An increased focus on working capital management and the movement towards open account trade looks set to stimulate Asian corporates’ demand for converged cash and trade solutions.
While converged solutions have already caught the imagination of multinational corporations (MNCs) based in Asia, regional corporates are also recognising the cost and resource benefits that these solutions can bring to their trade and treasury operations.
Many large Asian corporates are now looking to take advantage of integrated solutions to optimise their cash management processes, maximise the availability of working capital and enhance risk management.
The deployment of converged solutions is also seen as an important step towards achieving greater operational efficiencies by companies operating in the open account space – most notably when it comes to the provision of supply chain finance facilities to suppliers.
“Following the 2008 financial crisis, corporates have placed a much greater importance on optimising their internal working capital flows with a view to freeing up and ultimately re-deploying cash within their businesses. Part of this process has involved a closer relationship between cash and trade,” says Chetan Talwar, corporate trade advisory manager, Asia Pacific at JP Morgan treasury services. “Standalone cash and trade products are giving way to a market characterised by complex clients increasingly seeking holistic, integrated and bundled solutions.”
“Asian corporates are looking for converged solutions to manage their working capital because they want to accelerate their cash flows, enhance risk mitigation, and address counterparty risks related to their banks, suppliers and customers,” adds Anand Pande, Asia Pacific global head of trade product management at RBS. “Large corporates in countries such as Hong Kong, Singapore, India, China and Australia have heightened the movement towards convergence so that they can minimise their borrowings with a better cash management proposition.”
Treasurers at the helm
There is also growing evidence that the distinct departments that have prevailed for the management of treasury and trade are now being drawn together within larger Asian companies.
Some of the largest Asian corporates are now establishing new operational frameworks, which involve regional treasury centres, shared service centres and centralised trading centres that combine elements of both trade and treasury-related activities.
“Large domestic players, which are really just starting to establish their presence at a regional or even global level, are also exploring these types of structures. By establishing a centre in the early stages of their growth, rather than waiting until they are further along the path, they are ensuring that the cash and trade sides of their business are aligned, integrated and operating seamlessly,” says JP Morgan’s Talwar.
Meanwhile, those corporates where cash and trade are still managed by separate departments, there are signs that treasurers are now working more closely with procurement and trade professionals.
Many Asian corporate treasurers are taking on greater responsibility for handling all negotiations with their companies’ partner banks to meet the requirements of different business units.
Ravi Saxena, head of trade, Asia Pacific at Citi global transaction services, explains that as treasurers have always been responsible for managing bank relationships, they are “natural facilitators” when it comes to the arrangement of trade finance.
“In many companies, treasurers are now much more proactive here,” he says, pointing out that banks are now bringing converged solutions, which handle a range of functions including accounts payable, accounts receivable, procurement and credit control to the attention of corporate treasurers.
“Asian companies are recognising the need to manage trade and treasury together,” concurs Ashutosh Kumar, global head of corporate cash and trade banking, transaction banking at Standard Chartered. He points out: “It is now a Key Performance Indicator (KPI) for many treasurers to ensure that their supply chain is well-financed and that they guard against a supplier getting into any financial difficulties due to the lack of working capital finance from their banks.”
Open account to bring changes
The movement towards open account trade across Asia is also expected to serve as a major catalyst to the take-up of converged solutions.
Increasingly, large corporates that offer supply chain finance facilities to their regional suppliers are taking advantage of converged solutions to facilitate the entire process of providing early access to financing and making payments to suppliers.
According to recent research by Celent, there will be an 18% increase in supply chain finance programmes in Asia over the next three years, stimulated by fast GDP growth rates as well as the more limited financing options open to SMEs.
This growth is unlikely to be limited to western buyer-led programmes. A major survey, released by BNY Mellon in 2009 revealed that although corporates in China, India and Korea lagged behind their western counterparts in terms of treasury systems automation and integration, more than half of Chinese companies, and nearly three-quarters of Indian companies, would invest in supply chain services from a bank. In Korea, 85% of respondents said they would pay more for proven technology to achieve integrated trade and treasury.
Shivkumar Seerapu, regional head of trade finance, Asia Pacific at Deutsche Bank, believes that as the movement towards open account trade accelerates in Asia so too will the need for converged solutions.
“Large MNCs have moved towards converged solutions ahead of large Asian corporates; although Asian corporates working in the open account space which are actively looking to optimise their procurement to payment cycles are also going in this direction,” he says.
He explains that bundled cash and trade solutions make logical sense for corporates involved in supply chain finance programmes because invoice discounting (trade) can be fully integrated with the making of payments (cash). However, for corporates involved in traditional letter of credit-based trade, the benefits of converged solutions are less obvious – and cash and trade are typically handled separately.
Standard Chartered’s Kumar also believes that one of the biggest drivers for convergence is greater efficiency in the supply chain finance space.
“Arranging supply chain financing and getting payments to suppliers can be achieved in one conversation with a bank, making this a fully-integrated process,” he says, pointing out that by using Standard Chartered’s Straight2Bank solution for cash and trade, a corporate that enjoys 45-day payment terms with a supplier only needs to upload payment information into the solution and the supplier can then log-in and request payment and access early financing.
Similar opinions are voiced by Citi, which brought its cash and trade offering together in one business about four years ago, and operated a single cash and trade sales organisation in Asia even before this. “One of the examples where converged cash and trade solutions works very well is the management of payables and the provision of payables financing which can be coupled together and handled as one,” says Saxena.
Both large and medium-sized organisations across Asia are also relying more heavily on Enterprise Resource Planning (ERP) systems to manage their business activities, and many of them recognise the benefits of integrating these business systems with their cash and trade solutions.
In this way, they can automate the entire invoice management, payment and reconciliation process.
“Information on scheduled payments can be transmitted in a payment file from the ERP system to the bank system, uploaded to the bank and the payment executed, after which a confirmation of payment is sent back from the bank and fed into the ERP system. The whole process is fully automated,” explains Seerapu at Deutsche Bank.
Meanwhile, Pande at RBS adds that Asian corporates with multiple offices across the region are looking to integrate their working capital solutions with their ERP systems – not just for efficiency purposes, but also to improve their forecasting and achieve a better return on cash. “ERP integration also provides them with a complete solution, and ensures that people working in all business units, including marketing and finance, can access the same information,” he says.
Many Asian corporates involved in both international and regional trade are also now looking for FX services, which are integrated with cash and/or trade to enable the easy conversion of payments into the currencies they require.
“There is a massive opportunity for banks to offer trade services which are linked to FX. Companies in markets such as India, China and Indonesia are importing and exporting in US dollars, but also have local currency needs,” says Kai Fehr, managing director, head of trade and working capital Asia at Barclays, pointing out that his bank offers integrated trade and FX services to clients in local markets.
RBS, meanwhile, has embedded FX capabilities into its online banking solution to provide corporates with greater convenience and transparency.
“Asian corporates are working in multiple currencies and have multiple exposures. They are also trading with more companies locally including China where the renminbi (Rmb) is increasingly being used as a trade currency,” says Pande.
Another bank that is taking advantage of opportunities in this space is Deutsche Bank. The bank offers FX4Cash, a global cross-currency payments platform that allows corporates to execute payment and associated foreign exchange conversion on a single platform. The streamlined process offers them enhanced end-to-end efficiency as well as greater visibility, price transparency and flexibility, it claims.
“There is definitely a demand for it in Asia and we already have a number of clients who are actively using it,” says Seerapu, pointing out that the next step is for Deutsche Bank to offer an integrated trade and FX solution.
Standard Chartered, meanwhile, has fully integrated FX services into its converged cash and trade solution.
“As Asian companies grow their exports globally, they expect and receive payments from different geographies and in different currencies such as the euro and Japanese yen. They do not want to have to talk to their banks twice – once about the payment, and then again about FX conversion,” says Kumar, pointing out that Standard Chartered’s Straight2Bank solution enables corporate users to seamlessly integrate FX conversion into the whole transaction so that they receive payment in the currency they want it in.
“This means they can access the money they need – in the currency required – much more quickly.”
He adds that, moving forward, Asian companies are looking to integrate cash, trade and FX so that payments made to a supplier can be made in the currency the supplier requires.
Can local banks compete?
While global banks may have been frontrunners in the provision of converged cash and trade solutions, they are by no means alone in recognising the importance of this type of offering given anticipated growth in both open account trade and supply chain finance in Asia.
“International banks were the first to offer converged solutions in Asia, followed by the large regional banks,” says Seerapu. “Banks that do not adopt converged solutions will definitely be at a disadvantage if they win a mandate for a multi-country SCF programme.”
Meanwhile, Mark Evans, global head of trade and supply chain at ANZ, believes that stronger domestic banks in most locations are working hard to develop their own converged solutions, and are in a good position to invest in product development.
“Banks have been doing this on a bespoke basis for their customers for several years, but they need to move away from this mindset of treating each request as a ‘tailored solution’ and start developing customer-centric solutions,” he says.
However, the extent to which smaller domestic banks will embrace converged solutions remains subject to doubt, and is likely to depend on their own customer bases, business models and the resources available.
“The smaller, purely domestic banks with a largely domestic client base that do little overseas business are not yet going down this road as there has been little demand from their clients at the moment,” says Seerapu at Deutsche Bank. “Much depends on a bank’s product offering and its client base. If a bank’s clients are mid-caps, SMEs or retail customers, it may be more likely to focus on traditional lending.”
“Local corporates tend to be supported by local banks, and the technology offered to them plays a less significant role,” adds Pierre Veyres, global head, global transaction banking at BNP Paribas, although he notes that Chinese and Indian banks have ramped up their investment in new technologies.
Smaller local banks may also find it harder to resource the necessary investment.
“Over the next five years, small local banks will be making decisions about where they need to invest, and they will need to prioritise their costs which may put them at a disadvantage,” says ANZ’s Evans. “One bank cannot be all things to all people, and it is likely that they will need to focus on their strengths, which for many may be retail banking rather than services which support the needs of larger corporates, such as trade.”
Kumar at Standard Chartered agrees, noting that although local Asian banks do have a good understanding of the transaction banking business model, they also need to look at macro-economic factors such as the impact of more regulation, and how this affects their appetite for certain types of business.
“Most local banks have a small share of trade finance from a global context, but may have a market share in their own country. The question that arises is whether they can navigate their way through more capital intensive regulations such as Basel III, and still find it attractive to offer trade finance.”
However, one option open to smaller domestic banks in the future is the possibility of working in closer partnerships with global banks.
“As these domestic banks grow, partnering with a global bank that complements their offering and provides strategic advice on the best way to achieve their objectives is an important step,” says JP Morgan’s Talwar. “These relationships can often deliver efficiencies of scale and, similarly, cost efficiencies when delivering cash and trade solutions to their own clients.”