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GTR September/October 2011 feature


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GTR September/October 2011 feature

  1. 1. Feature | Cash Management Convergence of cash management and trade can help provide visibility. Yet is there a genuine demand among treasurers for such a product? Ben Poole reports. Getting a clearer picture on convergence W hile the topic of cash to work closely with their banks. management and trade “In this business, banks actively facilitate and convergence has been a popular even finance the transactions, while for the discussion point over the past corporates involved, the cost and formalities of 18 months, it is noticeable that it is the financial traditional trade processes can be done away institutions have been doing most of the talking. with,” explains Dalmia. Is there demand from corporate treasurers for That is not to say that every bank has the this convergence? Or is there any merit to the ability to offer the solutions required, despite suggestion that this is merely an exercise in appearances. The group treasurer of a global repackaging existing products by the banks? retailer headquartered in Switzerland, who According to Sanjay Dalmia, managing director prefers to remain anonymous, comments: of Fundtech India, the increasing importance “I think a number of banks are pushing it and of open trade is instrumental in driving the don’t have the skills. But the banks that have convergence of cash and trade. “Both in-country the patience will prosper. It is definitely one of as well as intra-regional trade is a significant and those things that you didn’t think was possible rapidly growing business for many corporates,” five years ago and is now a prerequisite for the says Dalmia. treasurer.” Such kinds of trade transactions that are high in The trade flows in a multinational are huge, volume and relatively low in value compared to and traditionally the treasurer hasn’t had muchMarkus Wohlgeschaffen, UniCredit traditional trade transactions require corporates oversight of day-to-day trading flows. But once58 | Global Trade Review
  2. 2. Cash Management | Featurethat is online and all of the players in the financial key to that. “Banks are not yet very good at chain – logistics, warehouse, treasury and At UniCredit we’re putting together the platformsboutiques – can see the product flow and the and the product specialists in order to speak tofinancial implications, it becomes a powerful tool the customer from one source,” he says.that shouldn’t be underestimated. “When I see A few banks are able to offer quite effective toolsthis information, it is very valuable to me. So I do to manage trade finance flows, but it is taking timethink that the concept is being sold, but only one for them to really understand what the treasureror two people seem to be able to deliver at the is looking for. The feeling that the convergencemoment,” adds the Swiss group treasurer. of cash management and trade is still a workThe value of being able to gather an end-to- in progress is supported by the group treasurerend view of all cash flow from a single source from Switzerland, who notes that their companyis something that Adnan Ghani, head of trade has only had a big breakthrough in the past 12finance at RBS, has seen first hand from a client. months. “We’ve started using a global tradeThe bank was working with a large European finance tool that is provided by a single bank. It’sconfectioner on a pilot of a supply chain finance an online tool where we can issue guarantees,system for the company in Spain for 32 suppliers. letters of credit (LCs) and documentary credits, for“They came back to us and said that, as they example,” explains the treasurer.were already doing payments through us, they The corporate has global pricing arranged, it isdid not want us to have two channels for them, a global facility, and their global entities can goand instead suggested that we combine the online to input data. Once the data is on theprojects and do both through one channel,” system, the bank approves it under the umbrellasays Ghani. This type of simplification to banking facility the company has, and is able to providerelationships makes a lot of sense for both banks alerts to group treasury and local finance teams.and corporates, and it also provides an example “It’s quite a breakthrough, and we’re trying to getof how both can profit from project collaboration. all our operating entities onto this system,” says“We’ve seen a 180% increase over the past the Swiss treasurer.year in our supply chain finance proposition. Even if a bank can provide such a solution, thereIt is a trend that is working well for banks and is still a lot of work to do between the bankcorporates,” he adds. and the corporate to get such a scheme up and running. It is very different, for example, toReceiving the required support using an online foreign exchange tool, which is aWhen it comes to gaining full visibility over total homogenised product. In trade finance there arecash and managing working capital, corporates many variables in the instruments available, whichneed a selection of solutions and support from add layers of complexity.their banks. Unfortunately, according to ErnieCaballero, global treasury director of UnitedParcel Service (UPS), most banks are unable toprovide corporates with the full smorgasbord of “We’ve seen a 180%cash management tools to allow transparency increase over the pastand visibility into bank accounts and the cash inthose bank accounts in a proactive manner. “They year in our supply chaindon’t offer any platforms that will help, other than finance proposition.”to look at your bank statement online. Any kindof tool that you need to understand where your Adnan Ghani, RBSbalances are on any given day on a real timebasis just doesn’t exist,” says Caballero.Certainly challenges exist in trying to link and Challenges for banks and corporatesprovide solutions across the entire working For corporates, the challenges of managingcapital spectrum of days payable outstanding, a combined cash and trade proposition candays inventory outstanding, days sales come from their need to have a much moreoutstanding and operational risk and efficiency. strategic relationship with their suppliers. ThisIf a customer looks at the entire supply chain, was particularly evident during the crisis, wherebanks need to provide solutions by bundling the companies were looking to make sure thatrelevant business offerings that may have been their suppliers were financially stable and ablepreviously sold as separate products. to continue the supply relationship. CorporatesMarkus Wohlgeschaffen, global head of trade would even go beyond this level and check onfinance and services at UniCredit agrees that the who was supplying the suppliers.conversion of cash and trade and FX is certainly Ashutosh Kumar, global head of corporate September/October 2011 | 59
  3. 3. Feature | Cash Management “Looking at China, providing a local currency solution in that market is definitely more difficult if you are a foreign-located supplier.” Jeremy Shaw, JP Morgan and trade product management at Standard central bank requirements around know your Chartered, agrees that companies want supply customer requirements for clients. South Africa chain finance to go further down the chain: “Just has some exchange control requirements that financing the tier one supplier is not enough, makes client onboarding a bit more difficult. companies want the finance to go to the tier two Shaw also picks out the jurisdictional and supplier.” governing law issues that exist in certain This can be difficult to arrange. If you start markets: “If you look at Saudi Arabia, there onboarding the tier two supplier, things can are potential challenges around Saudi law become complicated to manage. This has led to and shariah components. They are not companies asking their banking partners to look insurmountable, but it does mean that they at pre-shipment finance and similar tools. Pre- present additional obstacles to ramping up shipment finance percolates down to the tier two programmes in a quick and efficient manner.” suppliers, because what you are effectively doing Lots of businesses are focussing on Sub-Saharan is paying off the tier two supplier for their sales Africa following the interest of China and India to the tier one supplier – or the tier one supplier in building relations there. Each country in procuring from the tier two supplier – using the Sub-Saharan Africa itself, outside of Nigeria and pre-shipment finance to pay off their suppliers. South Africa, has its own independent challenges Kumar explains: “I’ve seen corporates really around issues such as legislation, governing law value these relationships with the banks when and enforceability. This provides many challenges they are able to work not only on post-shipment in terms of fully implementing and ramping finance but also pre-shipment finance. It shows successful cash and trade programmes. the supplier that this corporate and their banks brought real value to them and have been able to Moving to a closer relationship finance them even before the goods have been While corporate treasurers can see the value produced for shipment.” provided by the convergence of cash and Post-shipment finance is simple to do, but pre- trade, and banks appear eager to provide this shipment finance can be a real challenge. Banks breadth of functionality, there is still room need to understand the supply chain linkage for improvement in the relationship between between the large company and their suppliers. corporates and banks. It is important to understand the difference The group treasurer of the Swiss global retailer between running a supply chain finance finds that most of the slack is due to poor programme and financing a supplier on a communication between the people that develop bilateral basis, which is purely based on the the tools and the account officers and sales strength of balance sheets. This is an area where people who are actively selling the product. “It treasurers can struggle, because there are not really needs a long-term vision, both from the many banks that can understand these linkages. bank and from the corporate. Putting a payment Challenges in cash and trade convergence can factory in Asia for us is a two-year project. There also differ depending on which area of the world is a tendency for the banks, once they’ve sold you are dealing with and the markets that your something, to move onto the next sale,” says the cash is flowing into. Jeremy Shaw, head of global Swiss group treasurer. trade Emea at JP Morgan, points out that some Businesses challenges still exist in areas such of the bigger markets can pose some interesting as cash flow forecasting, supply chain financing challenges for corporate treasurers. and regional cash managing. Corporates should “Looking at China as a major market, providing a be asking their banks if they can deliver what local currency solution in that market is definitely many are promising from the convergence of more difficult if you are a foreign-located cash and trade – namely that they will give supplier,” says Shaw. Russia is generally quite a corporates full visibility over their end-to-end difficult market because there are very specific cash flows through one pipe. GTR60 | Global Trade Review