Whether driven by banks, corporates, or their suppliers, cash and trade convergence looks set to stay, and could be taken forward with the addition of other bank services such as FX. Liz Salecka reports.
Corporates worldwide are starting to take greater advantage of converged cash and trade finance solutions to improve their working capital management and achieve operational efficiencies.The adoption of integrated solutions is growing rapidly in Asia, where companies are exploiting the natural links between trade and cash – followed by Europe and the US. “By region, we are seeing strong demand from Asia and the US, as well as from the emerging markets generally,” says Marilyn Spearing, global head of trade finance and cash management corporates, Deutsche Bank, who notes that as GDP is now rising quickly in Asia, companies need to maximise their working capital to keep exports moving.
“In these countries, there is also an element of leapfrogging paper procedures and streamlining processes by using dedicated portals for both cash and trade. This enables suppliers to go in, see their invoices and find out if they have been approved.”
“As Asia is the home for many of the suppliers that US corporates deal with, their interest is now also developing,” adds Rory Kaplan, vice-president, business development trade finance, S1 Enterprise. “Large corporates are looking at their supply chains to see where efficiencies can be gained.”
To date, small and medium-sized companies have proved the most prolific users of converged solutions, largely because cash and trade functions, such as procurement, distribution and collections, tend to be centralised within their organisations.
By contrast, large multinational corporates have traditionally managed their trade and cash activities via separate departments.
“When we talk to large multinationals, it is often the case that they don’t want a generalist cash and trade solution,” says Mark Evans, global head of trade and supply chain, ANZ. “They are complex organisations, and are looking to work with specialists.”
However, the financial crisis and evaporation of short-term bank finance has triggered suggestions that these internal barriers may start to break down. As companies seek to maximise their working capital, both trade and supply chain finance have emerged as viable ways of securing finance. Corporate treasurers, traditionally responsible for cash, are taking more interest.
“As far as conventional trade finance is concerned, which is nowadays a small portion of the overall business, it is unlikely to converge with cash management. What is at stake is working capital management and cash management – these two essential dimensions are under the same roof and imply the use of a common platform,” says Pierre Veyres, global head, global transaction banking services, BNP Paribas. “Conventional trade finance managers are not necessarily working more closely with treasury. On the other hand, the professionals involved in working capital management have to be linked one way or the other with both finance managers and cash managers.”
“Receivables are idle assets that can be converted to cash, and companies and their treasurers are in a position to initiate this,” adds Markus Wohlgeschaffen, head of global trade finance and services, UniCredit Group. “As more people increase their understanding of the new opportunities presented by trade finance and supply chain finance in terms of working capital maximisation, then they will use them.”
He points out that a recent survey by Aberdeen Group revealed that 82% of companies have increased their focus on cash management; while 53% view trade receivables, and 36% view trade payables, as providing the best opportunity to improve working capital. Meanwhile, Lars Millberg, acting head of global transaction services and head of GTS corporate at SEB, argues that there is “a real need for corporates to merge their cash and trade functions so that communication between these departments is improved”.
“Many corporates face a particular need for which certain products may be more appropriate than others. They need to sit together and talk to each other about this,” he says.
Deutsche Bank’s Spearing also notes that treasurers themselves are increasingly looking at their companies’ abilities to issue debt and raise traditional finance, and that they recognise the strong potential of receivables financing and supplier financing.“We are seeing treasurers, finance managers and trade managers working more closely together,” she says, but notes: “Their coming together will be more of an evolving process – and this will be faster in some industries than others. Within treasury departments you are unlikely to see any type of ‘big bang’ change.
Things take time and treasurers’ priorities are always to support the business units that they serve first.” According to Dominic Broom, managing director, BNY Mellon Treasury Services, much will depend on the future role performed by treasury departments – whether they become profit centres with greater control over corporate financial flows, or whether they are run as cost centres that are primarily responsible for collections management.
“The vast majority of large multinational companies have maintained a distinction between cash and trade, but now they are looking at costs and what their business needs are. I think we will gradually see this historic distinction disappear as companies realise the value of a complete end-to-end process,” he says.
Aside from opportunities to enhance working capital management, investment in converged cash and trade solutions is also being driven by the operational benefits that can be achieved.The deployment of converged portals, which provide access to and streamline the provision of information on trade and cash positions, as well as offering transactional capabilities via a single sign-on, represent a major value proposition for most companies.
“Working capital management is all about payables and receivables financing and making payments and collections via the same unique portal is very logical,” says Veyres at BNP Paribas.
“There are huge efficiencies that can be gained in terms of processes,” adds SEB’s Millberg, who argues that for this very reason, spin-off companies are most likely to adopt converged solutions from the very outset. “To be able to view trade finance, supply chain finance and cash management processes in the same way and to put this information directly within the grasp of the person responsible for cash management is a big step towards removing inefficient processes, improving information flows, the speed of certain transactions and ensuring that the corporate is not wasting money.”
In the supply chain finance space, meanwhile, converged portals can provide buyers and their suppliers with a unified view of supply chain information and transactions.
“It can give them improved visibility into shipping documents, the flows of goods and other documents, and automates a process that, historically, has been paper-based. As we continue to develop solutions supporting more transactions on open account, the need to rely on physical documents being handled by banks will be reduced,” says ANZ’s Evans. Convergence also brings integration capabilities, such as the ability to link the process of supplier invoice discounting directly to a corporate’s back-end payments system or Enterprise Resource Planning (ERP) solution, enabling the automatic payment and reconciliation of supplier invoices.
“The movement towards financial supply chains has put treasurers into discussions on operational efficiency and also payments integration, which leads to improved liquidity management,” says Spearing.
Too many banks
However, the extent to which large companies can fully benefit from the ‘total picture’ that comes from using a converged portal offers is still hindered by the fact that they use several banks for their cash and trade services.“Large companies may use five different banks for cash and five for trade, but don’t want to use 10 different bank portals,” says ANZ’s Evans, pointing out that some of the largest corporates are now developing their own portals and asking their banks to build interfaces so that they can transact business with all of them via one front-end.“Questions have to be asked over the future of proprietary portals. Large companies do deal with several banks, and therefore end up using several proprietary portals,” adds Millberg.
“As they do this, more generic, multiple bank solutions are needed, and Swift offers an infrastructure that can take this forward, although there will always be costs involved. Ultimately, it is very unlikely that corporates will settle on using just one bank for all their cash and trade services,” he adds. UniCredit points out it offers a range of portal solutions to fit end user needs, ranging from an intuitive easy-to-use portal for smaller customers to sophisticated solutions for larger customers, as well as multi-banks solutions.“If a customer uses a portal from us, we can act as a portal services provider,” says Wohlgeschaffen. “Other banks can share in the provision of services to that customer and the risks, but the corporate benefits from the experience of one portal and deals with one bank.”
Can convergence go further?
As cash and trade convergence gathers pace, the likelihood that other bank services, such as FX will be added to the mix is growing. “Aside from cash and trade, the inclusion of liquidity management and fx would further enrich the converged portal experience,” says Spearing, who points out that Deutsche Bank’s FX4Cash solution, which automatically converts payments into the currency required, is available as part of its converged offering as well as on a standalone basis. “In addition to cash and trade the best players in this industry are now adding cash investments as well as FX, so the client has one single entry point in order to conduct its working capital management,” says Veyres at BNP Paribas.“Liquidity management and metrics management are also significant as part of a converged solution.
”Meanwhile, Kaplan at S1 Enterprise believes that banks may be interested in offering cash forecasting services – as part of cash management – via a single online channel. Such analytical tools would enable companies to foresee when their cash flows may be weak so that they can arrange to discount invoices. “Other services will definitely become available in the future such as liquidity management, FX and FX hedging as well as tools for analysis, reporting, reconciliation and risk management,” adds Wohlgeschaffen.“A large supplier may have collected vast amounts of data on the payment histories of its buyers, and these are key statistics which they can do a lot with if they have the right analysis tools.”
Converged portal solutions of the future may go even further, says BNY Mellon’s Broom. He envisages that, aside from offering extensive financial data management, services such as insurance and goods and resource tracking and monitoring will be offered in conjunction with insurance and logistics companies. GTR