Corporates worldwide are looking right across their supply chain flows to access new sources of liquidity – spearheading demand for integrated treasury and trade services that can facilitate this goal.
But while many global banking services providers offer integrated services, the restricted capabilities of local banks in certain geographies means that this option is not readily available to a large number of corporates – particularly those based in non-OECD countries.
This does not bode well for the future, given changing patterns in global trade, which indicate that non-OECD countries are accounting for an increasingly larger share of the world’s export market, according to a recent survey of six major exporting countries by BNY Mellon.
Although non-OECD countries are expected to account for as much as 45% of world trade by 2030, which will be fuelled by non-OECD trade and south-south trade, corporates in these countries still have the lowest levels of trade and treasury integration.
The need to invest in integrated solutions is all the greater as corporates move towards open account trading, which is now used for 70% of transactions, says the survey: ‘Integrating treasury solutions in Asia and Europe: a roadmap for success’, released by BNY Mellon at Sibos 2009 in Hong Kong.
“There has been a global trend towards open account trading, and this has brought specific challenges for Asian corporates, such as how they are going to fund their production runs, given that before, banks lent against letters of credit. Since the crisis started, many banks have also reduced how much money they are prepared to lend and this has really hit suppliers in this region,” says Richard Brown, head of Asia Pacific for BNY Mellon’s treasury services group.
“This has driven increased interest in finding more efficient ways of funding the production process. The financial crisis has exacerbated the importance of integrating cash and trade in the search for survival.”
The BNY Mellon survey, conducted in conjunction with research company Celent and communications agency Moorgate, revealed major variations in the levels of trade and treasury services automation and integration in corporates in China, India and Korea on the one hand, and Spain, Italy and Germany on the other.
These variations correlated directly with the sophistication of trade services offered by local banking services providers.
While Germany led the way with 80% of companies using an automated platform, not one company in China, which is increasingly becoming an open account market, was using an automated cash management or trade finance platform provided by a bank or other provider, the survey found.
Although Chinese corporates rely almost exclusively on local banks rather than international banks, 57% of them agreed that their local banking partners do not have the technology required to meet their needs.
“Increasingly, there is a trend towards a combined cash management and trade finance solution, but most smaller banks do not have the capability and resources to integrate these two products,” explains Henry Guo, senior associate – China for treasury services at BNY Mellon, who points out that should cash and trade automation and integration take off in China, it is most likely to be fuelled by the local banks themselves.
“Nowadays, corporates’ needs are diversified, so not only do they need banks to manage their accounts, they also require the additional expertise from banks to provide trade finance solutions.”
Competition from global banks
The survey found that while only 14% of Chinese corporates would not be prepared to invest in a supply chain finance solution, 57% said they would do so if a clear return on investment (RoI) could be demonstrated.
This, explains Brown, means that the local Chinese banks must start thinking about investing in the IT infrastructure needed to provide their local corporates with more advanced and integrated cash and trade solutions.
“One of the dilemmas Chinese manufacturers face is that they tend to bank with local banks, and the primary reason for this is that they want a bank that is geographically proximate to their operations. There are tens of thousands of local bank branches across China and no one global bank can establish itself quickly across the country in this way. During the economic crisis, global banks also looked around the world, trimmed their lines and pulled out of certain countries,” he says.
“Many local banks are also concerned about global banks competing with them. Ultimately, by investing in integrated technology they can benefit because they will be able to retain and grow their corporate relationships instead of seeing their market shares eroded by global banks that want to become local banks.”
The survey revealed a similar picture in India – another market dominated by local banks – with only 14% of companies using an automated cash management or trade platform from a bank, and little evidence of integrated solutions in use.
Here, the corporates surveyed agreed that Indian banks have a long way to go towards becoming fully integrated treasury and trade services providers, but also pointed out that they do not want to see their local banking partners lose ground in this arena to major global players.
Almost three-quarters of Indian corporates also said they would consider paying for supply chain finance services from a bank if there was a clear RoI.
“Supply chain finance is still a nascent business in India but is quickly emerging,” says Aneish Kumar, managing director and senior representative at BNY Mellon in India.
“It will be a key product for exporters, importers and local banks in the near future. In order to achieve true supply chain efficiencies, however, both the physical and financial components of a company’s supply chain process need to be working in close conjunction. In such an event, only a fully integrated cash and trade offering makes sense.”
He continues: “Banks, by nature, are a critical link, so for a fully integrated cash and trade offering to emerge, Indian banks need to keep moving towards this goal themselves or they may lose their place in the value chain.”
This was also the case in Korea, where 92% of respondents agreed that local banks were behind Western players in the provision of integrated services, but should not allow themselves to lose business to global banks.
However, the survey found higher levels of trade and treasury services integration in Korea – largely because a number of its large corporates are now mandating non-Korean banks as treasury services providers. Indeed, 15% of the Korean companies surveyed said that they were using a fully integrated service via an IT-based platform provided by a third party – the exact same proportion that were using the treasury services of a major global bank.
Although the vast majority of corporates (69%) agreed that Korean banks lack the technology to offer integrated services, there was a voiced demand for this type of offering.
“In Korea, 85% of respondents to our survey said they would pay more for the proven technology to achieve integrated trade and treasury services,” says Brown.
Western market trends
In contrast to China, India and Korea, the BNY Mellon survey found higher – although differing – levels of treasury and trade services integration in corporates based in Spain, Italy and Germany.
While not one Spanish company has yet invested in an integrated cash and trade IT solutions, around 86% of them said that their cash and trade functions work closely together internally.
“While our clients see the benefits of a fully integrated cash and trade offering in terms of financing and supply chain and document management, implementing such a solution is probably not a short-term priority for them,” says Ana Sancho, vice-president – Iberia for treasury services at BNY Mellon.
However, shortcomings in Spanish banks’ capabilities here were also cited as holding back corporate investment in advanced treasury solutions by one major Spanish construction company: “Local banks lack the technology, and this has always limited our capacity to leverage important operations with local banks,” it said.
Italian corporates, meanwhile, are much further advanced in deploying integrated solutions, according to the survey, with cash and trade functions working closely together via a bank/IT platform in 17% of cases. Only 20% of Italian companies believe that their local banks do not have the technology required to meet their banking needs.
“In Italy, the two elements of cash management and trade finance are intricately connected, and often the bank of choice of any exporter is the one who can actually provide both,” says Mauro Bonacina, vice-president – southern Europe for treasury services at BNY Mellon.
Meanwhile, in Germany, where corporates are most advanced in the deployment of integrated solutions, 20% of companies said that their cash and trade functions work closely together and are integrated via a bank/IT platform. A total of 80% of German corporates also said they would be prepared to pay a bank for supply chain services if there was a clear RoI.
The BNY Mellon survey concludes that where local banks have invested in the technology required, local companies are more likely to be using integrated services.
In countries where local banks lack the necessary technology, inevitably domestic corporates lag behind the wider competition in terms of their use of integrated services – unless they sought the know-how of a global bank.
This has major implications for local banks in non-OECD countries that have yet to offer their corporates the integrated services they need – particularly as the emerging markets are becoming the predominant exporting nations.
Brown argues that banks in non-OECD countries must catch up with their western counterparts or else they will lose this growing trade and export business to the global banks.
“What local banks need to do is access the technology needed to offer integration. This means that they either need to develop and buy the technology themselves, which can prove very expensive – and also expensive to maintain,” he says.
“Alternatively, they can pick out a global bank to work with which can provide them with the technology, but there is sometimes the risk here that these global banks may go after their local customers themselves, so local banks are slightly reluctant here.”
He points out that the third option open to local banks in non-OECD countries is to work in collaboration with an integrated trade and treasury services provider that is not a direct banking competitor.
“The model that we offer as a processing firm means that we are not positioning ourselves as competing with local banks and instead collaborate with local banks that white label our products. We tend to take an anonymous role as a transaction banking services provider.”
He argues that BNY Mellon has taken major strides in enabling local banks in non-OECD countries to provide integrated services to their corporate customers through its modular-based offering, which encompasses modules that handle cash management, trade finance, trade processing, short-term liquidity and foreign exchange.
Given the existing low levels of treasury and trade automation in corporates based in China and India, it may be some time before they can even consider the use of advanced integrated solutions, but Brown believes that BNY Mellon can provide a clear roadmap to achieving this goal.
“It is quite difficult for many small businesses to think about getting from where they are now to full integration. But they don’t need to do it all at once. They can mix and match the capabilities they take on. They need to dip their toe in the water, install new technology and then look at ways of enhancing the offering,” he says.
“Banks can adopt individual modules of our solution to match their needs. It is not in our best interest to sell them more of a solution than they need, as the only way that we can grow is if our business with client banks enables them to grow business with their own customers.”