Automation lifts east EU

The entry of several eastern European countries into the EU in May 2004 heightened interest among financial institutions and corporates in the region. However, unlike the relatively standardised environment of western Europe, the east remains a highly diverse region that presents challenges to those wishing to enter the market.

“Eastern European countries are consistently growing and this has attracted the interest of corporates,” says Adolfo Tunon, London-based director, head of receivables at Citigroup Global Transaction Services, Europe, Middle East and Africa. “Also, there has been an increase in trade flows between western Europe and central and eastern Europe, which is attractive for banks that want to explore new opportunities in the region.”

High regulation, high automation

Mark Davies, director of international product management at Royal Bank of Scotland, says some of the currencies and economies in eastern Europe remain highly regulated. “This level of regulation means there’s a lot of paperwork involved in the movement of money. Some clearing systems are less developed but, on the other hand, there are others that are fantastically well developed. These countries were able to skip the legacy systems the west has and go straight for 21st century technologies.”

The high levels of automation in some countries have proven to be an advantage, says Mr Tunon. “Most payables and receivables transactions in eastern Europe are done electronically. There are very few cheques or paper instruments being used.”

This characteristic makes the region particularly attractive for corporates and banks that want to reduce costs, he says. “In the early 1990s, nearly all of the central and eastern European countries adopted an electronic approach to most banking transactions and we are now seeing the benefits of that.”

There are distinct differences from western European market practice, says Brian Moran, vice-president, senior product manager, JPMorgan Treasury Services. “There is little or no use of cheques in most eastern European countries, for example.”

Mr Moran says that many of JPMorgan’s clients usually target the most deregulated countries and those with the largest economies first, when considering integration of the region in a pan-European treasury management structure. These countries include the Czech Republic, Poland and Hungary.

Further east

Russia has a large economy but is highly regulated and corporates tend to treat it as a separate entity, rather than trying to integrate it with the rest of Europe.

“Foreign companies still face considerable money laundering and know-your-customer requirements in Russia. Some companies are putting structures in place in Russia that reflect what they are doing in the rest of Europe, with the idea that ultimately they will be able to standardise and run the operations from outside the country in the future,” says Mr Moran.

Shared service centres

The growing attraction to eastern Europe is reflected in the number of shared services centres that are being set up in the region. The attraction is a well educated but low-cost workforce.

ING, which entered into an agreement with JPMorgan in 2002 to offer integrated, pan-European and global treasury management solutions, operates a shared service centre in Hungary.

Mr Moran says some corporates are already operating shared service centres in eastern Europe, and that JPMorgan’s clients in Europe and the US are expressing interest in setting up centres. “There are regulatory differences and other challenges in locating shared service centres in the region. As a bank, we need to make the process as painless as possible and to ensure that risk is controlled.”

Mr Tunon agrees that there are signs that some western European companies want to set up shared service centres in eastern Europe. “These moves are driven by a desire for cost efficiency. In some cases companies are moving their shared service centre into eastern Europe, while others are starting from scratch and centralising their treasury activities in the region.”