When Domestic and International Collide

by Helen Sanders, Editor

There has been a long-held perception that, somehow, cash management is different in the United States from anywhere else in the world. It is true that payment instruments are not the same, as cheques are not used in most parts of Europe, and the regulatory environment also differs from that of other countries. However, this can be said when comparing any two countries in the world. As the largest exporter and importer of goods in the world, the US is the world’s biggest driver of globalisation. With continuing economic challenges in many western markets, few companies can focus on the US home market alone, and are increasingly looking overseas to achieve their growth ambitions. This article considers some of the current and future cash management priorities of companies either headquartered or doing business in the US, and some of the ways in which their banks are supporting them.

Cash management challenges

Dub Newman, Head of North America Global Treasury Solutions at Bank of America Merrill Lynch highlights three key, related issues that treasurers are facing:

“The dominant discussions amongst US treasurers and cash managers are how to obtain access to liquidity on one hand, and dealing with surplus cash in a low rate interest rate environment on the other. Many companies have built up large cash balances over recent years and now need to find ways of placing this cash. Another important trend is the need to achieve efficient financial processing, such as the increased use of electronic payments.”

Treasurers really need to see all of their cash in one place at one time.

These priorities perhaps come as little surprise, as they have been the issues that have dominated the agenda for some time. However, Cindy Gerhard, Head of Product Management, Global Liquidity & Investments, Citi adds, 

“Maximising working capital and improving operational efficiency have remained priorities in recent years; however, what has changed is the intensity of companies’ focus on these areas. For example, while it may have taken 6 to 12 months for a treasurer or cash manager to roll out a bank solution, they are now putting in place professional programme management so that the solution is up and running in 3 to 6 months, with results being measured proactively.”

The three trends of liquidity, investment and operational efficiency are closely related. Dub Newman, Bank of America Merrill Lynch illustrates one of the challenges in investment decision-making,

“Cash managers and treasurers have a limited range of investment options that fall within their risk appetite. For example, many now only wish to invest in deposits that are guaranteed under the FDIC insurance scheme, which excludes money market funds (MMFs). The incremental return earned on MMFs is typically too low to justify giving up the benefit of FDIC insurance compared to short-term deposits that are insured whilst still offering access to liquidity.”

Cindy Gerhard, Head of Product Management, Global Liquidity & Investments, Citi emphasises that as a result of low investment returns, driving value from operational efficiency has become more important,

“While our customers still want to discuss how to invest their cash in a low interest rate environment, they are recognising increasingly that they can earn a higher return by investing in operating efficiency and proactively mobilising cash, as opposed to searching out a few additional basis points of return.”

Dub Newman, Bank of America Merrill Lynch also illustrates the importance of reducing the need for working capital to facilitate longer-term investment,

“A key liquidity challenge is to optimise the cash flow cycle, freeing up working capital for alternative use. By permanently extracting working capital, cash can then be invested in medium- to long-term investments, which alleviates the problem of where to invest cash.”

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From challenge to opportunity

To address these challenges, treasurers and cash managers are placing greater demands on their bankers. Efficient technology and communication, liquidity management solutions and risk mitigation strategies are all high up on the list of discussion topics. Pivotal to all decision-making is visibility over cash, not only at a domestic level, but globally. As Judd Holroyd, Wells Fargo explains,

“Terms such as visibility and control are now ubiquitous. Treasurers really need to see all of their cash in one place at one time, hence the importance of single channel strategies for global cash management in order to gain an aggregate view.”

He continues,

“We continue to hear from our clients the importance of flexibility in the way that banks deliver products and services, and the ability to change quickly in line with rapid market evolution. Consequently, banks need to focus on reinvestment in versatile technology and solutions.”

Cindy Gerhard, Citi also outlines that technology is a major focus for the bank,

“To respond to changing customer needs, we are expanding our liquidity management product suite, and increasing the sophistication of our technology so that routine money movements to cover end-of-day positions can be automated as much as possible. This has been a major area of investment with very positive feedback from our clients.”

In addition to responding to generic requirements that are common to every business, each company and industry will undoubtedly also have its own unique challenges, both domestically and internationally. Dub Newman, Bank of America Merrill Lynch exemplifies,

“With large retailer clients, we are exploring how to reduce the use of cheques in favour or card payments, and optimise cash held in stores through refinement of transportation and processing.”

A focus on payments and collections efficiency is resulting in a greater emphasis on automated solutions that meet both operational and working capital objectives, such as the use of commercial card solutions. While these are already well-known in the US, often more so than in other regions, there is increasingly a drive to extend these solutions further and create synergies on a global basis, as Kevin Phalen, Head of Global Card and Comprehensive Payables, Bank of America Merrill Lynch explains,

“Our clients are looking at how they can become more efficient. Commercial cards solutions, along with other types of electronic payments, are an essential element of this. Increasingly, these companies are looking to Bank of America Merrill Lynch not only to facilitate efficient electronic flows, but to enable collaboration across the community of buyers and sellers. This is already happening in the United States, with a network of 150,000 buyers and suppliers facilitated by Bank of America Merrill Lynch. Within this environment, the stage is set to deliver not only card solutions, but eInvoicing, dynamic discounting etc. as well that facilitate the financial supply chain. The next challenge is how to extend this model on a global basis to create a worldwide community.”

Each bank will have a different approach to delivering services in each location.

The final point that Kevin raises here is a key one. Building a domestic community of commercial counterparties is highly beneficial, but its value is diminished if significant differences remain between the domestic and international communities. Larger companies operating on a multinational basis typically have the scale, resources and technology to adapt their technology, messaging and bank communication in each country or region, particularly when leveraging SWIFT connectivity; however, as Judd Holroyd, Wells Fargo outlines, the opportunities are more limited for smaller companies that still require the same degree of sophistication, but lack the scale of their larger peers,

“Continued globalisation means that the boundaries between US domestic and international cash are blurring, and companies need interoperability of technology and solutions across borders. This creates challenges for mid-cap companies that may have expanded their activities more recently than larger companies. To help address the needs of these organisations, we package services such as low value clearing across 40 countries in a way that is familiar and consistent. By doing so, we manage the complexities and nuances of working across multiple jurisdictions so that our customers do not need to do so.”

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Maintaining control over cash

Entering new markets creates a variety of challenges, not least is the choice of banking partners. Companies that have operated domestically in the past may find that their current bank(s) do not provide the international capabilities that they require. In addition, appointing a single global cash management bank may compromise counterparty risk management objectives. However, appointing multiple banks can result in fragmented cash balances and information, which can be detrimental to cash management and operational efficiency objectives.

Whether one or multiple banks are appointed, typically treasurers and cash managers need their banks to enable them to manage liquidity so that cash can be mobilised across the group, as opposed to borrowing in one location and maintaining surplus cash in another. Cash concentration, notional pooling in permitted regions, interest optimisation techniques and other sophisticated cross-border techniques are therefore important services that treasurers should be discussing with their banks to derive the full benefit of growth in new regions. By leveraging the right techniques, appointing the right bank(s) can contribute significantly to a successful international expansion strategy, as Dub Newman, Bank of America Merrill Lynch illustrates,

“As our clients extend their activities globally, they are increasingly relying on Bank of America Merrill Lynch to help manage the complexity of operating in new environments, with different regulations, financial infrastructure, language and culture. This is proving an invaluable service that helps our clients to mitigate business risk when entering new markets, and maximising opportunities.”

Although some banks now have a very substantial international footprint, each bank will have a different approach to delivering services in each location: in some cases, this will be direct, while in others indirect. Judd Holroyd, Wells Fargo explains the bank’s approach,

“We have a strategy of serving customers in the regions where they need our services most. We use the expertise and technology solutions that we have built up over many years in the US to design a product set that can evolve into new markets as our customers’ businesses expand. We recognise that it is not feasible to be all things in all markets, so we focus on our core competencies, such as payments and reporting, together with our high quality of service, and blend these with services delivered by our in-country partner banks that help to manage customers’ domestic needs in those countries.”

He also emphasises that globalisation results not only in more US companies doing business overseas, but also an increase in the number of foreign companies operating in the US, who face a similar dilemma when deciding on how to manage their banking requirements:

“There is often an emphasis on payment and funds flows from the US to other regions such as Europe, but there are also huge volumes of flows from Asia, Latin America and Europe to the US. These companies need an effective banking partner with the footprint, technology and expertise in US cash and treasury management to help achieve their ambitions in North America.”

Future priorities

Regulatory change will play an important role in the way that treasurers and cash managers, and their bankers, operate in the future, on a domestic, regional and global basis. The Dodd Frank Act in the US, the Payment Services Directive and SEPA in Europe, RMB liberalisation, and the demands of Basel III will all influence corporate and banking behaviour in the future. Within this context, as Judd Holroyd, Wells Fargo explains,

“Liquidity and risk management will continue to remain key in the future, with customers continuing to demand flexibility, visibility and control. At Wells Fargo, technology innovation is a key way in which we help our customers to achieve these objectives.”

Cindy Gerhard, Citi agrees that technology will be an important enabler, for example,

“By developing our Treasury Vision suite further, we are able not only to provide account-based reporting but also to integrate a wider spectrum of information to enable capabilities such as cash flow forecasting, scenario analysis, intercompany lending etc. One of the key benefits of the solution, irrespective of whether a company uses a treasury management system, as well, is the ability to query data rapidly and easily.”

The focus on US cash management is becoming an anachronism.

The timeliness as well as quality of data is a key requirement, as Kevin Phalen, Bank of America Merrill Lynch describes,

“Clients are not only demanding enriched information, they also need it in real time. Treasurers and cash managers want to look across the whole spectrum of their activities at any point in time to enable decisions to be made based on immediate, accurate data.”

Leveraging convenient consumer technology will also become more important in the delivery and receipt of financial services, in order to meet liquidity, risk and operational needs, as Cindy Gerhard, Citi continues,

“Looking ahead, we anticipate continuing improvements in essential financial processing such as the timeliness, automation and security of payment and data exchange and integration. In addition, leveraging technology such as tablet and mobile devices will become increasingly important, particularly for executive-level requirements such as approvals, dashboards etc.”  [[[PAGE]]]

Kevin Phalen, Bank of America Merrill Lynch also outlines that new technology will have a growing role to play at a consumer level,

“Cards will continue to be an essential element for companies seeking to optimise their payments strategy. Increasingly, we will see the current model extending to leverage technology such as the use of Chip and PIN, which is already ubiquitous in Europe and parts of Asia. In addition, the use of mobile devices for financial transactions is a logical extension of this, which is already proving highly successful in some emerging markets.”

From domestic to multi-domestic

The focus on US cash management is becoming an anachronism. True, there are challenges to overcome, such as processing large volumes of cash, and driving a shift from cheques to electronic payment methods such as ACH and cards. These considerations will be more or less important depending on the proportion of a company’s business that is conducted in the US, and whether a company operates in the business to consumer and/or business to business space. However, as companies continue to enlarge their geographic footprint, these same considerations will exist in every country in which they do business. Consequently, depending on the industry, treasurers’ focus will be more on managing cash in a multi-domestic environment, rather than simply focusing on the US, and on cross-border cash management to enable cash to be repatriated and used to fund financial requirements across the group. To achieve this, treasurers will need the right skill sets within the department, banking partners that can support an international growth strategy, efficient processes and versatile technology. By achieving all of these, treasurers can create strong competitive advantage and reduce the risks in international growth significantly.