Published: August 01, 2011
Featuring Kenneth C. K. Ng, Group Treasurer, DFS Group and Stephen Chan, Head of Liquidity Management, Asia Pacific, Global Transaction Services, CitiWith retail operations across Asia and beyond, DFS has cash inflows in a wide range of currencies, while most purchasing takes place in USD. Its group treasury in Hong Kong faced huge bank charges with a large number of cross-border cash transfers and the cost of buying and selling USD. Furthermore, there was a great deal of manual work required by local divisions and treasury to administer the process, and tight deadlines. DFS was therefore seeking to transform its cash management processes to avoid negative FX movements eroding the company’s profit margin, whilst reducing labour-intensive processes and external transaction costs. This would be no easy task but not impossible. To do this they required a banking partner that was committed to understanding their needs, who could successfully bring together product innovation with customer service excellence.
DFS approached Citi to discuss ways of enhancing the way they manage cash and foreign exchange risk, in order to make the process more convenient without increasing risk or cost. There were a variety of reasons why DFS selected Citi. Firstly, Citi already had a strong relationship with DFS as its key partner bank for global cash management and payments in both local and foreign currency. Secondly, the bank is a participant in DFS’s loan facility. However, the quality, as opposed to simply the scope, of the relationship was the decisive factor in DFS’s decision. Kenneth C.K. Ng, Director and Group Treasurer, DFS explains,
“We have had a long and successful relationship with Citi for both borrowing and cash management. A particular benefit of working with them is the quality of service that we receive, so we were enthusiastic about opportunities to extend the relationship further.”
He continues,
“We worked closely to design a new solution that would meet our current and future needs by reducing costs and administrative effort, whilst increasing our currency flexibility. We were impressed by its innovative and pragmatic approach to designing, implementing and maintaining a cost-effective, scalable solution that was specifically designed around our business objectives.”
The new liquidity structure represents a complete transformation in the way that cash and FX risk is managed at DFS. Local business divisions no longer need to transfer surplus cash to treasury, nor to request additional funds. Similarly, treasury does not need to exchange foreign currency amounts for USD, nor to convert amounts back to local currency. The workload across the business has therefore been substantially reduced, whilst retaining visibility and control over cash flows and FX processes.
To achieve this, the solution comprises a two-way cross-currency, cross-border sweeping arrangement with automatic conversion into USD. Surplus funds in DFS’s accounts across the region, in all currencies, are automatically swept into a central USD account held by DFS’s global shared service centre (SSC). The conversion is performed at a competitive rate based on an agreed margin with the sweeps undertaken according to pre-defined rules determined by DFS. Similarly, overdraft balances in each currency account are funded automatically from the liquidity structure at the end of each day to avoid overdraft charges. The process is fully supported with account information and confirmation of foreign exchange transfers provided promptly through CitiDirect® Online Banking. [[[PAGE]]]
The new solution was implemented within a month, with all the relevant tasks performed by Citi. Consequently, DFS could take advantage of the new solution without having to dedicate project resources to its implementation. For example, Citi opened the relevant new accounts on DFS’s behalf and created the necessary reporting to be accessed through DFS’s existing CitiDirect application. As there were no technology modifications required, DFS did not need to make any additional technology investment. The internal sales process was straightforward as the benefits were clear without the need to justify an up-front investment in the project.
Kenneth Ng, DFS outlines some of the benefits of the new solution,
“Since implementing the cross-currency, cross-border sweeping arrangement, we have greatly reduced the amount of administration required as we no longer need to initiate transfers and FX deals, nor do we need to fund local accounts manually. Local divisions can access cash easily without having to forecast cash requirements in advance. In addition to internal cost savings, we have also reduced our FX transaction costs, particularly as we no longer have to sell USD to buy foreign currencies. Based on our calculations to date, we estimate that our first year cost savings will amount to $300,000-500,000 in external costs alone, in addition to substantial internal efficiencies and cost reductions.”
This cross-currency, cross-border sweeping structure is an integrated part of DFS’s overall cash management framework, so treasury has a complete view of cash and risk. As well as satisfying DFS’s current objectives, the solution is scalable so that new locations can be added easily as the company expands its operations in the future.
The project has already proved a major success with tangible cost benefits as well as proving to be a catalyst for a process transformation at DFS. This is even more significant bearing in mind the rapid and convenient way in which it was implemented. A key factor in the project’s success has been the close relationship of the two parties as they worked together to design a solution that would specifically address DFS’s financial and process challenges. By clearly articulating the business objectives, DFS obtained the necessary support from both local business divisions and senior management. The SSC and business units recognised that they would benefit from a considerably reduced workload, without the need to invest resources into the initial project, which also helped to secure their support. Furthermore, as Kenneth Ng continues,
“A key factor in the success of this project has been the skills and resources that Citi has been able to dedicate to the design and implementation of the solution, with a focus on understanding and meeting our needs. We have achieved considerable tangible savings in a short time, whilst enhancing our financial performance.”
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DFS is seeking to diversify its currency risk further in the future as a result of the ongoing depreciation of USD, a trend which appears to be continuing for the foreseeable future. Consequently, DFS and Citi are currently discussing the replacement of the existing USD-denominated structure with a comparable cross-currency, cross-border arrangement denominated in Singapore dollars (SGD). In this way, DFS will continue to benefit from the same operational, cost and FX risk management advantages while supporting its overall strategic objectives. Kenneth Ng concludes,
“We have had an entirely positive experience on this project, and we have benefited from its flexibility, innovation and customer focus. Based on the positive outcomes we have already achieved, and the ease of working with them, we look forward to extending these benefits in the future, such as diversifying our exposure to USD.”
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