Large, multinational Asian corporates are seeking out converged trade and cash management solutions to better manage their liquidity and keep their costs low. Liz Salecka examines which banks are meeting these new demands.
The financial crisis and movement towards open account trading in Asia is driving demand for bank solutions that integrate both trade and cash management services.
Many large Asian corporates are looking for total solutions from their banks, which encompass traditional cash services, such as money collections, payments and receivables management, with supply chain financing and risk management.
At the same time, they want to harness the latest technological advancements – both at their own ends and for their suppliers – in order to improve the supply of information on trade and cash flows, automate treasury processes, and drive down costs.
“The convergence of cash and trade is an attractive proposition for both buyers and suppliers, but this requires significant investment for the supplier,” explains Patrick Furlong, director, Asia Pacific, financial institutions at Lloyds TSB.
Yet, the attractiveness of this trend inevitably differs from country to country, and from bank to bank.
“Cash and trade convergence varies according to the segment, the size and reach of corporates as well as the location, and is more typically seen in Hong Kong and Singapore,” Furlong notes. “At the same time, there are not that many banks that have the footprint or reach in Asia for this to make sense for them [the banks] from a business perspective.
“Local banks, focused largely on lending, are less sophisticated here whereas international banks can offer the whole package. Large corporates will go to them.”
A need to improve liquidity
The demand for converged solutions is being driven by corporates’ need to source, access and optimise liquidity, says Sridhar Kanthadai, managing director and regional head of treasury and trade solutions, Asia Pacific at Citi.
“What has happened over the last 24 months is that cash management has come to the fore and companies are assessing their liquidity positions and risk positions,” he says.
“In the past, trade was focused and aligned more with operational aspects linked to procurement and logistics, but there is growing recognition of the benefits of integrating the two, so that they can use their trade activities to mitigate risk and improve their liquidity situations.”
Meanwhile, Tan Kah Chye, global head of corporate cash and trade, transaction banking at Standard Chartered, points to the movement by corporates towards open account trading as spearheading demand for converged solutions.
“Open account trading has brought cash and trade a lot closer together and generated the need to converge the solutions being made available,” he says.
Nevertheless he adds that there will be limitations to the level of convergence achievable. “Letters of credit will be hard to converge with cash management services,” he notes.
Converged solutions available
Approaches taken by banks towards converging trade and cash naturally vary across the region.
Some focus specifically on meeting their corporate clients’ requirements with bespoke or tailored solutions; others are bringing their cash and trade offerings together under the same umbrella.
“At ANZ Bank, we always work to meet our clients’ requirements. If they want a converged solution, then we will provide them with a bespoke solution,” says Vivek Gupta, head of trade and supply chain, Asia at ANZ, who adds: “There is very close co-operation between our cash and trade teams so that we can meet the end-to-end needs of our clients faster and more flexibly.”
Simon Constantinides, head of trade and supply chain, Asia Pacific (ex-Greater China) at HSBC, notes that HSBC is continually promoting the development of solutions that are tailored to their clients’ needs: “If there is a need for integrated products across different transaction banking disciplines, and other areas of banking, we have a range of value-added products to strike the necessary relationship.
“HSBC was the first international bank to complete renminbi (Rmb) trade settlement transactions in Asean countries. This is an example of how we are providing integrated solutions that encompass traditional trade products, cash management and foreign exchange.”
Both Citi and Standard Chartered have brought their trade and cash management operations together under the same management teams.
“At Citi, we made the decision 24 months ago to integrate our cash management and trade functions to form trade and treasury solutions to provide our clients with a complete end-to-end offering,” says Kanthadai, who manages Citi’s combined offering in Asia.
“By bringing together cash management and trade under the same umbrella, we can go out and have broader conversations with our clients. The majority of our client managers in Asia Pacific are now focused on the larger picture.”
“We are embedding a mindset change in clients and selling the idea of a converged cash and trade function, which is needed today given the liquidity and risk issues companies face. This urgency may not necessarily continue in the future as economic environments normalise and priorities change.”
He explains that Citi does offer a total converged solution, which encompasses all aspects of cash management including centralisation, transfers and liquidity optimisation, combined with trade, but that this is most suitable for particularly progressive companies.
Therefore, it is currently focusing on two solutions – supplier financing and buyer financing.
Citi’s supplier financing solution supports large multinational purchasers of goods and materials, which want to extend their payment terms without jeopardising their suppliers’ cash flows and access to working capital.
“It is a potentially lower cost for the supplier than other external sources of financing and they can receive money earlier. Meanwhile the buyer benefits from being able to extend its payment terms at no extra cost,” says Kanthadai. “We are offering this solution domestically and across borders for suppliers in countries such as China, Taiwan and Korea. As Citi operates in 109 countries worldwide, we can bring all these parties together.”
Meanwhile, the second solution supports large Asian corporate buyers which want to grow their sales, but are not comfortable with the increased working capital needs or the risk they are taking because of the receivables building up on their balance sheets.
“In Asia Pacific, many large companies have found that payment terms are being extended by both domestic and international companies and this is affecting their liquidity. They face greater risk – and don’t want to have significant increases in counterparty risks – but, at the same time, they want to extend their market share and sell more and this may mean extending payment terms to creditors,” says Kanthadai.
“By using an integrated cash and trade solution, companies can offload the receivables on their balance sheets, and bring liquidity in fast.”
Linking cash and trade
In a similar vein, Standard Chartered has merged its cash and trade operations recently under Tan Kah Chye’s management in Asia. The bank offers two converged solutions – receivables financing and vendor pre-pay – and is looking to expand its offering.
The bank merged an existing cash management product, which enables corporate sellers to speed up the collection of monies from distributors worldwide, with trade services to offer receivables financing.
Standard Chartered manages the collection of monies due from distributors and enables them to make payments due into virtual accounts in their home countries, which are tagged to the seller’s main account. It then advances funds early to the corporate seller, eliminating the need for the seller to wait for up to 90 days to receive payment. The provision of this service is facilitated by the bank’s visibility into distributors’ payments behaviour and an understanding of their payments history.
“The solution includes financing, as the seller gets cash early; risk management, as the seller gets cash regardless of whether distributors pay up or not; the collection of monies from distributors; and ledger management,” says Tan. “These four services are bundled into one.”
Vendor pre-pay, meanwhile, is a combined service, which encompasses the management of corporate buyers’ payments to suppliers, and the provision of early financing to suppliers where required.
When corporate buyers provide Standard Chartered with payments information in a payments file, extracted from their enterprise resource planning systems, the bank automatically loads the payment orders onto its straight-to-bank platform. Suppliers can log on and decide if they want to discount payments due, and receive funds earlier.
“As we go forward, there will be a lot of potential for us to push the convergence of cash and trade services even further,” adds Tan.
There are many challenges facing banks looking to capitalise on this convergence trend.
“Asian corporates are looking for converged trade and cash services, and some banks are better placed to meet those requirements than others,” says Standard Chartered’s Tan.
“Geographic coverage is the key, highlights Tan, picking out one key obstacle for banks: “How many banks out there can effectively collect money across different countries, particularly in large countries like China, India and Indonesia? This is a major challenge.”
According to Lloyds TSB’s Furlong, many big international players still do not have the reach to certain remote areas and to service smaller companies.
“There is also an issue with local risk, and whether international banks have the knowledge required to spread that risk.”
Another stumbling block to the provision of multi-country, converged solutions is the traditional localisation of cash management services.
Trade services and instruments are older and more globalised than cash management services, and therefore offer consistency worldwide. Many cash management products, meanwhile, such as GIROs, same-day cheque clearing, sweeping and pooling, are much newer, and do not share common regulatory frameworks.
“Asian corporates now want to see their cash managed globally and consistently,” says Tan. “Banks have to be able to offer across-the-board solutions, and in countries where the regulations may be different.
“As big as some foreign banks may be, they have not yet penetrated more than 5% of China, and it is much the same situation in other large Asian economies.”
He adds that Standard Chartered is partnering with local banks in countries such as China, Indonesia and India, who do not see the bank as a competitor, to offer this capability.
The extent to which Asian corporates are ready to integrate trade and cash management also represents a potential barrier.
“A corporate’s internal structure – in relation to how treasury management, procurement, distribution and logistics are managed – will frequently drive their requirements for related banking products and services,” says HSBC’s Constantinides.
“In certain cases, there will be a requirement for bundled trade and cash management services, but in other cases, these services are purchased and managed distinctly within each business function. This is not only relevant for trade and cash management but also FX, as we continue to see increased consolidation of trade and FX.”
ANZ’s Shankar adds: “Companies that are decentralised typically won’t go down this route.
Companies in which there is the need typically have centralised treasury functions where risks are managed centrally, pricing is uniform, collections are managed centrally and information on days sales outstanding is brought into the centre.”
Kanthadai at Citi adds that whereas cash and trade centralisation is commonplace in new-generation Asian companies, such as the technology companies estalished in recent decades, older corporates are more likely to have separate departments.
“For them, making the transition is harder and more complex, perhaps due to deep-rooted cultural and business practices. It is not about the solutions we offer, but whether our clients are ready to make this transition,” he says.
“However, the credit crisis has served as a catalyst to re-evaluate this situation and discuss new solutions so this is an ideal time to spearhead the movement towards convergence.”
Impact on local banks
The adoption of converged cash and trade solutions from a single banking partner is expected to have a dramatic impact on the many local Asian banks that have traditionally delivered cash services to Asian corporates.
A recent survey by BNY Mellon found that local banks in Asia lag behind global players in the provision of integrated services, and that this could ultimately see them lose business.
According to Richard Brown, head of Asia Pacific for BNY Mellon’s treasury services group, local banks – particularly in countries such as China and India – still need to make major investments in advanced IT infrastructure to offer integrated solutions. Alternatively, they should consider working closely with a global bank which can provide them with the technology, or collaborating with an integrated trade and treasury services provider.
He believes that BNY Mellon can set them on the right track with its white-labelled integrated cash, trade and foreign exchange solution.
However, technology aside, local banks are also at a disadvantage when it comes to offering integrated services across multiple countries.
“Foreign banksare in a better position to offer converged solutions than local banks because they already offer cross-border services,” says Tan Kah Chye, global head of corporate cash and trade, transaction banking at Standard Chartered Bank. “That said, it is more likely that corporates will rely more on local banks for basic cash management services such as collections – particularly collections of coins.
“For advanced cash management services too, such as liquidity pooling and the transfer of liquidity, corporates need to use international banks.”
Sridhar Kanthadai, managing director and regional head of treasury and trade solutions, Asia Pacific at Citi adds: “Given the liquidity issues in Asia now, it is likely that many companies will still need their local banking partners too.”
“However, local banks typically have limited presence or understanding of regulations and risks in other markets and thus their ability to underwrite credit, arising from trade across borders, does not compare to what we offer.”
Vivek Gupta, head of trade and supply chain, Asia at ANZ, echoes such sentiments: “Not all banks are ready with converged solutions,” he says. “If you take a large multinational company, for example, whose annual sales may be close to US$4-6bn, not all banks would have the credit appetite to support such a big customer alone.”