Talking cash and trade in Asia: Will banks be able to keep up with demands?

Feature | 21 June 2017
Asia_Trade_Corporate_Cash_Management

Banks have responded to corporate demands and started to align their cash and trade services in Asia, but they need to stay on their toes and come up with an efficient digitised service that combines the two, says Rebecca Brace

Asia's cash and trade landscape is highly fragmented, with numerous countries, currencies, languages, tax regimes and market practices in place across the region. For companies operating in Asia, this can make
the task of managing cash and carrying out trade transactions less straightforward than in more homogenous regions.

"Fundamentally, this means that you have certain challenges, such as the stringent controls on capital and cash which can result in trapped cash in countries like China and India," says Him Chuan Lim, group head of product management, global transaction services at DBS.
"At the same time, no bank has a presence in every market in Asia,
so companies tend to deal with different banks in different markets."
 

This fragmentation has been matched by other barriers within the areas of cash and trade - at least until recently. Banks, for example, have historically regarded cash management and trade finance as two distinct areas, with product and sales teams
working relatively independently from each other.

On the one hand, this distinction between cash and trade is one that arguably matters more to banks than corporates. "Clients don't talk in the language of cash and trade," says Farooq Siddiqi, global head of trade at Standard Chartered. "They talk about payments, settlement and risk management - essentially trade is nothing but
a payment coupled with financing and risk mitigation."

That said, in the last few years companies have begun bringing together areas such as corporate treasury and procurement, which previously operated independently from each other. Alexandra Lecompte, Asia Pacific head of Digital Council in GTB at Deutsche Bank, notes that treasurers are increasingly interacting with other teams within the business. "Historically, when you were talking to clients about cash management services, you were typically just speaking to the treasurer or financial controller," she says. "But increasingly we are seeing people like the procurement team, credit management and even HR coming into the discussion."

At the same time, companies are looking for different types of solutions than in the past. David Blair, managing director of Singapore-based consulting firm Acarate Consulting, notes that the most sophisticated treasuries have addressed basic cash management using structures such as in-house banking and other variants. Such companies are now moving away from a straightforward focus on cash management and are increasingly looking at working capital management, which in treasury terms centres around accounts receivable and accounts payable, rather than on inventory.

Implications for banks

For banks, this shift is resulting in some notable changes to the way in which the relevant services are provided. Banks in the region report that their existing business models are being challenged,
with a greater emphasis on integrating the cash and trade services provided to corporate clients.

Siddiqi observes that this is being driven by a number of factors, including the evolution of corporations' business models and the knock-on effect on banks business models. Regulation is another notable catalyst. "If you take the regulation around anti-money laundering (AML), this typically started with a focus on financial crime compliance in the payments space," he says. "We now see this focus expanding into other areas such as trade finance."

The convergence of cash and trade has been taking place at both a sales and product level, with banks removing organisational siloes, creating unified cash and trade teams, and building technology platforms that combine cash management features with trade capabilities. Areas such as supplier financing offer particular opportunities for banks to combine payments with elements of
risk mitigation and financing.

At the same time, Siddiqi says that banks are having to look at the profitability of a transaction differently, "through a client profitability lens rather than a narrow product lens". He points out that whereas a trade transaction consumes capital, the return dynamics look different when this is coupled with a cash transaction.

This convergence has benefits for banks as well as for their corporate clients. "We do see a lot of upside to sharing data between cash and trade," comments Lim. "We have customers who submit the same set of data to us separately for trade and for cash, which is not very efficient. Moreover, the integration will also increase visibility of transaction processes for businesses."

Embracing innovation

As banks adjust their models to provide cash and trade services
in a more holistic way, developments in technology and recent market initiatives are providing further opportunities for
companies looking to manage these areas more efficiently.
 

The rise of fintech solutions certainly presents some interesting opportunities. However, treasurers need to be aware of the limitations of individual solutions and should have a clear understanding of how these can be deployed. Research published
last year by the Boston Consulting Group and BNP Paribas found that 90% of the treasurers surveyed felt that fintechs are not equipped to meet the full array of corporate treasury needs. Treasurers cited several factors, including the youth and small
scale of fintech firms.
 

"Where emerging fintech is concerned, new technology services are emerging in the payments space - but these solutions usually solve one problem and they are not usually connected together," says Deutsche Bank's Lecompte. "The common denominator is still the bank, which brings the trust component that companies need."

Meanwhile, other developments could also provide companies with opportunities for greater efficiency. For example, Lim notes that solutions such as Swift's global payments innovation (gpi) initiative has the potential to bring considerable improvements
to this area. "The whole premise around providing more information with a payment resonates really well with customers," he says. "Whether it's a straightforward payment or a payment linked to a trade transaction, the customer is very keen to know
if a payment has been received by a beneficiary - and that additional information is very useful too."
 

Also significant are initiatives such as Singapore's National
Trade Platform (NTP), a trade information management platform which is currently being built. The goals of the project include helping companies reduce the inefficiencies associated with the manual exchange of trade documents and enabling them to gain insights from their trade data using data analytics.

Working together

With so many different challenges and developments in play,
it is important that banks are flexible enough to adapt their
models and embrace innovation where possible. Lecompte notes that as the market changes, banks are working to become more agile and "leverage technology to solve problems and enhance
the client experience".

 

Siddiqi says that banks first need to decide how to respond
to the developments, both tactically and strategically. He adds,
"In the context of third party players, banks need to recognise
that if they don't work with the new technology, they are not
going to survive."


 

As such, Siddiqi says that banks are looking to collaborate
both with third party providers and with each other. "Banks recognise that you can't do everything alone," he concludes.
"You have to realise that you are a cog in the system, which
means building collaborative models for the benefit of clients
and the industry as a whole."


 

Rebecca Brace is a freelance financial journalist

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