- KK Tay
- Head of Global Transaction Banking Asia Pacific, UniCredit
by KK Tay, Head of Global Transaction Banking Asia Pacific, UniCredit
Under the banner of the renminbi (RMB), Asian influence continues to spread throughout the world. As corporates in China and the rest of Asia seek to expand into new continents, they can also benefit from influence flowing in the other direction. In particular, new treasury innovations can help take their growth to the next level, says KK Tay, Head of Global Transaction Banking, Asia Pacific at UniCredit
Chinese corporates are on the rise, and they are leading the way as a host of corporates all across Asia increase their dealings with foreign counterparties – particularly in Europe. This trend is seeing Asian influence set in all over the world – with the popularity of RMB settlement increasing exponentially over the past few years.
Meanwhile, increased interaction with foreign counterparties is allowing influence to flow in both directions. The potential for mutual enrichment is particularly strong in Europe, where firms are settling a growing number of trades in RMB in order to diversify their currency portfolios.
Having said that, the Chinese regulator also reacted. On 5 September 2015, the People’s Bank of China issued the updated regulation [Notice of PBOC 2015], which supersedes the circular 324 in Nov. 2014. This is an enabler for one of the most frequently used cash management techniques: cash pooling. Already widely used in Europe and the US, this technique is now becoming more prevalent in Asia too. The latest regulatory changes have considerably widened the scope in which the product can be offered, with relaxation of the entry criteria for onshore and offshore corporates, turnover limitations being reduced, and even overdrafts in the RMB special account being allowed.
The benefits of SEPA
At the same time, Europe is also going through a period of intense innovation. This stems partly from the Single Euro Payments Area (SEPA) regulations – a directive from the European Commission aimed at harmonising payments throughout the region. The temptation among Asian firms may be to see these new rules as a compliance burden, but this would be a mistake. SEPA represents a significant opportunity for Asian corporates.
Though the experience of European firms suggests it will require time and effort to integrate SEPA processes into existing workflows, the advantages are numerous. Chief among them is vastly improved access to European markets, with the payments landscape now harmonised to a significant extent. Meanwhile, SEPA’s digital format enables payments to be made with greater speed, efficiency and security than ever before.
Yet the benefits of this move into digital territory are not limited to transaction efficiency. SEPA technology is laying the foundations for a range of innovative and impactful digital tools. And these can play a major role in maintaining strong growth both in China and throughout Asia.
Taking control with virtual accounts
Near the top of the list of valuable new tools are virtual accounts. The idea behind these is to centralise cash management by consolidating a firm’s funds into a single parent account. This can then be divided into sub-accounts, known as virtual accounts, to accommodate different departments and subsidiaries.
Organising accounts in this way brings a number of benefits. First of all, it improves liquidity – breaking down cash silos and making all funds available in a single place. This also makes virtual accounts much more transparent, since treasurers can view cash flows and map exposures for the entire business. And corporates need not sacrifice granularity to achieve this perspective. Some banks, such as UniCredit, offer virtual account services that provide daily statements for each individual virtual account, in addition to one for the parent account.
Furthermore, centralised cash management systems such as virtual accounts enable firms to alter their account structure and add new accounts at the click of a button, and without the need for bank authorisation – another factor making them ideal for Asian corporates looking to expand.[[[PAGE]]]
Secure settlement – without the delay
Of course, expansion requires more than just scalability. Risk mitigation will be another important factor, especially when dealing with new and unfamiliar counterparties. This role has traditionally been filled by the letter of credit (LC), and in Asia the LC remains the pre-eminent means of settlement. Indeed, 65% of all LCs today are issued in Asia. It’s easy to understand why they are so popular. LCs are an established and robust settlement method, providing valuable risk mitigation by using banks as intermediaries.
Yet in today’s fast-moving world, LC processes can often be prohibitively slow, and Asian corporates looking to improve efficiency may well want to look at other options for these transactions.
One method that has proved popular, particularly outside Asia, is open account settlement. This is where counterparties simply exchange bank details and transact with one another directly. Of course, while this accelerates the payment process, the lack of bank mediation also eliminates the risk management benefits that underpin the LC.
However, digital innovation has brought a third option into play. The Bank Payment Obligation (BPO) is designed to combine the merits of these two methods, offering both the digital speed and efficiency of open account settlement with the advantages of bank mediation.
And since companies in China and the rest of Asia have yet to take up open account settlement on the scale of other regions, they are well poised to lead the way in adoption of this innovative settlement technique – one that will surely aid them as they seek to establish themselves in new markets.
In fact, the process is already underway – consolidating links between Europe and Asia. Last year, Japanese corporate Mitsui & Co changed how it settled accounts with its German partner, RVT Rühr-und Verfahrenstechnik – moving from open account terms to create the first BPO agreement between Japan and Germany.
This has the potential to be a frontrunner for a much larger movement. According to the ECB, the EU accounted for 28% of Asian trade in 2013 – far more than any other trading partner. Meanwhile, SWIFT predicts that the letter of credit will account for only 11% of world trade by 2020. As the BPO steps in to fill the gap with a faster and simpler alternative, and SEPA eases the path for Asian corporates in Europe, we can expect to see many more BPO transactions between these two regions in the coming years.
Supply chain innovation
Indeed, digital innovation has already overseen an increase in the volume of trades between Europe and Asia. And this, in turn, is leading to further innovation – this time in the area of supply chain finance.
One growing trend is seeing larger corporates take advantage of their strong credit ratings to improve borrowing conditions for their suppliers. This is done by guaranteeing bank payments on behalf of the supplier – meaning credit can be extended on the basis of the buyer’s strong profile, rather than that of the smaller supplier.
This technique is highly advantageous. Suppliers can secure credit at lower rates, and buyers can use the technique to negotiate better prices. Certainly, it is a compelling option for Asian corporates – many of whom deal with highly-rated firms in Europe. And of course, larger Asian firms can use the same technique to fortify their own supply chains.
Certainly, this kind of technique – combined with innovative tools such as virtual accounts and BPOs – can put unprecedented sophistication at the fingertips of Chinese and other Asian treasurers. This sophistication could translate into a huge advantage for their firms as they look to build upon the impressive growth of recent years.
