Global views, local insight

Companies are today trying to find solutions to their complex cash management needs in an ever-more challenging global environment. There is an accelerating trend towards globalisation for corporates, and global providers have to meet their clients’ needs, says Norbert Wanninger, Deutsche Bank’s global head of cash management. “Corporates are making heavy investments in their own treasury systems to unlock their full synergies and replicate processes and approaches of their service providers,” he says.

“Truly global solutions are on the upswing. However, the trend today is for regional treasury centres that handle liquidity to have a couple of providers for truly global corporates. This highlights the question of how the providers are investing their money, whether in local or global solutions. Most of Deutsche Bank’s investment money is going into global solutions, although this doesn’t mean that one size fits all. But the key feature of how you interface with your customers is one and the same across the globe.”

Regulation impact

The topic of corporate governance, highlighted by legislation such as Sarbanes-Oxley in the US, has become a major theme for corporate treasurers and CFOs. Most companies – even those that were historically quite comfortable with treasury being decentralised and keeping their banking decisions very local – are reviewing their cash management systems and implementing electronic banking systems that give them visibility and transparency of account information at the centre.

In one sense, global and local are complementary, as part of a continuum, says Ian Clark, a senior manager at PricewaterhouseCoopers. “I don’t think there are very many companies that can claim to have truly reached the end of this continuum, and local cash management is the first stage along the line. Most companies in the developed world will have had, for some time, some sort of cash management capability.

“One of the issues arising now with the coming of eastern European countries into the EU, and this applies also to China and some other Asian countries, is the lack of anything established in their legal system to support cash management. For example, notional pooling, which is a common technique, has no legal basis in Poland. If you draw a ring around those countries, the solution is to find out what can be done locally, and there are many banks trying to assist with that.”

New themes

“In terms of our client base, we’re seeing a few themes developing,” says Swati Mitra, managing director at Citigroup global transaction services. “The local-to-global connectivity has become more important over the past 12-18 months. Treasurers are finding that with multiple locations around the world, it can be difficult to obtain bank account and cash flow information across all entities. Hence most are applying an 80–20 rule and targeting the larger countries and flows first.

“Pressure on visibility of information and difficult credit markets is, in some instances, leading to consolidation of banking relationships, as multi-bank reporting can be more expensive and less efficient than simply revisiting the number of banks used in certain markets. As pressure on costs and the need to maximise operating efficiency has increased, companies are moving towards regional or global hubs for activities like payments, collections and back office processing,” says Ms Mitra.

“Locations like China, India, central and eastern Europe are being considered. There is also an increased focus on controls and risk management, and this is fuelling the need for state-of-the-art electronic delivery systems like Citidirect,” she says.

Cash as a corporate asset

A key trend developing around the world, at any level, is a concentration on the aggregation of cash. Companies are trying to implement a policy whereby cash is seen as a corporate asset, as opposed to local or specific property among other reasons, to pay down debt.

“We conducted a research project last October of corporate treasurers around the world and found that 80% were focusing on the concentration of cash to pay down their debt,” says John Gibbons, managing director for working capital at ABN AMRO. “It wasn’t about improving interest conditions or returns, but simply to pay down debt. When you think about the global dynamic, you’ve got to think about it against that backdrop. From a global point of view, companies are beginning to organise their cash management centrally. The first thing they are organising is their excess liquidity. As a result of that, local organisations are being brought into global and/or regional structures that change how they do their own business.

“Headquarters is obviously responsible for the management of company debt. In the same survey, some 80% of the clients have been able tocentralise their cash at least at a regional level. That is the number one dynamic that we see taking place. We also found that when you go past two weeks, cash forecasting accuracy declined to a 56% rate. If you’re thinking about paying down debt by using your cash flows to manage the business, at that level of accuracy you might be in trouble. Accuracy for two to three days is only 82%, and one week is 72%,” says Mr Gibbons.

“When you start to think about what is going to take place at a local level, with this objective to manage cash and the problems of achieving cash management accuracy, we find increasingly that companies are saying they must establish best practices locally,” he adds.

Banking relationships

In that respect companies are looking for concentration of banking relationships to handle their cash management business. There is also a focus on working capital and, where possible, for local organisations to funnel their excess cash back to regional and global headquarters. The large global providers come into this on two levels. In the first instance, they work with customers to establish best practices locally. ABN AMRO restructured and renamed its entire division “working capital” to reflect the bank’s focus on helping clients to do this.

“We focus on working with clients to help them improve their day’s payable and day’s inventory outstanding,” says Mr Gibbons. “We have cash pooling instruments that allow our customers to aggregate their long positions and net them off against their short positions. We provide a variety of investment instruments for whatever excess liquidity they have to meet their cash forecasting cycle. If they need the cash for two days, it will be kept in a high yield current account. Or if it’s for a month, we have other options available on the time and risk horizon.”

Cross-border issues

A huge amount of attention is being given to consolidation, first within the industry, then within the markets, and finally at the client level. Within the industry, this concerns the preoccupation with the complexity of moving money, particularly on a cross-border basis.

Market participants cite the euro environment as a good case in point. “We’re seeing a lot of legislative interest in protecting the consumer, providing transparency on what transactions cost and how they get processed,” says John Hazlewood, vice president, JPMorgan Treasury Services. “The various industry players, such as the clearing systems, the banks and large corporations are thinking about how they can respond to these issues while improving their own efficiencies and back-office processes.”

One of the major problems is that in Europe there are more than 40 clearing systems in operation for moving money around. The logical outcome is a great deal of complexity and cost, and this is a challenge for the regulators, whose task is to keep control over this movement of money. Organisations such as the European Central Bank and the European Commission are driving an agenda that the banks have responded to with initiatives such as the European Payments Council, whose objective is to try to devise a commercial response to these issues.

“Within the individual markets, that consolidation is being modelled on the US, where there is a single market,” says Mr Hazlewood. “The anomaly of Europe is considered to be no longer acceptable. Consolidation is also about a high level of M&A activity to try to find efficiencies, to break down the boundaries of moving money, and to improve shareholder return. At the client level we’re seeing consolidation in terms of their account structures and the way they manage their liquidity. If you can centralise currency activity and streamline flows of money between different accounts, as well as optimising the information obtained on a day-to-day basis, you can do things with that money that yields a better rate of return.”

Competition factor

Competition is another issue that invariably comes into the cash management picture. Banks are always looking to find ways to mitigate the pressure on their profit margin, and this business requires a massive amount of investment in technology. JPMorgan has about $2bn invested in technology and treasury services to support its payments business, says Mr Hazlewood. “If you don’t find ways to continually build scale and improve productivity, you will find yourself in trouble,” he says.

“We’re always looking at ways to be innovative, and to do more business across a wider spectrum of products and currencies with our existing client base. The third trend is very much about efficiency and standards.”

Most of the cash management business that banks process tends to be based on SWIFT, which is the means of communication for banks. With the arrival of the internet, the message handling structures of SWIFT became obsolete; now there is SWIFTNet, as well as a variety of other competing mediums of communications to replace it.

Large multinational clients are picking up on this and are looking to agree common standards that will allow them to communicate with one another. This, to the banks’ consternation, can create an element of disintermediation.

“But the focus on standards actually creates new opportunities for us to add value,” explains Mr Hazlewood. “Just one example of the way the market has responded is through the creation of TWIST, an organisation that is creating end-to-end open standards to allow corporates to communicate with one another over the internet in an agreed fashion. This enables huge amounts of back-office efficiencies to be gained.”