: June 02, 2012
One of the most frequently recurring themes in global transaction banking is the increasing integration of cash management and trade finance products. A recent case study from one of the largest transaction banks in Europe, UniCredit, and a big multinational corporate has now proved that this is not only possible, but also brings tangible benefits to both corporates and financial institutions.
A client, in this case one of the world’s leading manufacturers in the pharma and health care sectors, approached the bank for help in rolling out a supply chain finance programme in Central and Eastern Europe. Despite the broad geographical scope of the project, the real challenge was not the required breadth of banking network, but rather the depth of internal integration that the client asked for.
The multinational client had already mandated UniCredit to manage its entire outbound payment flows in the large and heterogeneous region of Central and Eastern Europe. Thanks to the advanced cash management solutions of the bank, the giant pharma company was able to concentrate its numerous payment streams in one single, highly efficient payment factory in its central treasury, located in continental Europe. The centralised unit aggregates all payment instructions from the European subsidiaries, validates them and sends them via a unique electronic interface to the bank. The financial institution then transferred the funds to hundreds of suppliers via the local clearing and settlement systems in their respective countries. Having reached a high degree of automation and maximum efficiency in the management of its payables, the corporate requested the bank to add a supply chain finance functionality to the solution, without interfering with the straight-through process for normal payments.
To realise the customer’s requirement the hurdle of achieving the convergence of cash and trade had to be overcome.
Initially treated as separate universes by most banks, over time the two product areas had developed sophisticated solutions on parallel paths, without necessarily planning for integration. In the current market environment, however, cash and trade have started to converge under the influence of both external and internal factors.
Looking at their corporate clients, banks began to realise that modern companies have re-organised their functions, centralised competencies and become much more demanding when it comes to transaction visibility. The objective of this slow but steady company evolution was the optimisation of working capital, whose significance was fully grasped by corporates most recently during the liquidity crises in 2008/2009. Thanks to modern technologies, central treasuries are now able to bring together and digest data that were previously lodged in remote corners of the enterprise, especially those related to trade finance transactions (e.g., letters of credit, receivables discounts, forfaiting) and cash management (e.g., domestic or international payment orders on open account). Gathering all the information on one screen allows companies to monitor much more precisely the level of working capital needed to keep operations afloat during each time frame, thus enabling pro-active decisions on how to invest or request funds.
The trend is still ongoing and most of the enterprises have yet to achieve an adequate level of centralisation; however the process has reached a point of non-return. Nowadays it is not uncommon to look at the organisational charts of large corporations and spot new roles such as ’Working Capital Manager’, who is responsible for all the processes and projects that have the aim of improving the firm’s working capital position.
Looking at their own internal delivery models, banks have also come to realise that the combination of cash and trade would open up new business opportunities. Old manual and paper-intensive processes for payment execution or documentary trade have been digitised and automated, making it a quite natural step to consolidate and integrate them in one-stop-shop electronic platforms. The recent changes in the Basel rules for capital requirements gave a significant boost to this process. All products that imply a certain consumption of risk-weighted assets have to face a much tougher capital treatment, and banks are only willing to offer them to clients who also award them a fair share of risk-free, fee-based business - for example cash management services. This form of cross-selling, which has long been known as an astute sales technique by financial institutions, has recently mutated into a sheer necessity in order to keep client relationships profitable. This makes the convergence of cash and trade a priority for all institutions engaging seriously in the commercial banking arena.[[[PAGE]]]
As the two product families of ‘cash’ and ‘trade’ have been maintained in silos for decades before they started to get closer, their integration is a challenge that all big banks are facing. A sensible convergence strategy has to consider the effects of the integration on three different layers of the product organisations:
The majority of banks have work in progress in each of the product layers mentioned above.
In the case study mentioned at the beginning of this article, UniCredit and its client devoted most of their initial efforts to the technological layer. An IT project team was set up to enhance the bank’s pan-European payment solution and also enable it to collect the data that were relevant for the supply chain finance business. These data had then to be automatically sorted out of the normal payment workflow and routed to the supply chain finance banking application. After adjusting data formats and fine tuning connections, the client was able to use the existing interface between its payment factory and the bank as one single electronic pipe for the real-time execution of both cash and trade transactions. Payment instructions were generated and sent by the client’s ERP system to the bank only once. Based on pre-defined rules, they were then used to trigger plain-vanilla settlement payments or to offer convenient receivables discounting to the suppliers.[[[PAGE]]]
The strategy and development layer of the bank was also adapted and moved towards a balanced form of collaboration. Cash and trade product experts today maintain their different specialisations but have learnt how to reach out to each other and co-ordinate major client projects. Budget decisions are now often taken jointly and a common road map is defined to ensure that the product propositions eventually converge into a coherent offering.
The commercialisation layer is the one where all big financial institutions are still experimenting the most. A few global players like UniCredit have taken the decision to merge their cash and trade sales teams, at least at the leadership level. Individual sales people are still assigned to a specific product area, but the organisational integration pushes them towards drawing consistent sales plans across cash and trade and makes them look more strategically at the overall working capital needs of their clients. This proved a competitive advantage when designing the solution for the multinational pharma client.
The effects of the convergence of cash and trade in the banking world are already visible. Corporate clients are reacting positively to the banks’ new holistic approach, encouraging them to continue down the challenging but necessary path of integration. On the other side, financial institutions are already collecting the fruits of their efforts, thanks to the cross-selling opportunities arising from an all-round service proposition.
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