Convergence of cash management and trade can help provide visibility. Yet is there a genuine demand among treasurers for such a product? Ben Poole reports.
While the topic of cash management and trade convergence has been a popular discussion point over the past 18 months, it is noticeable that it is the fi nancial institutions have been doing most of the talking.

Is there demand from corporate treasurers for this convergence? Or is there any merit to the suggestion that this is merely an exercise in repackaging existing products by the banks?

According to Sanjay Dalmia, managing director of Fundtech India, the increasing importance of open trade is instrumental in driving the convergence of cash and trade. “Both in-country as well as intra-regional trade is a signifi cant and rapidly growing business for many corporates,” says Dalmia.

Such kinds of trade transactions that are high in volume and relatively low in value compared to traditional trade transactions to work closely with their banks.

“In this business, banks actively facilitate and even finance the transactions, while for the corporates involved, the cost and formalities of traditional trade processes can be done away with,” explains Dalmia.

That is not to say that every bank has the ability to offer the solutions required, despite appearances.

The group treasurer of a global retailer headquartered in Switzerland, who prefers to remain anonymous, comments: “I think a number of banks are pushing it and don’t have the skills. But the banks that have the patience will prosper. It is definitely one of those things that you didn’t think was possible five years ago and is now a prerequisite for the treasurer.”

The trade flows in a multinational are huge, and traditionally the treasurer hasn’t had much oversight of day-to-day trading flows. But once that is online and all of the players in the financial supply chain – logistics, warehouse, treasury and boutiques – can see the product flow and the financial implications, it becomes a powerful tool that shouldn’t be underestimated.

“When I see this information, it is very valuable to me. So I do think that the concept is being sold, but only one or two people seem to be able to deliver at the moment,” adds the Swiss group treasurer.

The value of being able to gather an end-toend view of all cash flow from a single source is something that Adnan Ghani, head of trade finance at RBS, has seen firsthand from a client.

The bank was working with a large European confectioner on a pilot of a supply chain finance system for the company in Spain for 32 suppliers. “They came back to us and said that, as they were already doing payments through us, they did not want us to have two channels for them, and instead suggested that we combine the projects and do both through one channel,” says Ghani. This type of simplification to banking relationships makes a lot of sense for both banks and corporates, and it also provides an example of how both can profit from project collaboration.

“We’ve seen a 180% increase over the past year in our supply chain finance proposition. It is a trend that is working well for banks and corporates,” he adds.

Receiving the required support

When it comes to gaining full visibility over total cash and managing working capital, corporates need a selection of solutions and support from their banks. Unfortunately, according to Ernie Caballero, global treasury director of United Parcel Service (UPS), most banks are unable to provide corporates with the full smorgasbord of cash management tools to allow transparency and visibility into bank accounts and the cash in those bank accounts in a proactive manner.

“They don’t offer any platforms that will help, other than to look at your bank statement online. Any kind of tool that you need to understand where your balances are on any given day on a real time basis just doesn’t exist,” says Caballero.

Certainly challenges exist in trying to link and provide solutions across the entire working capital spectrum of days payable outstanding, days inventory outstanding, days sales outstanding and operational risk and efficiency.

If a customer looks at the entire supply chain, banks need to provide solutions by bundling the relevant business offerings that may have been previously sold as separate products.

Markus Wohlgeschaffen, global head of trade finance and services at UniCredit agrees that the conversion of cash and trade and FX is certainly key to that. “Banks are not yet very good at that.

At UniCredit we’re putting together the platforms and the product specialists in order to speak to the customer from one source,” he says. A few banks are able to offer quite effective tools to manage trade finance flows, but it is taking time for them to really understand what the treasurer is looking for.

The feeling that the convergence of cash management and trade is still a work in progress is supported by the group treasurer from Switzerland, who notes that their company has only had a big breakthrough in the past 12 months.

“We’ve started using a global trade finance tool that is provided by a single bank. It’s an online tool where we can issue guarantees, letters of credit (LCs) and documentary credits, for example,” explains the treasurer.

The corporate has global pricing arranged, it is a global facility, and their global entities can go online to input data. Once the data is on the system, the bank approves it under the umbrella facility the company has, and is able to provide alerts to group treasury and local finance teams.

“It’s quite a breakthrough, and we’re trying to get all our operating entities onto this system,” says the Swiss treasurer.

Even if a bank can provide such a solution, there is still a lot of work to do between the bank and the corporate to get such a scheme up and running. It is very different, for example, to using an online foreign exchange tool, which is a homogenised product.

In trade finance there are many variables in the instruments available, which add layers of complexity.

Challenges for banks and corporates

For corporates, the challenges of managing a combined cash and trade proposition can come from their need to have a much more strategic relationship with their suppliers.

This was particularly evident during the crisis, where companies were looking to make sure that their suppliers were financially stable and able to continue the supply relationship. Corporates would even go beyond this level and check on who was supplying the suppliers.

Ashutosh Kumar, global head of corporate cash and trade product management at Standard Chartered, agrees that companies want supplychain finance to go further down the chain: “Just financing the tier one supplier is not enough, companies want the finance to go to the tier two supplier.”

This can be difficult to arrange. If you start onboarding the tier two supplier, things can become complicated to manage. This has led to companies asking their banking partners to look at pre-shipment finance and similar tools.

Preshipment finance percolates down to the tier two suppliers, because what you are effectively doing is paying off the tier two supplier for their sales to the tier one supplier – or the tier one supplier procuring from the tier two supplier – using the pre-shipment finance to pay off their suppliers. Kumar explains: “I’ve seen corporates really value these relationships with the banks when they are able to work not only on post-shipment finance but also pre-shipment finance. It shows the supplier that this corporate and their banks brought real value to them and have been able to finance them even before the goods have been produced for shipment.”

Post-shipment finance is simple to do, but preshipment finance can be a real challenge. Banks need to understand the supply chain linkage between the large company and their suppliers.

It is important to understand the difference between running a supply chain finance programme and financing a supplier on a bilateral basis, which is purely based on the strength of balance sheets. This is an area where treasurers can struggle, because there are not many banks that can understand these linkages.

Challenges in cash and trade convergence can also differ depending on which area of the world you are dealing with and the markets that your cash is flowing into. Jeremy Shaw, head of global trade Emea at JP Morgan, points out that some of the bigger markets can pose some interesting challenges for corporate treasurers.

“Looking at China as a major market, providing a local currency solution in that market is definitely more difficult if you are a foreign-located supplier,” says Shaw. Russia is generally quite a difficult market because there are very specific central bank requirements around know your customer requirements for clients.

South Africa has some exchange control requirements that makes client onboarding a bit more difficult.

Shaw also picks out the jurisdictional and governing law issues that exist in certain markets: “If you look at Saudi Arabia, there are potential challenges around Saudi law and shariah components. They are not insurmountable, but it does mean that they present additional obstacles to ramping up programmes in a quick and efficient manner.”

Lots of businesses are focussing on Sub-Saharan Africa following the interest of China and India in building relations there. Each country in Sub-Saharan Africa itself, outside of Nigeria and South Africa, has its own independent challenges around issues such as legislation, governing law and enforceability. This provides many challenges in terms of fully implementing and ramping successful cash and trade programmes.

Moving to a closer relationship

While corporate treasurers can see the value provided by the convergence of cash and trade, and banks appear eager to provide this breadth of functionality, there is still room for improvement in the relationship between corporates and banks.

The group treasurer of the Swiss global retailer finds that most of the slack is due to poor communication between the people that develop the tools and the account officers and sales people who are actively selling the product. “It really needs a long-term vision, both from the bank and from the corporate.

Putting a payment factory in Asia for us is a two-year project. There is a tendency for the banks, once they’ve sold something, to move onto the next sale,” says the Swiss group treasurer. Businesses challenges still exist in areas such as cash flow forecasting, supply chain financing and regional cash managing.

Corporates should be asking their banks if they can deliver what many are promising from the convergence of cash and trade – namely that they will give corporates full visibility over their end-to-end cash flows through one pipe. GTR